The Republican Health Care Trilemma

Republicans want three things about health insurance, but it's only possible to have two, which is why they can't come up with a health care policy.

Dear readers,

Most Republicans, including the president, do not want to extend the enhanced Affordable Care Act subsidies that Democrats first enacted during the pandemic. But they also don’t want to sound like they don’t care about skyrocketing health insurance premiums. So we’re back in yet another cycle of Republicans saying they’re going to reform the health care system to make it much cheaper and better, and as always, there’s really no plan — not even the “concepts of a plan” the president promised he had during last year’s campaign. Instead, there’s just a lot of complaining that health insurance is too expensive, and vague claims that Republicans can make it cheaper by unleashing the markets and consumer choice.

Back in 2017, former House Speaker John Boehner said this about Republicans and health care: “In the 25 years that I served in the United States Congress, Republicans never, ever, one time agreed on what a health care proposal should look like. Not once.” Eight years later, that remains true, and here’s why: (most) Republicans want a health insurance system that does three things — or rather, that doesn’t do three things:

1. It should not force people to buy health insurance if they don’t want to.

2. It should not spend a lot of taxpayer money subsidizing health insurance.

3. It should not allow insurers to discriminate against people with pre-existing conditions.

The problem for Republicans is it is only possible to have, at most, two out of those three things. In an unregulated market, you could have (1) and (2). It would suck for people with cancer, but it is a theoretically possible policy to enact. The trouble is with (3) — (3) is a rule that ensures that health insurance isn’t a normal kind of insurance, and to make the abnormal insurance market work, you have to abandon either (1) or (2) (or both).

The key thing to understand about health insurance is that if it worked the way auto or homeowner’s insurance works, we would not be very happy. This is because, while you can sell a house or a car, you cannot get a new body. Events may befall you this year that will cause you to have more and/or higher medical costs for the rest of your life, or at least far beyond the term of whatever health insurance policy covers you today. In the future, you will need to obtain insurance that covers expenses due to events that occurred in the past; left to an open market, your insurance is likely to be either unavailable or unaffordable.

For the system to work, sicker people need to be able to buy insurance for less (often much less) than it actually costs to cover them. There are two ways to do that: the government can use tax revenues to subsidize insurance for the sick; or it can impose a cross-subsidy, by forcing healthy people to pay more for insurance (often much more) than their actual risks would require. And, for that second option, the key is “forcing”: if insurance for healthy people is based on sick people’s costs, it’s often going to look like a pretty bad value. The dreaded individual mandate is not the only way to bring the healthy along into the market, but all the options to make it work are pretty anti-free-market in one way or another.

Meanwhile, there is the compounding issue of high prices. Our high costs make every kind of possible health care policy harder to implement here than elsewhere: single payer would be way more expensive here than it is in Europe, while private-market solutions entail premiums that look shockingly high before subsidy — and that would be too high for some healthy people to afford, even if they weren’t cross-subsidizing the sick. In practice, we rely on a patchwork of direct and indirect government subsidies to get most non-elderly Americans on private health insurance, while we provide government insurance for free to the poorest Americans, and at a deeply discounted price to the elderly. There is a public sentiment that people have the right to receive health care, and these subsidies are necessary to ensure that they actually get it.

All of which is to say, a normal insurance pool transfers wealth to people who experience unforeseen losses and away from those who don’t experience them. Our health insurance system also makes these kinds of transfers, but for the reasons described above, it also needs to make two other kinds of transfers not normally seen in insurance markets: a cross-subsidy to people with foreseeable health costs, from people whose health costs are foreseeably low; and to people with low incomes, from people with high incomes.

Republicans look at this system, see the cross-subsidy, and decry it. They think that it is unfair for light users of the health care system to pay a lot into it, and they want to make it cheaper for them. Their instinct is shared by a lot of consumers, who look at the premiums for health insurance provided by the ACA exchanges, and wonder why they’re paying a thousand dollars a month for coverage with a deductible so high that they’re unlikely to make claims unless they get seriously ill. Democrats’ usual retort is that’s what insurance is — you pay a premium, and what you get in exchange is the right to make a big claim if something terrible befalls you. But this retort isn’t quite correct. Yes, part of a healthy person’s ACA plan premium pays for their own risk of developing serious illness, but a lot of it is financing other, sicker Americans’ already known serious illnesses. The premium would be a lot lower if it were built around the enrollee’s individual risk in the way a homeowner’s policy would typically¹ be, instead of adding on this expensive cross-subsidy.

The problem with getting rid of this cross-subsidy is: what are you going to do instead? You can tell people not to live in a flood zone if they can’t afford to insure against the risk of flood, but you can’t tell people not to get cancer if they can’t afford to insure against the risk of continuing to have cancer.

One option is that you can use taxpayer subsidies to replace the cross-subsidy — indeed, Democrats would generally like to do this, and the enhanced ACA subsidies that are about to expire are an example of a way to do it. Another way to replace the cross-subsidy, sometimes floated by Republican policy wonks, is the creation of “high-risk pools,” where the government provides a pool of money to subsidize health insurance for the sick. The problem is that an effective high-risk pool is very expensive and Republicans never want to put up the amount of money needed to turn their talking point into a workable policy. A third option — the one that prevailed in most of the country before the ACA — is that you can simply allow health insurers to refuse to cover pre-existing conditions, making insurance unaffordable or unavailable for a lot of sick people. This would be hideously unpopular and it would run afoul of prong (3), to which most Republicans remain committed. A fourth option, used in some blue states before the ACA, is that you can bar insurers from discriminating on the basis of pre-existing conditions, and also not provide subsidies to help people buy insurance. This improves “fairness” because, instead of health insurance being unaffordable for the sick, it becomes unaffordable for nearly everyone who doesn’t get it through work or Medicare or Medicaid.

Do you see why Republicans never actually come up with a health care plan? They could allow insurers to charge people based on how sick they actually are, but this would produce a broken insurance market that makes everyone mad — that is, this approach would violate prong (3). Replacing cross-subsidies with explicit subsidies, financed by taxes, violates prong (2) — it is something Republicans do not want to spend money on. A third option — the one Mitt Romney chose when he was governor of Massachusetts — is they could require healthy people to buy insurance whether they like it or not. The stick of a penalty for not carrying insurance can replace much of the carrot of subsidies for buying insurance, and reduce the fiscal cost of producing a reasonably universal health insurance system. But of course, this violates prong (1).

No option is available that meets all of the core Republican objectives, which is why they mumble and dissemble instead of actually producing a policy agenda around health insurance.

What I’ve described above is complicated, but it’s not that complicated. Republicans have had decades to learn that, like the Democrats, they want to regulate insurance in a way that won’t allow a free market to work, while unlike the Democrats, they are unwilling to commit to a corresponding set of mandates and subsidies to make that regulation work. This is why they couldn’t repeal Obamacare, and it’s why they don’t have an alternative to offer today — the suite of outcomes they think they are in favor of remains impossible to produce.

Very seriously,

Josh

1. My characterization of property insurance here is stylized, and in fact, property insurance markets are sometimes regulated in such a way that creates either direct fiscal subsidy or cross-subsidy of people with known risks — particularly of flood, hurricane damage and wildfire — that policymakers have decided those people should not have to bear in full. Those regulations cause problems and my general preference is to get rid of them. But broadly speaking, property insurance pricing is much more tied to the specific risk facing the insured than health insurance pricing is.