Recently, Sears and Darden Restaurants (the parent company of Red Lobster and Olive Garden) revealed plans to change how they provide benefits to their workers. Instead of selecting a plan for the workers, the two companies will give them cash directly to purchase insurance from an online marketplace. Creating private insurance exchanges is a simple but potentially game-changing approach to health insurance coverage.
Private exchanges put choice back in the hands of employees. Those who want cheaper plans with lower coverage pay less; those who want more comprehensive coverage will pay more.
Employees will see exactly what their plan costs and the coverage they receive, allowing them to make smarter choices with their money. And existing federal rules (pre-ObamaCare) for group insurance ensure that employees won’t be charged higher prices if they become sick and can’t be denied coverage if they change jobs and shift to the individual insurance market, as long as they keep their coverage current.
Though similar in name, ObamaCare, aka the Patient Protection and Affordable Care Act (PPACA) takes the basic idea of market-based health-insurance exchanges and buries it beneath a morass of new taxes and heavy-handed regulations
Supporters claim that PPACA applies market principles to help control health costs. The health-insurance exchanges the law establishes allow uninsured individuals to purchase insurance using a combination of their own money and federal premium subsidies (and in some cases cost-sharing subsidies) that scale with income (up to 400% of the federal poverty line). So nominally at least, PPACA does harness market forces. But there are some very important caveats.
For starters, the exchanges are loaded with regulations and taxes that will drive up the cost of insurance in the individual and small-group markets. PPACA’s minimum-coverage provisions (called “essential health benefits”) include coverage for mental-health and substance-abuse services, rehabilitative and habilitative services, medical devices, and pediatric dental and vision care. This is a significantly richer and more costly set of benefits than is commonly sold to individuals and small businesses today. The CBO estimates that premiums will rise by close to 30 percent because of this.
PPACA also limits insurers’ ability to offer lower prices to younger and healthier applicants or charge higher prices to sicker and older enrollees. This restriction will also drive insurance prices up, particularly for the young, healthy people that we should be encouraging to buy (and keep) insurance.
Finally, PPACA includes billions in taxes on insurers, drug companies, and medical-device companies that will be mostly passed on to consumers in the form of higher insurance premiums. Congress’s Joint Committee on Taxation estimates that the insurance tax alone will add close to $400 annually to family premiums in 2016. Because the taxes require aggregate amounts to be collected from insurance companies – $14 billion by 2018 – if one insurer’s payout declines, other insurers have to make up the difference. PPACA’s tax structure will likely motivate insurers to merge—reducing competition and further driving up costs for consumers.
Even its supporters admit that PPACA will drive costs up. Although he previously said that PPACA would “for sure” will lower costs, former Obama administration health advisor Jonathan Gruber now admits that the law will drive up individual insurance premiums – by 40% in Maine and Minnesota, and by 20% in Colorado. Other analysts predict increases of as much as 85% in Ohio and 95% in Indiana. Rates for small businesses are expected to rise as well, although not as much.
Creating private, employer-based insurance exchanges is a great start. Private exchanges are much better positioned to offer high quality coverage without new taxes and expensive new regulations. And new insurance reform proposals offered by the GOP’s Romney-Ryan ticket would improve them even further.
Employer-based exchange plans remain group plans, and if employees lose their jobs they’d have to pay the full cost of coverage out of pocket, without the tax benefit that comes with employer-based coverage. Individuals may also face higher prices in the individual market later if they become sick. The rules vary by state.
Here’s where sensible reforms suggested by Governor Romney and Paul Ryan would improve the market while avoiding PPACA’s high costs.
First, insurance policies have to be truly portable. Romney-Ryan would level the playing field by giving individually-purchased health plans the same tax advantage that employer health plans receive, making insurance much more affordable.
Second, they’d also reform insurance rules to ensure that as long as you kept your coverage, you wouldn’t have to worry about paying a higher price if you got sick.
This would encourage more companies to open insurance exchanges and help their employees navigate them to find the best value. States wouldn’t have to spend money to open their own exchanges – although they could opt to, if it made sense in their local markets. High-risk pools could be created with relatively modest funding from Washington for the small number of people with pre-existing conditions who can’t find affordable coverage.
By repealing PPACA’s expensive regulations and taxes, the Romney-Ryan plan would also help lower the cost of health insurance. And by creating rules permitting the purchase of insurance across state lines, the GOP plan would help individuals find more affordable plans that fit their families’ needs – without being told what they have to purchase by lobbyists and bureaucrats in Washington.
Private health-insurance exchanges can serve as a model for real health-care reform – especially if the insurance they sell is made truly portable while protecting individuals from future rate increases as long as they stayed insured. It’s a simple, elegant approach that would improve American health care at low cost.
All courtesy of a company that specializes in Italian cuisine and unlimited breadsticks.
Paul Howard, PhD, is the Director of the Manhattan Institute’s Center for Medical Progress, and Yevgeniy Feyman is a research associate.
Paul Howard is Director and Senior Fellow at the Center for Medical Progress at the Manhattan Institute for Policy Research.