Why Mitt Romney's Plan for Pre-Existing Conditions is Better Than Obamacare's

One of the talking points that Democrats have used for years in defending Obamacare is that the law helps those with "pre-existing conditions" to get affordable insurance coverage. And when Mitt Romney explained in last week’s debate that his own health-reform plan would address those with pre-existing conditions, those same Democrats guffawed. But Romney’s plan for pre-existing conditions is superior to Obamacare’s. Here’s why.

(DISCLOSURE: I am an outside adviser to the Romney campaign on health care issues. The opinions contained herein are mine alone, and do not necessarily correspond to those of the campaign.)

First, it’s important to understand why we have a "pre-existing condition" problem in America. If we don’t understand what caused the problem in the first place, it’s hard to come up with the right solution. And the problem was caused by an act passed by Congress under the Roosevelt administration called the Economic Stabilization Act of 1942.

World War II-era wage controls triggered the pre-existing conditions problem Because much of America’s work force was off fighting World War II, the Roosevelt administration feared that the domestic demand for workers would outpace labor supply, leading to a spiral of higher wages and runaway inflation. The 1942 law mandated wage ceilings for a broad range of occupations, and required federal approval for any changes thereof. But fringe benefits, such as health insurance, were not covered under the 1942 wage controls. As a result, many employers started offering health benefits as a way around the new federal wage limits. This loophole gained further strength when, in 1943, a federal court held that employer-sponsored health insurance was exempt from taxation. In the early postwar years, courts and the IRS continued to struggle with how to treat the tax status of health insurance. Then, under President Eisenhower, Congress passed a comprehensive revision of the federal tax code called the Internal Revenue Act of 1954. Section 106(a) of the 1954 Internal Revenue Code officially excluded employer-sponsored health insurance from taxation:

The employer tax exclusion disproportionately benefits high earners

The enshrinement of health insurance as non-taxable income meant that employers and their workers had a huge incentive to divert dollars of salary into dollars of health insurance. For example, a worker who pays federal and state income taxes at a combined rate of 30% will receive $7,000 for every $10,000 his employer provides in gross salary. But the same employee will receive $10,000 in benefits for every $10,000 his employer spends on health insurance—a 43% improvement.

This subsidy is even higher for the highest earners. A Wall Street banker who pays federal and state income taxes of 50% will receive $5,000 for every $10,000 his employer provides in gross salary. But by receiving $10,000 in benefits, he gets a 100% improvement on his taxable income. And because he’s a high earner to begin with, he’s likely to benefit from an especially generous health insurance plan.

This exclusion of employer-sponsored insurance from taxable income—known as the employer tax exclusion for short—is what ties Americans’ health insurance to their jobs. If you lose your job, and stop paying for health insurance on your own, and then get sick, an insurer is under no obligation to cover you, due to what is now your "pre-existing condition"—and, in rare cases, the insurer may do just that.

The primary problem: Discontinuous health coverage

The reason why people fall victim to pre-existing condition problems is discontinuities in coverage. A person who at one job gets injured, and tries to switch jobs, has to switch health plans. The new insurer is stuck with the costs of treating for the injured worker, and has to charge enough to not lose money on that enrollee.

Same goes for someone who stays uninsured for a prolonged period, waiting to buy insurance after he gets sick. Insurers can’t provide affordable health insurance if the only people they cover with their policies are already sick.

So the policy solution to the pre-existing condition problem is to make sure that people own their own insurance policies, and don’t have to change plans when they change or lose their jobs. This is what wonks call continuous coverage.

The secondary problem: Health insurance is too expensive

The second most important reason why we have a pre-existing condition problem is because insurance is too expensive. And the high cost of insurance is also largely due to the employer tax exclusion.

Because people don’t buy insurance for themselves, they have no incentive to shop for value and buy the plans that meet their needs, without extraneous coverage. In addition, this fourth-party system in which third parties buy insurance on our behalf makes us all insensitive to the cost of our care. We go to the doctor and expect our costs to be covered. We don’t have any reason to think about how much one hospital costs versus the next.

The private insurance market can be divided into three subgroups: the large-group market, for employers with more than 50 workers; the small-group market, for those with 2 to 50 employees; and the individual or non-group market.

The individual market is dysfunctional in America because few Americans use it. Insurers have a hard time building economically viable risk pools with a heterogeneous group that consists of young people,

Economists of all ideological stripes agree that the employer-sponsored system in America is a key reason why health insurance is so costly here. And, in turn, because insurance is so costly, people with low incomes can’t afford it, and go without it for long periods. And if they get sick when they’re uninsured, they have a pre-existing condition.

