As a last ditch attempt to win conservative Republican votes in the House of Representatives for a repeal and replacement of the Affordable Care Act, Trump’s White House agreed to gut the law’s requirement that all health insurance policies that qualify for federal subsidies include ten essential benefits.
The theory is that people who are not likely to need particular benefits shouldn’t have to pay for them. Sean Spicer, the President’s Press Secretary, for example, noted that “if you’re an older man, you can generally say that you’re not going to need maternity care.” According to Spicer, “it’s about a series of benefits being mandated for everybody, so what has happened is the cost of health care fore every individual has gone up and the choice has gone down.”
If this is the way Republicans see the problem, then it makes a lot of sense to allow the market to tailor health insurance policies to the particular needs of particular individuals. Men and women past their childbearing years could be able to buy cheaper insurance policies that don’t include coverage for pregnancies. Younger people could buy cheaper policies that cover injuries but don’t cover things like dementia.
Problem solved.
Not.
Despite all of its business trapping—the agents and brokers, the incomprehensible and endless paperwork, the monthly premiums—the health care insurance market is a casino, just like all other insurance markets. People and insurance companies make wagers with each other all the time, and one pays the other if particular events beyond their control occur.
People who buy insurance are making a bet with an insurer that they are going to become sick or injured during the year in which the insurance policy is in effect. It’s fundamentally the same thing that happens in a game of blackjack. In a standard game of blackjack, the gambler bets that the total value of his cards will be closer to 21 than those of the dealer. If the gambler’s cards exceed 21 or if the dealer's cards are closer to 21, the gambler loses and the dealer keeps all of the money wagered.
Though you can have some fun with one friend playing blackjack, you can’t make a business of it. When you’re only playing with one friend, the odds are that over time, you’ll both lose as much as you win because the odds of winning for both players are the same. To make a business of it, a casino has to win more than it loses.
And that’s why Republican efforts to come up with a replacement policy for a repealed Affordable Care Act using private insurance almost never make any business sense. They always fail to create products with odds that result in reasonable wagers for buyers that can also turn a profit for the insurance companies.
Let’s take Sean Spicer’s thoughts on maternity benefits as an example. Imagine two insurance policies, one for men and one for women. I’m purposely leaving out prepubescent children and women who can no longer bear children for the sake of argument (presumably, under the Republican insurance regime they’d also have customized policies). The male policy covers prostate cancer, but it doesn’t cover pregnancy; the female policy covers pregnancy, but it doesn’t cover prostate cancer. Otherwise, the policies for women are identical to the policies for men.
To entice a person to wager that he or she will suffer some loss by buying an insurance policy, you have to price the policy low enough so that the anticipated return for making the bet is sufficient to justify the risk of making the bet. Nobody is going to buy an insurance policy if the cost of the premium is higher than the cost of treatment multiplied by the risk. On the other hand, no insurance company is going to issue an insurance policy if it expects to pay out more in claims than it collects in premiums.
The cost of the female policy will have to be relatively high. Assuming that women of childbearing years have the Republican “freedom” to decide whether they want to buy a policy that covers pregnancy, it’s completely irrational for any woman who is not planning to try to become pregnant to bet against accidental pregnancy by buying an expensive insurance policy that includes maternity benefits. Effective birth control (or even abstinence) is a cheaper.
Aggregating risk solves the problem. True, men, prepubescent children, and women who aren’t capable of bearing children aren’t going to need the maternity benefit and so their insurance premiums do subsidize the pregnancy risk of others. But the premiums paid by young women who don’t get pregnant will subsidize insurance company payouts for prostate cancer treatments, dementia treatments, and juvenile diabetes treatments. With enough people in the risk pool, just like a well-planned casino, the insurance companies will “win” most of the time, enabling them to make the payouts required and still earn a profit when the relatively few unfortunate policy holders hit the jackpot.
None of the schemes put forward by Republicans seem to take any of this into account. Tailoring policies to particular risks makes those policies extremely expensive because they’re likely to interest only people who deem themselves likely to suffer from the particular health risks covered by the policies. Sensible people are likely to avoid policies that cover only catastrophic losses because the premiums they would pay far exceed the expected loss multiplied by the risk.
You’d think the “party of business” would understand all this. You’d think that a president whose main credential is that he has been a successful businessman would have had more than a passing exposure to the insurance industry. But they don’t.
And that’s why I’ll never bet on Republicans when it comes to fixing the health insurance market.
