Open letter to Representative Faso on health insurance

March 30, 2017

Dear Representative Faso,

A fellow constituent shared with me your letter to him on the subject of health insurance. It points to some serious misunderstandings on your part. I’ll get to the specifics of your letter, but I wanted to start with the general concept of “actuarial fairness.”

On the one hand, I don’t want to explain a concept you already know, and as someone who has dealt with public policy you may well be familiar with this one.

On the other hand, your earlier work as a lobbyist and a member of the state assembly may not have required you to learn about this particular term. And your support of the AHCA suggests you haven’t really thought through the implications of applying actuarial fairness in health insurance, so I’ll proceed with and explanation of that and then get to the particulars of your letter.

Actuarial fairness is the idea that people should be charged insurance premiums that are proportional to the costs they will probably impose on the system. If you’re selling 20-year life insurance, you have to charge more for an unhealthy 45-year-old than for a healthy 30-year-old. And you should charge slightly more for a healthy 45-year-old man than for an equally healthy 45-year-old woman. If you’re selling car insurance, you have to charge a higher premium for a 20-year-old man (some young men are excellent drivers, but the average person in that group is more reckless than others). And you have to charge more for people who have moving violations (their documented behavior shows them as individuals to be more reckless than the average driver).

In both of these forms of insurance, actuarial fairness isn’t a problem. We don’t require people to have life insurance, and it’s hard to see that there’s a social problem with people not having it, so we leave that to the market. We do require people to have car insurance if they’re going to drive, and driving is close to a necessity for many people. But it’s easy to separate out the part of someone’s high premium that’s due to who they are (charging more for a 20-year-old male) vs. the part that’s due to how they behave as an individual (a person with multiple moving violations). And that piece about “how you behave as an individual” is a large piece of the premium and useful to have in there as a deterrent to bad behavior, so we’re fine with actuarial fairness in car insurance as well.

In health insurance, however, it has very bad effects.

Start with a healthy 25-year-old man. Most likely, his only medical expenses for the year will be a short visit to the doctor and some blood work. $300 in cost? But of course there’s a chance that even a healthy person will develop cancer or diabetes, or get hit by a truck—that’s why we have insurance. So you figure in a small chance of these large expenses, plus profit and operating expenses for the insurance company, and his premium might be $1,500 a year. That’s roughly $120 a month—a little on the high side for an iPhone plus coverage plan, but sort of in the ball park (I’m thinking of Rep. Chaffetz’s remark that people are choosing to have iPhones rather than health insurance).

Now turn to an equally healthy 25-year-old woman. She’s got the same one-visit-per-year predictable cost, but she also has about a 5% chance of getting pregnant and giving birth, whereas her male counterpart has a 0% chance of incurring those costs. Childbirth in the U.S. costs on average about $10,000 to $15,000, though it can be much more (see here). If we apply actuarial fairness, that means that this healthy 25-year-old woman should be charged at least $500 more than her male counterpart.

And that’s pretty clearly insane.

We all have an interest in the health of the next generation, men as well as women, and people who choose not to have kids just as much as those who want to. And we were all born. Prenatal and maternal care is a fundamentally social interest. But actuarial fairness means that this cost is borne exclusively by women of childbearing age. Some women find pregnancy a fulfilling experience, but it is also uncomfortable for most and carries some small but real medical risks. It is bad policy to insist that, in addition to bearing these physical costs, women also get the “privilege” of carrying the financial burden alone.

And the problems get more serious from there.

Let’s say someone has diabetes. Now their known medical costs aren’t $300 a year, or even $300 for sure plus a small chance of $15,000. A person with diabetes has about $8,000 per year in medical expenses attributable to their disease (see here). An actuarially fair policy for them has to start at $8,000, since the insurer knows that the costs will be about that much. Then you add in additional amounts for the risks of cancer, accident, or other unpredictable health problems, plus profit and operating expense for the insurance company, and you’re well over $10,000. For one person.