The 1996 HIPAA law addressed pre-existing conditions, sort of

A 1996 law called the Health Insurance Portability and Accountability Act, or HIPAA, patched up some of the issues with pre-existing conditions. HIPAA required that small-group health plans could not deny coverage to those who had maintained creditable coverage in the recent past, without any significant breaks; i.e., coverage gaps of 63 days or longer. HIPAA also applied this provision to any employer plan, regardless of size, if a worker is eligible under the terms of the plan.

For those who do have coverage gaps, insurers must still offer insurance, but can refuse to provide benefits specifically related to pre-existing conditions for 12 months after enrollment. Most importantly, HIPAA doesn’t dictate what insurers charge for covering those with pre-existing conditions, though plans may not ask a worker to "pay a premium or contribution which is greater than such premium or contribution for a similarly situated individual enrolled in the plan on the basis of any health status-related factor in relation to the individual."

So, contrary to what you might think, most people can’t be denied coverage because of a pre-existing condition. However, people who switch jobs, and fall ill before switching, can be charged higher premiums at their new place of employment. And again, the new insurer has no economically viable option but to charge the sick patient what it costs to cover his condition.

In addition, if you lose your job, HIPAA requires that insurers offer you coverage regardless of pre-existing conditions—a policy known as guaranteed-issue—but only if you stick with the COBRA plan that you are offered by your employer. (The Consolidated Omnibus Budget Reconciliation Act of 1985 allows employers to offer group coverage to workers who have lost their jobs for 18 months, though workers usually have to pay the premiums themselves.) If you don’t like the plan offered by your employer, and want to go with a different plan in the individual market, the HIPAA protections don’t apply.

In addition, HIPAA’s guaranteed-issue provision doesn’t apply to the individual market generally. That is, for the 5 percent of Americans with health insurance who use the individual market, there is no guaranteed-issue mandate, until Obamacare’s mandate kicks in in 2014.

There’s a good reason why HIPAA didn’t impose guaranteed issue in the individual market. If it had, individuals would have had an incentive to avoid paying for insurance until they got sick, creating the adverse selection death spiral that would destroy the individual insurance market.

But HIPAA, whatever its merits, didn’t address the two underlying causes of the pre-existing conditions problem: the lack of true portability of health insurance from job to job, and the fact that increasing numbers of American’s can’t afford insurance.

Do only 82,000 Americans suffer from the pre-existing condition problem?

You might think, given how often supporters of Obamacare talk about pre-existing conditions, that it’s the biggest problem with our health-care system. But it isn’t, not by a long shot. In the post-HIPAA environment, very few people—less than one percent of Americans—are denied coverage because of a pre-existing condition.

These individuals fall into a fairly narrow bucket: they’re too well-off to qualify for Medicaid, and too young to qualify for Medicare. They’re either unemployed, or don’t get insurance through their employers. They’ve elected not to maintain coverage on the individual market, either because they couldn’t afford it, or because they didn’t want to. And then they got sick.

A Congressional Budget Office study found that, of those who are uninsured, only 3.5 percent were uninsured because their health was too poor to qualify. On the other hand, 71 percent blamed the high cost of insurance for their lack of it. 3.5 percent of 55 million is 1.9 million, or 0.6 percent of the U.S. population. It’s both a big number (1.9 million) and a small number (0.6 percent). If the CBO’s numbers are right, the pre-existing condition problem is one that we should pay attention to, and try to fix, but without making things worse for the other 99.4 percent of the population.

The number of people with this problem may be far lower than that. Obamacare created a set of high-risk pools that would provide subsidized insurance to people who have a pre-existing condition and have been without health coverage for the last 6 months: a reasonable definition of the population. The CBO estimated that up to 700,000 individuals would enroll in the program. As of July 31, 2012, only 82,000 had signed up.

Do only 82,000 Americans without insurance have pre-existing conditions? It could be. It could also be that Obamacare’s high-risk pools were underfunded and poorly structured, leading few people to sign up for them.

Obamacare’s ’solution’: Guaranteed issue with higher premiums, individual mandate, trillions in new spending

So how does Obamacare "solve" the pre-existing conditions problem? By going where HIPAA did not: forcing insurers in the individual market to accept all comers, regardless of pre-existing conditions. But in order to enforce that rule, without destroying the individual insurance market, Obamacare had to enact...well, the rest of Obamacare.

Obamacare requires most Americans to buy health insurance—the infamous individual mandate—to discourage people from waiting until they’re sick to buy insurance. Because if only sick people buy insurance, but insurers are forced to accept all comers and charge healthy and sick people the same rate, insurance would rapidly become too expensive for anyone to afford. The individual mandate, as you know, was so Constitutionally controversial that it was barely upheld in a 5-4 vote by the Supreme Court.

