Re: The Sad Case of the Patient Protection and Affordable Care Act
I was asked to provide more detail regarding my assertion that actuarially, the way Roberts reinterpreted the PPACA pretty much ensured it could not work.
Also, in this particular post, I am limiting my comments only to the actual contents of the law itself. There are better ways to accomplish what the law purports to achieve. As I said in the original post, no matter what you believe about what health care coverage
should be, this
particular law fails to deliver.
It's faded into the background now, earlier this year something like 811 waivers were granted for so-called "mini-med" programs (like McDonalds offers, for example). One detail of the law prescribes how much of an insurer's premium income has to be paid out in claims (the "loss ratio"). Someone staffer apparently read a few articles and noted that the market tends toward an 85% loss ratio over time in certain plan designs (i.e., if premium income is $1,000,000 then claims payments are $850,000). This trend comes about due to competitive pressure in the marketplace. Insurance companies have a target return on capital, and a long-term loss ratio under 80% brings price competition to bear.
So this bright staffer, earnest, well-meaning, and lacking experience and wisdom, decides to encode this information into statute. Two huge problems, one immediate, and one latent.
The immediate problem of course was mini-med plans. Partly because the plans have a relatively low benefit limit, and partly because of the populations they serve, mini-med plans necessarily require more administration, while the maximum claim is relatively lower....mini-med plans typically have a loss ratio of about 65%, which is "appropriate" for that plan design. However, the law specifies an 80% loss ratio in any one year. Had the law been admnistered as written, it would have resulted in a loss of coverage for quite a few people who are served by the existing coverage. To insulate itself from the political fallout, waivers were granted left and right.
The deeper problem is more insidious. Loss ratios really should be some kind of rolling average over time, because there is
always a one-year time lag between the time a premium rate is set and the time at which the insurance company has to pay the claims. I'll set aside the distinction between "manual rates" and "experience rating" in setting premiums for another time. However, loss ratios in excess of 100% are not all that unusual....companies insuring Wall Street firms in 2007 - 2008 saw a huge spike in mental and nervous claims, for example, I think one company had a 132% loss ratio on one block of business.
However, the law does not provide for any kind of smoothing over time. Each year, the loss ratio has to be no less than 80% or else premiums have to be refunded to make up the difference. So you can lose money if you have a bad year, but you cannot make money if you have a good year.
On top of that, everyone agreed that you needed the mandate to make it possible for insurers to offer cover without pricing in the appropriate level of risk for people who already are sick (imagine for a minute a homeowners insurance law that requires insurance companies to provide coverage for a building that is already on fire!!). Only by spreading the risk over a large enough pool of healthy people can you get that incremental spread you need from each one to cover the concentrated risk from unhealthy insureds. However, the mandate has been ruled unconstitutional. It was reframed as an "option" in order to allow the law to stand under an alternative interpretation: you can either pay a tax or buy insurance, except the tax is often much less. This ruling subverts the intention of the law while allowing the shell to stand anyway. If people try to skate on coverage thinking they'll just buy insurance once they get sick, they will find that coverage still does not apply retroactively.
A relatively minor tweak would have been so much better. Rather than merely require pre-existing conditions be covered upon demand, you have an open enrollment window once every two years, say...anyone who wants to buy coverage can during that window, otherwise you still have to qualify until the next window opens. Incentives matter. This particular law is resoundingly stupid in so many different ways.
