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Oops about the ACA's OOPM: You really can't keep your health plan

By KENT GARDNER
Policy Wonk
Rochester Business Journal
December 20, 2013

The Tampa Bay Times' "Politifact" has awarded its coveted "lie of the year" rating to President Barack Obama's oft-repeated promise: "If you like your health plan, you can keep it." I'm happy to chalk this one up to naivete and the heat of the political moment(s).
 
As the president has noted, the reason why existing health insurance policies have been canceled willy-nilly is that the plans don't measure up to the Affordable Care Act's standard for coverage. Supermarkets can't sell unpasteurized milk; health insurers can't sell these plans.
 
It is not immoral to sell or buy non-compliant plans. Many consumers chose non-compliant plans on purpose because they were cheaper. Let's look at one provision of the ACA that has received little coverage-the out-of-pocket maximum. The law initially required that a 2014 individual policy must cover all costs above $6,350 annually for singles or $12,700 for families of any size. That's the OOPM (now delayed to 2015).
 
That sounds like a lot of money to some of you. But if you have experienced or been close to someone who has experienced a major health event, you know otherwise. My daughter was born prematurely. It doesn't take too long in the neonatal intensive care unit to blow the doors off a $12,700 OOPM. Perhaps you take a nasty fall and need complex orthopedic surgery, or you struggle with cancer; the same is true.
 
Imagine that you're the insurer. Now you have to cap a consumer family's spending at $12,700. How do you pay for the big bills that some of your customers will run up? You can either charge a high monthly premium or impose a high deductible. For the plans with the lowest premiums, the deductible begins to approach the OOPM.
 
Deductibles add their own pocketbook pain to your health problems. Except for some always-free preventive care like annual checkups, mammograms, colonoscopies (my favorite) and so on, you have to pay out of pocket until you've shelled out the deductible. Then you pay part of the cost of future health expenses under co-insurance and/or co-payments until you hit the OOPM.
 
In previous decades, many people with health insurance had plans that completely flipped this relationship. The plans paid part or all of the cost at the outset with a small deductible or none at all, but there was no OOPM. When my father had heart bypass surgery in 1969, our family had "major medical" coverage that paid 80 percent of the bills-with no OOPM. Twenty percent of the cost of heart bypass surgery is a lot of money.
 
In the pre-ACA world, many people chose health care plans that charged lower premiums and paid more of their immediate bills. But these plans left them exposed to serious debt, even bankruptcy. The policy question is whether they should be allowed to buy these plans.
 
There's a case to be made for forcing people to make better decisions. Economists and psychologists have shown over and over that we do a lousy job making decisions about risk. Some of us worry about flying in airplanes but think nothing of driving on a busy highway, which is objectively more likely to cause injury or death. Just as we protect consumers from the risks of unpasteurized milk, the ACA doesn't let consumers buy health insurance that exposes them to the risk of bankruptcy.
 
The OOPM also protects the providers of health care. Consumers whose medical bills put them in or at risk of bankruptcy typically pay less than they owe. Health care providers like hospitals write off massive amounts of unpaid bills every year. These losses will drop like a rock if everyone is insured with a plan that has an ACA OOPM.
 
But many people won't feel "covered" by a health care plan that carries a $5,000 deductible. They will be writing a sizable monthly check to an insurer in exchange for, well, not much. Or so they'll feel.
 
That's why it is possible that the Affordable Care Act will drive up the share of the population without health insurance, at least in the short run. On purely financial grounds, consumers must weigh the cost of the premiums against the penalty for not having insurance-and the penalty will be much less for many consumers, even when the law is fully implemented. The deciding factor will be how consumers view the risk of incurring bills that exceed the deductible.
 
The system blows up if the pool of insured consumers is sick enough to make the OOPM-$6,350 for an individual or $12,700 for a family-too low to permit insurers to issue ACA-compliant insurance policies at prices that substantial numbers of consumers are willing to pay. With higher prices, even fewer sign up and we enter the ACA "death spiral." If Congress were capable of rational action, I'd urge that the OOPM be increased, thus allowing consumers to choose lower deductibles and/or premiums in exchange for assuming more "big ticket" risk. There's a place for regulating what kind of coverage insurers can provide, but if the regulations drive prices up too high, then the entire effort will collapse.
 
The federal subsidies change this dynamic for individuals, of course. Yet when the dust settles, we'll have turned the insurance market into even more of a pretzel than it is already. Odd though it sounds in the midst of the HealthCare.gov debacle, a single-payer system would probably be an improvement on the ungodly "public-private partnership" we have today.

Kent Gardner is chief economist and chief research officer of the Center for Governmental Research Inc.

12/20/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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