How To Actually Cover Pre-existing Conditions

One of the selling points of the Patient Protection and Affordable Care Act (also known as Obamacare or the ACA) was that it would help people with pre-existing conditions, or high-risk individuals, access healthcare. Insurance companies would normally charge them higher prices or fail to offer them insurance all together. Although most individuals with pre-existing conditions have access to healthcare—provided by their employer or government provided; people who have no option but to buy insurance on their own in the so-called individual market—have a rough time of it. Provisions of the ACA were designed specifically to remedy this situation. The goal was to force insurance companies to take on these individuals whose risk was known ahead of time—something insurance is not designed for.

Insurance Companies and ACA

The ACA required insurance companies to enroll high-risk individuals, no one can be turned away (guarantee issue), and prohibited the companies from charging high-risk individuals higher premiums (community rating).

To draw insurance companies uncertain about the risk in the new market into the state exchanges, the ACA included programs to transfer funds to insurers that ended up with a relatively risky, high-cost mix of patients. To force cross subsidies from the healthy to the sick, the ACA included a mandate that everyone buy coverage. Furthermore; to avoid the offer of cheaper, slimed down, policies to attract healthy individuals away from more expensive, comprehensive, policies; the ACA mandates a broad set of must-cover services.

To make it harder for insurance companies to narrow their networks to make their policies unattractive to relatively sick individuals, the ACA required broad networks of providers. Problems with any one of these could doom access to insurance for those with pre-existing conditions. Too few healthy individuals signed up, causing insurers to raise premiums or pull out newly created state insurance markets. In addition, to the extent they could get away with it, insurance companies limited physician and hospital networks and drug coverage, making their policies unattractive to the sickest patients. With its complicated regulatory structure, the ACA failed to improve access to care in the individual market for people with pre-existing conditions.

As Karen Pollitz, a Senior Fellow at the Henry J. Kaiser Family Foundation, wrote in 2017, there must be “some other mechanism, such as high risk pools, to help finance costs attributable to the sickest individuals if they are to be covered. Enrollee premiums can finance a portion of the cost of such programs, but by definition, significant additional funding will also be required because the cost of each person covered will be substantial.” Prior to the ACA, many states had high-risk pools, but most were unattractive—they had high premiums, low coverage, ridiculous annual or lifetime limits, and due to costs, some limited the number of individuals they would insure.

Spending Money for People with Pre-existing Conditions

In 2010, in anticipation of the rollout of the state exchanges in 2014, the ACA allocated $5 billion to fund temporary, state-level, high-risk pools to help cover uninsured individuals with pre-existing conditions. With federal subsidies through the Federal Pre-existing Condition Insurance Program (PCIP), total enrollment in state high-risk pools rose from 21,454 in 2011 to 110,298 two years later. In 2013, total spending under the PCIP was $2 billion. It would cost much more to do it right. This is because two provisions of state PCIP programs precluded entry of many individuals with pre-existing conditions. Applicants had to have been without insurance for six months and the state programs excluded coverage for pre-existing conditions for six to 12 months. Some of the states had high premiums, unreasonably low annual limits, and high deductibles.

There is no easy solution. Government subsidies create incentives for consumers to rely on government programs when, instead, they could be self-supporting or take steps to improve their health.

Why not “Medicare for All” or “Medicare for All who Want It”? Because the Medicare fee-for-service payment system is not run well. As lawyers Charles Silver and David Hyman (also an M.D.), point out in their book, Overcharged: Why Americans Pay Too Much for Health Care, overhead costs look low as a percent of total expenditures because Medicare expenditures on health care services are high. Lack of oversight and the fee-for-service payment system lead to payments for unnecessary care.

Potential Solutions for People with Pre-existing Conditions

Those who propose Medicare payment rates in a “Medicare for All” system might be surprised by an increase in physician billing to offset lower payment rates. Or physicians might be discouraged from accepting “Medicare for All” beneficiaries. The California Medi-Cal program offers a troubling example of the consequence of low payment rates.

Here are my suggestions:

  1. Eliminate ACA restrictions on private insurance policies that were aimed at increasing access for individuals with pre-existing conditions—community rating and guaranteed issue. Allow the private market to function as it did prior to the ACA—offering true insurance, but with subsidies for low-income households. These subsidies won’t need to be nearly as big as they are now as premiums will fall when community rating and guaranteed issue are eliminated.
  2. Reinstate the PCIP that funded state-level coverage for individuals with pre-existing conditions. This time, require standard rate premiums (along with subsidies for low- and middle-income households). Put no limits on annual or lifetime payments. And avoid the impediments in the original program—applicants had to have gone without insurance for six months; coverage for pre-existing conditions was excluded for six to 12 months.
  3. Existing ACA taxes (obscuring the costs) should be eliminated and a transparent tax, such as an increase in the income tax, should be the source of funding for ACA subsidies and the reestablished PCIP. For state PCIPs, a capitated payment system makes the most sense. In capitated systems, an insurance company gets an annual amount—per member—to provide healthcare services. Kaiser Permanente is an example of an exceptional model; states might want to contract with Kaiser to run their PCIPs. Capitation has an advantage over fee-for-service payments in that capitated systems tend toward coordinated care, encourage healthy behaviors, and discourage overuse and, therefore, overbilling.

Americans feel a moral obligation to pay for care for individuals with pre-existing conditions, but legislators, concerned that transparency would doom the plan, set up the ACA to hide the real costs. It’s regulatory complexity, designed to assist individuals with pre-existing conditions, has failed. It makes sense to allow insurance companies to do what they do well and to set up a complementary federal program, with transparent funding, to assist individuals with pre-existing conditions who face personal financial constraints that preclude their access to healthcare.

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Shirley Svorny
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Shirley Svorny is Professor of Economics Emeritus at California State University, Northridge, and a Cato Institute Adjunct Scholar. She earned her Ph.D. in economics from UCLA. She is an expert on the regulation of health care professionals. She has a strong interest in public policy and regulation in general. Her most recent work, with Michael Cannon, is "Right‐​Skilling Health Professionals: Replacing Government Licensing with Third‐​Party Certification."

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