By Jacob Reses
Obamacare’s regulatory mandates are a major obstacle to the creation of a patient-centered health-care system. The effort to repeal and replace Obamacare must repeal them. Affordability, choice, and competition, the goals of any real health-care reform, depend on it.
Despite the fact that much of Obamacare was passed via Budget Reconciliation, the arcane procedural rules of Congress have led some reformers to shy away from even trying to repeal these mandates. They are instead leaving some of the most troublesome regulations in place and trusting that either the executive branch will lighten their burden through relaxed enforcement or that Congress will use another legislative vehicle to restrict funding to enforce these regulations, and thus render them moot. This is a high-stakes bet. Regulations that stay on the books can more easily be resurrected if future elections bring to power an executive branch that is hostile to reform. Reformers should push to wipe these regulations off the books; and if they do not succeed immediately, they should make it clear that it will remain their most urgent goal.
Much of the debate over the repeal and replacement of Obamacare has centered on Congress’s plans to reform Medicaid and replace Obamacare’s system of subsidies with tax credits for those without employer-sponsored insurance. These issues are important. Unfortunately, these debates have obscured what should be an obvious question: Why is insurance under Obamacare so expensive? And why is even a market so heavily subsidized in the midst of a death spiral, with insurers headed for the exit doors from the law’s exchanges? The answer lies in its regulations.
Essential Health Benefits
While the AHCA makes some steps toward increasing risk variation in insurance costs by widening Obamacare’s age band rules, it does not tackle another group of regulations forcing Americans to offset the cost of services they will not consume themselves: the law’s essential-health-benefits mandates applying to the individual and small employer markets, as well as broader mandates like the preventive services mandate applied also to large employer plans.
Consumers who hope to hedge against particular risks are instead forced under Obamacare to subsidize the cost of services they will never use or that they might otherwise prefer to pay for out of pocket. In addition to hospitalization coverage, Obamacare-compliant plans must also cover habilitative services, preventive and wellness services, and various other benefits – benefits that were in some cases not defined, let alone offered at all, in plans prior to Obamacare. These requirements are universal, driving up the cost of coverage for beneficiaries who would otherwise consume the least in terms of health-care services and therefore undermining efforts to rein in health-cost growth overall. Young, healthy people know they do not need coverage nearly as comprehensive in terms of benefit packages as what is required under the onerous essential health benefits mandate on the exchanges, and they naturally resist efforts to force such coverage onto them, undermining efforts to balance risk in the exchanges.
The mandate grants sweeping authority to the Secretary of Health and Human Services to define the scope of required coverage within the various statutory benefit categories. Such discretionary authority can be dangerous in the wrong hands, and not merely because of its implications for insurance costs. The Obama Administration spent years engaged in legal challenges after using its discretion over benefit mandates to force religious institutions like the Little Sisters of the Poor to purchase coverage that violated their conscience. Similar incidents, or worse, are likely under future left-wing governments.
The essential-health-benefits mandate also undermines market-based health care in a more fundamental way: In rigidly defining the parameters of what may be offered as an insurance product, it prevents insurers from experimenting with more innovative health-care financing structures that trade lower premiums for less comprehensive coverage. This limitation is exacerbated by yet other Obamacare mandates left untouched by the AHCA.
Arbitrary Limits on Costs Borne by Consumers
In addition to limiting insurers’ ability to offer products priced differently based on customers’ different risk profiles and benefit preferences, the law applies arbitrary out-of-pocket limits that govern how much customers can be expected to pay themselves for their health care costs. This provision, like many others in Obamacare, is intended to prevent high-cost customers from facing bills they cannot afford. In practice, it limits insurers’ ability to provide low-premium offerings to those willing to bear higher out-of-pocket costs.
The more federal mandates force insurers to charge all beneficiaries for the massive cost burdens of one-size-fits-all coverage, the harder it will be for markets to stabilize enough to provide affordable options for most Americans. Ending Obamacare’s restrictions on insurance market pricing discretion must be a top priority for repeal efforts aimed at driving down insurance costs.
Regulation of Provider Networks
Even diehard Obamacare proponents like The New Republic’s Jonathan Cohn acknowledge that the law’s web of regulations places increased pressure on insurers to find new means by which to contain premium costs. One consequence has been that plans offered under the law have tended to constrict provider networks. Generally speaking, plans can be priced more aggressively if they do not need to cover as many potential providers.
The law includes an additional intrusion into insurance-product design to address this drawback: rules mandating “adequate provider networks” to guarantee access to a variety of different providers covering a range of potential customer demands. This approach gets the problem exactly backwards; rather than aiming to drive down costs and address the root causes of limits to provider access, it mandates the problem away, further adding to the house-of-cards structure of regulatory assumption built on regulatory assumption that has driven insurers out of the unworkable exchanges.
