After reiterating his promise to repeal and replace Obamacare, Donald Trump has indicated he may keep two of the law’s most popular provisions. One is straightforward enough — children up to the age of 26 being allowed to stay on their parents’ plan. The other — preventing insurance companies from denying covering because of pre-existing conditions — offers a perfect illustration of why Trump and most of the other Republicans critics of Obamacare don’t understand the health insurance market.
Let’s say that in the beautiful new world of “repeal and replace,” insurers are required to sell you insurance despite the fact that your kid has a brain tumor. Insurance companies know what to do with that. Their actuaries can calculate that kids with brain tumors typically require (I’m making this number up) about $200,000 a year in medical care. So they’ll offer to sell you a policy at an annual premium of $240,000.
At this point your response will probably be that such an outcome not fair. When the law says insurance companies can’t discriminate on the basis for pre-existing conditions, surely what it means is that they have to charge roughly the same price for health insurance, irrespective of your pre-existing condition. In the language of insurance, that’s called “guaranteed issue at community rates.”
Unfortunately, in the states that have tried guaranteed issues at community rates, the insurance markets have collapsed. That’s because if you guarantee everyone the right to buy health insurance at community rates, then some consumers will game the system. The young and healthy ones won’t buy any health insurance at all—they’ll go without until they are diagnosed with diabetes or a brain tumor or get hit by a truck crossing the street. And when that happens, they will immediately call up Aetna or Anthem and exercise their right to buy health insurance at the low community rate, irrespective of their medical condition. It won’t be long before insurance companies begin losing a ton of money and are forced either to raise premiums through the roof or stop writing policies altogether.
So how do you prevent that kind of gaming of the system by consumers? Well, that’s easy. You require that everyone buy at least some minimal level of insurance at the beginning of every year, so they can’t buy insurance only after they get sick. Let’s call that an” individual mandate.” But because you can’t expect poor people to pay $1,000 a month, they will require subsidies to keep their out-of-pocket costs to something like 10 percent of income. To pay for the subsidies, a new tax will be required.