For the government to enforce that mandate, it has to come up with a government-approved definition of what "health insurance" is. And Obamacare takes advantage of that new role to define insurance expansively, so that insurance plans that qualify for the mandate are costly and comprehensive, driving up non-group premiums by 19 to 30 percent.

And it’s unfair to force poor people to buy a costly insurance product that they can’t afford. So Obamacare spends $1.9 trillion over the next ten years to subsidize insurance for those with lower incomes.

Obamacare does make insurance cheaper for the small number of Americans who have pre-existing conditions and have been denied coverage by insurers. But the price of that "solution" is to drive up the cost of insurance for everyone else, and fund $1.9 trillion in new spending over the next decade with $1.2 trillion in tax increases and $716 billion in Medicare cuts.

Obamacare doesn’t make coverage more portable. Indeed, the law includes an employer mandate that forces employers to cover health insurance for their workers or pay a steep fine. And it doesn’t make insurance cheaper, because its regulations will drive up the cost of insurance, and already have.

Hence, while Obamacare makes insurance more available for the tiny minority of Americans who have a tough time finding coverage today, it does so by dramatically decreasing the affordability of that insurance for everyone. Over time, Obamacare will fail to protect those with pre-existing conditions and those without them from the law’s impact on rising insurance premiums.

Romney’s solution: Address the root cause of the problem

Mitt Romney’s plan, by contrast, takes on the underlying causes of the pre-existing condition problem. The plan finally addresses the tax-code legacy of World War II, by equalizing the tax treatment of employer-sponsored and individually-purchased health insurance.

Under Romney’s plan, anyone who purchases insurance for himself, and maintains that coverage from job to job, will never have to fear losing his coverage because he becomes ill. Moreover, if other insurers want his business, they will have to compete for it, by making him a financially attractive offer; i.e., one with lower premiums or more benefits.

In addition, if people are assured of being able to keep their plans, they can sign long-term insurance contracts, aligning everyone’s incentives. An insurer could offer you a lower premium if he knows you’re guaranteed of staying with him for, say, five years. Today, he has no such assurance, because you can drop out of his plan or change jobs.

Romney’s plan will, through choice and competition, make insurance cheaper, rather than forcing carriers to offer costly, over-regulated products. That will encourage more people to maintain their coverage, because it will be more affordable. The Romney plan will also guarantee that health insurance is truly portable, ensuring that no one who maintains his coverage will lose it.

In concert with these fundamental reforms that address the root cause of the pre-existing condition problem, the Romney plan contains patches for people who are currently stuck with a pre-existing condition today. The Romney plan extends HIPAA’s guaranteed-issue and health status protections to people in the individual market, so long as they have maintained creditable coverage.

In addition, for those who haven’t maintained creditable coverage, Romney proposes offering federal subsidies to states to provide high-risk pools. As I noted above, Obamacare makes a nod to conservatives with its own, limited high-risk pools: but Romney’s plan would incorporate them as a central feature, and put significantly more money behind them.

Something that is not explicitly in the Romney plan, but could become part of a bill that Romney would sign, is a one-time transition whereby those who haven’t maintained creditable coverage could, for a specified period of time, enroll in any plan regardless of their medical history. From that point onward, it would be up to them to maintain that coverage in a reformed system.

Yes, Romney’s plan is better than Obamacare

Obamacare’s approach to pre-existing conditions, in summary, may help a tiny minority with pre-existing conditions to gain coverage in the short term, but the law will drive up the cost of insurance for everyone else, leading to adverse selection and higher premiums for all. And the price of Obamacare is steep: the individual mandate; trillions in new spending and taxes; deep cuts to Medicare providers.

The Romney approach is, over the mid-to-long term, the far superior one. Romney’s plan liberates Americans to own their own health insurance, continuously, as opposed to remaining dependent upon their employers. In addition, his plan would reduce the cost of insurance, making it more affordable for Americans to maintain their coverage. And, depending on how his plan was structured, it could involve minimal new spending while also reducing the deficit.

Pro-Obamacare partisans will claim that Romney’s plan is somehow not a real plan, because it doesn’t force all insurers to take all comers in all circumstances, no matter what. But the Obamacare approach will unravel over time, as its web of mandates, regulations, and subsidies drives the cost of insurance skyward.

Making sure that all Americans have high-quality health insurance doesn’t require a $2-trillion government takeover of the health-care system. Free markets can do a better job, if we give them the chance.

This piece originally appeared in Forbes

This piece originally appeared in Forbes