Let’s say it’s a family of four, and one has diabetes. We have three people insured at roughly $1,500 per person (plus $500 if the family includes a woman of childbearing age), for $5,000, plus the policy for the family member with diabetes for at least $10,000, and now you’re over $15,000 for the family.

Median household income in the U.S. in 2016 was $56,516. There are a lot of households making $40,000, or $30,000.

Actuarial fairness says they should be paying 25% or 30% or 50% of their pre-tax income for health insurance.

When it’s put in those terms, I’m guessing you wouldn’t think that was a good idea.

And it’s easy to come up with more extreme examples than diabetes. The term “actuarial fairness” sounds good, because it includes the word “fair.” But when we apply it to health insurance its consequences are inhumane and deeply unfair. What it really means we’re going to have a sort of health lottery, and if you happen to draw a bad ticket, you will be hundreds of thousands of dollars poorer in life than your neighbor who drew a good ticket.

If we think that’s a bad outcome, then we have to limit the application of actuarial fairness in health insurance.

I’ve gone to considerable lengths on this topic because when it comes to insurance, markets will always move in the direction of applying actuarial fairness. There’s no other way they can possibly operate. If I were to try to ignore actuarial fairness in selling insurance policies, I would quite quickly go out of business, losing customers to competitors who did apply actuarial fairness, and/or losing money on any policies I did manage to sell.

And so in the end, it’s not that complicated:

• Once people understand the consequences of actuarial fairness in health insurance, they really don’t like them.
• Markets always try to impose actuarial fairness.
• The only way to control the undesirable effects of actuarial fairness is through government action, either by putting constraints on the policies that insurers can sell and how they can charge for them (the Obamacare approach) or by simply providing insurance directly (single-payer).

The thrust of the AHCA—that you supported—went in the opposite direction. By reducing the restrictions on insurers (in the name of making premiums lower for some people), the AHCA would have increased the scope for actuarial fairness, thus driving up premiums for others. When that was combined with the AHCA’s reductions in subsidies, the all-too predictable effect would have been to drive many people out of the insurance market altogether.

The problems with Obamacare are real.

The so-called solutions in the AHCA were not.

If you’re really interested in serving your constituents and improving access to health care while holding down costs, you have to start from an understanding of the economics of health insurance.

If you’re interested in that project, you will have the cooperation of me and many others in our district.

So much for general principles. On to the specifics of your letter.

You write:

As the 115th Congress began consideration of healthcare reform, I put words into action by speaking out for a better, more affordable healthcare system. I consistently defended what works in the Affordable Care Act (ACA), such as guaranteed coverage for pre-existing conditions and health insurance for children under their parents' plan until age 26. Furthermore, I fought to fix parts of the law that have drastically raised premiums and deductibles for many.

Surely you understand that “guaranteed coverage for pre-existing conditions” requires one of two things:

1. A mandate to ensure that people won’t game the system: forego insurance while they’re healthy, then take advantage of the guaranteed-coverage rule when they get sick.
2. The government simply covers everyone; individuals are free to turn to the market for coverage beyond the universal package provided by the government, but a basic insurance package is provided to all legal residents, funded through taxes. Obviously, this is the approach better known as “single-payer.”

If you try to require private insurers to cover pre-existing conditions but don’t require individuals to have coverage, you destroy the business model for private insurance companies.

The AHCA half-heartedly recognized this by requiring individuals to maintain continuous coverage or be charged penalties that would go to the insurance company. There is a little bit of logic to having those fees go to the insurer, since that is the party that is potentially getting cheated by people gaming the system as I described above, but it is more likely that people will drop coverage for financial reasons, and then be unable to get back on due to the penalty for non-continuous coverage. The bill you supported would have preserved the insurance companies’ business model, but at the expense of leaving increasing numbers of vulnerable people priced out of the market.

