Tuesday, January 21, 2020

The Economics of Healthcare in America #3: Why Are Pre-Existing Conditions Even a Problem? (Part 4 of 4)

Click here to read the original Cautious Optimism Facebook post with comments

8 MIN READ - The Cautious Optimism wraps up his series on American healthcare and pre-existing conditions by evaluating actual reform proposals from three presidents (George W. Bush, Barack Obama, Donald Trump) and two presidential candidates (Mitt Romney and Hillary Clinton). 

In previous installments of this healthcare series we identified the origins of the pre-existing conditions problem in 1943 when FDR ordered employer-paid health insurance be given tax-deductible status for American companies. We’ve covered two well-meaning but otherwise unworkable proposals to reverse the employer-dependence problem: giving individual plans the same tax-credit status or ending the employer tax credit entirely. 

Finally we mentioned the best proposal, which so far has been limited to free market think tanks: shift the employer tax credit from a deduction for providing health insurance plans to a deduction for depositing health insurance dollars into a worker Health Reimbursement Arrangement (HRA) account with which employees can buy whatever portable plan they wish.

Presidents and presidential candidates going back to Bill Clinton have tried to solve the pre-existing conditions problem, with only two so far getting their proposals passed (Obama and Trump). We’ll review them next.

Keep in mind that these proposals apply only to solving the pre-existing conditions dilemma that the federal government created in 1943, not the broader healthcare cost issue which separate legislative initiatives have attempted to address.


In 2007, after Republicans had already lost control of both houses of Congress, the George W. Bush White House proposed to solve the pre-existing conditions problem by offering workers a large standard deduction on their tax returns to compensate them for buying a portable individual health plan.

The idea was that employers already get a tax credit for providing health insurance to workers, so why not “level the playing field” and give workers a tax credit for buying their own plans and divorcing their health coverage from the workplace?

While the goal of divorcing health insurance from employers is paramount, the tax deduction was a failed idea from the start. The reason was and remains simple: it’s still far cheaper to stay with an employer-subsidized health plan than buy an individual plan on the open market.

Imagine telling American workers “Cancel your employer’s family plan that only costs you $250 a month out of your paycheck and buy a $1,000 a month plan directly. The IRS will let you take a large $12,000 standard deduction for it (which only translates to $250 per month for a taxpayer in the 25% bracket).”

Pay $3,000 a year with your employer? Or $9,000 a year yourself? No one would take the bait. Everyone would remain on their employer plans.

Furthermore, by waiting until 2007 to make the proposal, Bush doomed it from the start. It was killed instantly in the Democrat-controlled Senate in an opposition effort led by, of all people, then-New York Senator Hillary Clinton.


2012 presidential candidate Mitt Romney also wanted to divorce health insurance from the employer. Yet his proposal wasn’t much different from Bush’s. Romney suggested giving workers' individual plans tax-deductible status by allowing them to pay with their own Health Savings Accounts (HSA) dollars.

HSA contributions can be deducted from one’s taxes, so paying insurance premiums via an HSA would be tantamount to giving insurance purchases tax-deductible status. Again, the strategy was “level the playing field” with employers who also get a tax deduction.

Romney’s plan would fail outright for the same reason as Bush’s: even with the tax deduction, workers would still find it far more attractive financially to stay on health insurance with their employer than paying for expensive insurance out of pocket.

In any event Romney never got the chance to introduce legislation because he lost the presidential election to Barack Obama.


President Bill Clinton’s plan for solving the pre-existing conditions problem was clear from the start. Almost as soon as he entered office he assigned his wife Hillary Clinton to lead a virtual government takeover of private medicine. Under a government-run system, Americans would be “guaranteed” health coverage paid for and distributed by the federal government. Since Uncle Sam would theoretically always be there to "take care of you,” regardless of your employer or employment status, the pre-existing conditions problem would disappear because Washington, DC would always consider you covered anyway.

Of course the idea of government-run medicine was unpalatable for a majority of Americans in the 1990’s as well as a majority of Congressional politicians (the majority of whom were Democrats in both houses at the time) and the proposal died.

Since then, Hillary Clinton has been staunchly opposed to any plan that makes it easier for workers to move away from corporate (or government) group plans and back to owning their own individual plans, as evidenced by her successful effort to squash President George W. Bush’s individual insurance tax deduction proposal.


In the Economics Correspondent’s previous report we identified by far the best proposal: allow employers to keep the tax credit, but only for taking the dollars they normally spend on worker health plan premiums and instead depositing them into individual worker Health Resource Arrangement (HRA) accounts. Then employees would take the company’s money and buy whatever plan they want on the individual market. And that plan would be portable from job to job. No more worrying about “losing your job” and losing your employer health coverage.

There are other benefits to the HRA plan such as rolling over unused dollars year after year and accumulating HRA “reserves” that can be used to pay deductibles or to pay premiums if the worker finds himself unemployed for many months.

However to date the Economics Correspondent has literally never heard a president or presidential candidate utter a word about this solution.

Until now.

Just recently the Economics Correspondent learned that in October 2017 President Donald Trump quietly signed the “Executive Order on Health Care Choice and Competition” which allows the creation of Individual Coverage Health Resource Accounts (ICHRA’s, pronounced “ick-rahs”).

The ICHRA concept closely mirrors the HRA concept with only one or two key exceptions, and it went into effect on January 1, 2020. Yes, it's already the law.


Under the ICHRA provision:

-Companies can contribute corporate dollars into employee ICHRA accounts. Workers can then buy whatever individual plan they want with their ICHRA dollars (this was illegal under the Obama administration). Companies in turn can still deduct the cost from their tax bill.