That house of cards collapses when insurers are finally forced to determine premiums. That process forces them to account for all the aforementioned contingencies that Obamacare gives them limited flexibility to address, contingencies that can be hedged against only through higher premiums for beneficiaries. As a consequence, Obamacare imposes unprecedented federal review of the rates submitted by insurers for their products—on top of the already burdensome review process in place in the states.
Such rate reviews create significant incentives for insurers to play gymnastics with regulators by replacing old products subject to review with new ones, and these gymnastics in turn have forced the federal government to promulgate a new maze of rules to prevent such maneuvering. As insurers lock horns with federal regulators year after year over their ability to increase premiums, the incentives for insurers to exit the exchange mount further – a reality for which federal regulators have few adequate responses save for provisions limiting the ability of insurers facing losses to leave the exchanges at all. This pattern of cost-driving regulations forcing insurers to raise premiums beyond levels deemed acceptable to regulators, aiming to skirt such regulations and being further chased down by Washington, before finally engaging in lengthy battles with Washington over their ability to exit the exchanges, creates uncertainty for patients already stuck with higher premiums than necessary to pay for products they do not want.
Among Obamacare’s central promises were that insurers would no longer be able to deny coverage to the sick and the elderly. Under Obamacare’s “guaranteed issue” requirement, insurers cannot deny coverage based on age or health status to potential customers. In isolation, insurers would adhere to such a rule by pricing their offerings to sick customers accordingly, in some cases prohibitively. For this reason, the requirement was paired with “community rating” rules prohibiting insurers from underwriting based on beneficiaries’ health status and limiting price flexibility with respect to age.
This system is meant to pool insurance risk across the population and therefore smooth out extreme variations in coverage costs. As Linda Blumberg and John Holahan note in Health Affairs, “Employer based insurance, still the primary source of insurance for the non-elderly, promotes natural pooling of risk, since individuals generally choose employers for reasons unrelated to their health status, and participation in employer-offered plans tends to be high.” In the individual market, such dynamics are less natural but can be facilitated by establishing legal channels for voluntary risk pooling or, as scholars like James Capretta of the American Enterprise Institute and Edmund Haislmaier of the Heritage Foundation propose, creating consumer protections available only to those who purchase and maintain continuous insurance coverage. Obamacare’s designers aimed to pool risk instead by coercion via community rating rules for all plans, whether issued to those who become sick after choosing to be uninsured or the healthy consumer who has consistently paid his premiums.
Such a system is a recipe for adverse selection. The healthy beneficiaries necessary for this risk pooling scheme to succeed, aware that they are paying for others’ risk rather than their own, will opt out of a market that by design does not meet their own needs–unless induced otherwise. Hence the perceived need for further government interventions such as Obamacare’s individual mandate. When such coercions fail to balance the risk pool, as has occurred on the Obamacare exchanges, policymakers create the worst of all worlds, discouraging insurance among the young while raising costs to all consumers who remain in the market.
“Full Repeal” is Empty Without Regulatory Reform
Obamacare’s essence is the centralization of regulation of health insurance in Washington, D.C. The law’s regulatory mandates have necessitated other troubling features of the law, such as its heavy use of subsidies and its coercive individual mandate. And these mandates have also caused the many problems that have accompanied the law, from canceled health-insurance plans to unstable health exchanges.
On the margins, these elements of the law can be pruned over time. Subsidy formulas can be tweaked for more efficient delivery. Mandates can be refined to better induce desired consumer behavior. Anti-consumer and anti-taxpayer collusion where it exists can be exposed in the media, and provisions promoting corporatism can be refined. But these problems will persist in one form or another so long as regulatory edicts from the federal government are the most powerful force in health care.
Truth be told, as harmful as Obamacare has been, its architects never had the opportunity to fully deploy the nearly unlimited regulatory apparatus at their disposal. Near-term political considerations and the disastrous performance of the exchanges forced the administration to scale back its ambitions. Indeed, the Obamacare statute vests so much power in federal regulators that it actually could have been worse.
In leaving this sweeping federal regulatory authority on the books for a future left-wing administration to abuse, conservatives are unwittingly laying the groundwork for full centralization of all aspects of health coverage under the auspices of unaccountable bureaucrats in Washington.
Conservative health policy is built on skepticism of these grand plans’ efficacy and with a different goal: to make markets freer and make insurance more consumer-driven. Achieving that goal is essential in the effort to rein in runaway health costs and limit Washington’s influence in Americans’ lives. That makes repeal of Obamacare’s regulatory architecture essential. It’s time for Washington to put Obamacare’s regulations on notice.
Jacob Reses is Director of Strategic Initiatives at Heritage Action for America