Is that what you wanted?

In your next paragraph you write:

The American people were promised that the ACA would drive down costs of coverage, expand access to insurance and retain quality care. While there has been some success in reducing the numbers of uninsured, many people have reported to me that they can no longer afford plans offered by their employers or on the exchanges. I've long believed that the ACA has concentrated too much decision-making authority in Washington instead of with the states, which have traditionally regulated health insurance markets. Premium and deductible hikes for New Yorkers in 2017 average 16.6% for individual plans and 8.3% for small group plans. Individuals have also received cancellation notices from insurance companies, lost doctors that they liked, and many can no longer afford their plan due to mandated services that are unneeded or undesired.

The rate hikes that you describe here are real, but it’s important to understand their source. Note that they affect the individual market on the exchanges set up by the ACA, not the employment-based policies that cover most people. And that points to part of why they’re happening. A major component is so-called “churn,” where people game the system by avoiding insurance when they’re healthy, then relying on the ACA’s requirement of coverage for pre-existing conditions when they get sick. With individuals acting like that, insurers have no choice but to request significantly higher premiums (see here).

The answer to that problem is two-fold: increase the penalties for not being insured, and increase the subsidies so that more people view insurance as affordable.

The AHCA would have reduced the subsidies, and the current administration has instructed the Internal Revenue Service not to enforce the individual mandate.

So the underlying problem is too few people buying insurance, and you support a bill that would have reduced the carrot, and you support a president who is eliminating the stick. It feels as though you’re not serious about fixing the problems with Obamacare.

Another factor in the premium increases on the exchanges is the relatively small numbers of people insured there, and the bias toward having worse-than-average health. Smaller pools are riskier, which insurers compensate for by charging more. And people in the exchanges are disproportionately people who have been without coverage for a period of time, sometimes a fairly long period, during which health problems have built up. The ACA exchanges were an improvement for many people, but this was an inherent weakness of its approach. The solutions are either to provide bigger subsidies or to move to a single-payer approach. As discussed below, simply allowing the sale of “thin” policies that cover very little is not a viable approach.

It’s important to focus in on this passage: “I've long believed that the ACA has concentrated too much decision-making authority in Washington instead of with the states.” There are no mysteries here, only misunderstandings on your part.

As discussed above, if the federal government is going to require insurers to cover pre-existing conditions, then the government is also going to have to require individuals to have coverage. And because health care is expensive, if the government is going to require people to have insurance, it is also going to have to provide subsidies to help people buy that insurance, if their income falls below some threshold. And if the government is going to provide subsidies for people to buy insurance, then it has to also define what elements must be covered in order for a policy to qualify (both for a subsidy and to satisfy the individual mandate).

Either the federal government steps out entirely, and lets the portion of uninsured people rise back to what it was before the ACA, or it steps in at least as far as the ACA, if not further.

Those are the only two choices. Everything else is fantasy.

The AHCA that you supported was particularly bad in this regard and it became disastrous the day before it was withdrawn, with the removal of the essential health benefits (EHBs). Those EHBs are exactly what define a “valid” health-insurance policy. And remember, you single out “coverage of pre-existing conditions” as part of Obamacare that you like, but if you’re going to accomplish that through private insurers, there’s an unbreakable chain of logic that leads to the EHBs. If you support a bill that removes EHBs, then your actions don’t support coverage of pre-existing conditions, even if your words say you do.

This is related to the argument that “many [individuals] can no longer afford their plan due to mandated services that are unneeded or undesired.” There are two things going on here.

First, some people had policies that sounded good on paper, but actually covered very little—that’s why they were so affordable. If you actually got sick, you discovered that the coverage you’d been paying for left you very exposed.

“Well, that’s no business of ours.” Except that it is, because people with such thin policies are going to show up on the public dole once they do get sick. The fiscally responsible thing to do is to make sure that they have real coverage up front, rather than allowing them to skate by on skimpy coverage and then become our problem when they’re ill.

