As Congress continues to discuss changes to the Affordable Care Act, it may be helpful to share some actuarial and insurance fundamentals.
As Republicans in Congress continue their efforts to repeal and replace the Affordable Care Act, they keep on looking for new ways to separate portions of the insurance markets’ risk pools into different segments. For example, proposals from both the House of Representatives and the Senate would have made it easier for insurance companies to sell barebones plans that would appeal to those consumers with no health conditions who would be willing to trade off low premiums for limited coverage.
Republican legislators have also questioned provisions of the ACA that require plans to include coverage for items that benefit only a segment of the population, such as maternity coverage, as part of the “essential health benefits” required under ACA.
These efforts – to fragment the risk pool and to create different risk pools for individual with different levels of healthcare needs – highlights a tension between individuals’ unwillingness to “pay for someone else” and some fundamental actuarial principles.
First, Americans’ reluctance to pay for “someone else.” The aversion to sharing risk with “others” predates the current health care debates. Americans have long embraced benefit plans structured as individual accounts and have become attached to a model where what’s mine is mine and what’s yours is yours. Period. This individualistic streak can be seen in the growth of 401(k) plans and HSAs. Indeed, the author has long joked that Americans view risk pooling as akin to socialism.
But, at some point this individualism reaches some practical limitations. Watching your account balance in a 401(k) plan grow is very satisfying. And, upon death, the balance of your 401(k) account goes to your beneficiaries. However, there is also a flip side. That 401(k) plan will not provide the guaranteed lifetime income of a defined benefit pension plan. And, the reality is that DB plans’ ability to pay lifetime income is, effectively, funded by the forfeitures of participants who die younger. Similarly, an individual’s HSA may pay for healthcare costs, but it is not insurance and will not be enough to pay the costs incurred upon a catastrophic illness.
In the case of health insurance, larger and more inclusive risk pools (ultimately) benefit everyone. Larger risk pools are more stable and have more predictable costs. More inclusive risk pools help reduce the adverse selection that occurs when individuals do not seek comprehensive insurance coverage until they become ill or injured. In effect, if I purchase a bare bones catastrophic plan now because I don’t currently need more coverage, I will be shocked at the high price tag of more comprehensive coverage when I actually need it.
Insurance is about pooling risks, spreading costs across that pool, and preventing adverse selection against that pool. Individuals may not want to share costs incurred by “others” but, at some point, each of us becomes that “other” person who needs coverage for that illness or accident. And Congress increases everyone’s risks when they ignore these actuarial realities.