-Employees can also pay for many out-of-pocket medical expenses using ICHRA dollars.

-Unspent ICHRA dollars can be rolled over into the following year.

-Employers must offer the same ICHRA terms for all employees, but are allowed to increase contributions for older workers and workers with dependents (this would partially satisfy the Hillary Clinton-minded politicians who worry about older workers losing subsidies from younger workers via group plans).

-Employers can continue to provide traditional health coverage to existing employees while offering ICHRA’s to new hires.

However there are two shortcomings in the Trump ICHRA executive order:

-When the employee leaves the company any unspent ICHRA dollars go back to the company. They are not portable with the employee.

-Employers will still have the choice of either continuing to buy traditional group health plans for their workers OR providing ICHRA accounts for workers.

The first problem is by far the most problematic. In the Economics Correspondent’s opinion, if an employee leaves his company the remaining ICHRA balance should be transferable with him.

One of the enormous benefits of the freer-market HRA concept is that workers will have an incentive to economize and roll unspent HRA dollars over year after year, building an “HRA reserve” with which to pay deductibles in the event of an illness, or (very importantly) to keep paying insurance premiums should he lose his job—long enough to tie him over until he finds a job with another company that resumes contributing to his ICHRA account.

By prohibiting the dollars to follow the employee between jobs, the plan gives workers an incentive to “burn through” as many ICHRA dollars as possible—the antithesis of the “HRA reserve” concept.

The second problem limits the number of workers who will have an ICHRA option. Since the provision permits companies to keep buying health insurance plans outright and deduct the cost from their taxes, analysts estimate only about 11 million workers will be offered the ICHRA option. However if the government were to grant the tax credit for ICHRA accounts only and drop company-bought health plans, virtually every company-covered worker in America would be transferred to the ICHRA funding solution.

This is only speculation, but it was likely considered politically too risky to tell every workplace-covered American “you’re being forced out of your company’s health plan into one of your own choice” at once. Hopefully the longer-term strategy is to gradually ease more and more Americans into portable individual plans over time.

However, the Trump ICHRA plan marks the first time in U.S. history that any president—any federal politician for that matter—has succeeded in realizing a policy that at last begins to steer Americans away from our insane system of reliance of employers for health insurance. For the first time since the 1943 FDR tax credit was introduced, some companies will receive incentives to finally stop creating pre-existing conditions victims.


Even though the Trump ICHRA executive order is already a huge step in the right direction, the House GOP has its own plan (the American Healthcare Choice Act or AHCA) that retains the same corporate tax credit for individual plans—only using traditional HSA’s as the vehicle and thus allowing reserve funds to follow employees even when they leave their employer.

Successful passage of this bill would represent the second huge step away from dependence on employer health plans and mark the end of 77 years of the government-created pre-existing conditions problem. Healthcare analyst John Goodman predicts approximately 100 million Americans would move towards HSA-purchases of individual health insurance and say goodbye to job dependence for coverage. See here:


However the key difference between the Trump ICHRA and the GOP proposal is that Trump’s plan is now reality. With the Democrat-controlled House of Representatives obsessed with impeachment and more investigations into all things Trump (except anyone who spied on his campaign), the odds of the GOP AHCA gaining any real traction aren’t promising.


Finally former President Barack Obama’s solution was the simplest of all: Obamacare declared it illegal for an insurer to reject enrollees on pre-existing conditions grounds, even though a sick applicant had made absolutely zero premium contributions to that insurer.

His law was akin to forcing an insurer to write a brand new homeowners policy the very day a hurricane destroyed the enrollee’s house. If homeowners never had to buy insurance until they had a major loss, insurers would lose out on premium revenues while still shouldering the burden of large claims.

Trying to force through an alleged “solution” with mandates that insurers “eat the cost” was a major factor (albeit not the only one) in famously driving individual health insurance costs through the roof with 300%, 400%, sometimes 1,000% premium increases.

Under Obamacare controls, uninsured individuals with a pre-existing condition could simply refuse to buy insurance and pay the lower IRS fine so long as they felt healthy, knowing that if they got sick they couldn’t be turned down. If a year later they got sick again, they could go to an insurer, say “you have to accept me,” and immediately dump hundreds of thousands of dollars in medical bills in their lap—all before paying a dime in premiums.

Insurers and their actuaries were well aware of the consequences of this regulation and immediately calculated the additional payout costs they would incur plus the loss of revenues from patients forgoing insurance.

Predictably they passed on the higher costs in the form of sharply higher premiums for those customers responsible enough to retain coverage.

The premium inflation that victims of Obamacare have incurred has largely been a subsidy to the irresponsible who “game the system” by refusing to buy insurance until they get sick.

The contrast between the Trump plan and Obamacare demonstrates the difference in both principle as well as consequence of using adjusted tax incentives versus government force.

With a tax incentive to contribute to employee HRA’s the pre-existing conditions problem would be largely solved and individuals would also economize due to self-interest in spending their own dollars, thus also slightly lowering premiums and cost overall.

With the Obamacare forced mandate incentives became so perverted that premiums skyrocketed while responsible Americans were coerced into subsidizing irresponsible ones.

Nevertheless, the American public generally still supports the Obamacare pre-existing conditions mandate—in large part because they don’t understand why pre-existing conditions is a problem (regulation), why they should never have been a problem to begin with, and why the most effective proposals to fix it employ consumer choice instead of coercion by Washington bureaucrats.

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