Furthermore, once you accept the idea of coverage for pre-existing conditions—as you have—it is everyone’s business that your policy cover certain things, since the public will be subsidizing it.

Second, there’s the language about services that are “unneeded or undesired.” There was Senator Pat Robert’s tone-deaf satire worrying about losing his mammogram coverage (see here). The larger issue he was getting at was the ACA’s requirement that insurers charge the same prices for men and women, despite the fact that, obviously, a man will never require prenatal and maternity care.

I’ve discussed the absurdity of this objection above, in the opening section on actuarial fairness.

Additionally, there are services useful to men but irrelevant to women, such as prostate screenings and treatment for prostate cancer. If it’s unfair to charge men for maternity coverage, then it’s equally absurd to charge women for issues relating to the prostate.

In the end, a very reasonable position is that nobody should be charged more simply for having been born a woman, nor for having been born a man. Which means that people will be paying for things they don’t need.

The issue of “undesirable” services is maybe an indirect way of referring to some people’s moral objection to paying for some or any forms of birth control. This is a difficult issue, but it’s tied up with the necessity—explained above—for the federal government to define what counts as coverage. The goal of the Affordable Care Act is to give people affordable access to important aspects of health care. To my mind, contraceptive services definitely come under that heading of “important aspects of health care.” And from a fiscal perspective it makes a lot of sense to help women avoid unwanted pregnancies, so on two counts I support keeping contraception in the EHBs.

If some people’s moral objections are so strong, we should have this conversation openly, and if contraception is removed from the EHBs, it should be done in full recognition of what that will mean for the health and finances of many women. The nature of government is that it acts for us all, and regardless of what action it takes, some portion of the citizenry will feel that government is acting against their wishes, or perhaps against their moral convictions. Personally, I find it morally repugnant that the government might subsidize a policy that covered Viagra but not contraception. Is my moral concern of less weight than that of someone who thinks contraception is wrong?

You write:

Federal control of America's healthcare system has also resulted in reduced options for those looking to buy affordable plans. In fact, 36 percent of exchange participants have no choice among insurance providers. Many private insurers have declined to continue providing plans under the ACA. Additionally, more than two-thirds of the original 23 Consumer Operated and Oriented Plans established by the ACA have shut down across the nation. In New York, the failed Health Republic cooperative cost taxpayers over $200 million, kicked over 200,000 enrollees off their plans, and still owes providers millions in unpaid fees.

These are real problems, but as with the premium increases, it’s important to look at what’s behind them.

One of the two biggest blows to the Affordable Care Act was Congress’s refusal to continue funding the so-called risk corridors (the other was the decision of some states not to accept Medicaid expansion). From the insurer’s perspective, the risk in offering policies under the ACA was that you would attract a disproportionate share of people with higher-than-average health costs. Insurers have to tread a narrow path, balancing the need to cover their costs against their need to keep their premiums low so as to be competitive.

In crafting the Affordable Care Act, Democrats recognized this problem and created the risk corridors in order to give insurers more room to keep premiums down. Then Congress limited the administration’s ability to operate the risk corridors (see here). Under those conditions, it’s hardly surprising that insurers are pulling out. If you’re not advocating proper funding of the risk corridors, your actions once again speak to political posturing rather than actually trying to solve real problems in the ACA.

As I said earlier in the letter, I am one of many among your constituents who recognize problems in the Affordable Care Act and want to work on ways to improve it.

If you’re truly interested in developing better insurance solutions, we’re happy to work with you.

If you’re not, we’ll have to focus our efforts on replacing you with someone who understands health insurance and cares about improving it.

Thank you for your time.

Karl Seeley, Ph.D.
Associate Professor and Department Chair
Department of Economics
Hartwick College
Oneonta, NY 13820

(Related item here. Earlier essays on this topic here, here, and here. And an even later letter here.)