Republicans want to replace the Affordable Care Act with something that President Donald Trump argues will provide “insurance for everybody” with “much lower deductibles.” While he did not give any specifics, history provides deep evidence that Republican alternatives are unlikely to be any more successful, or any less expensive, than those offered under the ACA. More likely, replacing the act will likely return us to a pre-ACA era when older people, the unemployed, and people with preexisting conditions won’t be able to afford health insurance.
The ACA is the latest in a series of laws designed to improve an employment-based health care system that has never delivered universal coverage. The characteristics of the employment-based system coupled with the intrinsic qualities of insurance make it difficult to cover everyone. Combine that with the fact that our political process relies heavily on lobbying by insurance companies, pharmaceutical firms, the American Medical Association, and others, and curing the common cold seems more likely than “fixing” health care.
I began studying the economic and historical development of our current system during the Clinton era, when it seemed that an important step in improving the health insurance system would be to understand its origins. Several papers and a nearly finished book later, it is apparent that history still offers valuable lessons to modern policymakers.
No single architect engineered our current system of health insurance. Before the late 1920s, what we think of as health insurance did not exist. Medical expenses were low, so people felt they did not need health insurance. Even if people wanted coverage, most insurance companies refused to offer it out of fear that unhealthy people would be more likely than healthier individuals to purchase it, pushing premiums to an unaffordable level.
That problem — known as adverse selection — is still with us today. But it is reduced if both healthy and sick people purchase insurance. That’s why the ACA includes the individual mandate: By requiring people to purchase coverage, the ACA helps insurance companies spread risk and keep insurance affordable.
One reason why premiums are rising under the ACA is because more people than expected are choosing to pay penalties rather than buy health insurance. If Republicans strip the ACA of the requirement that individuals must have insurance, even fewer healthy people will buy coverage and premiums will rise even higher.
What we think of as modern health insurance originated in the late 1920s. As health care costs increased, hospitals recognized that people were having trouble paying their bills. Baylor University Hospital came up with a unique solution when it contracted to give 21 days of hospital care to Dallas teachers who each paid $6 a year. Other hospitals followed, and these hospital plans formed the Blue Cross system.
Blue Cross plans were popular with consumers. They also demonstrated that adverse selection could be limited by selling insurance to people who didn’t really need it — people who were healthy enough to work. Following the success of Blue Cross, traditional insurance companies began to offer health insurance to workers and the employment-based system was born.
Blue Cross plans formed as nonprofit organizations. They relied on what’s called community rating, in which groups of people are charged the same price for insurance regardless of their health status. Under the ACA, insurers engage in modified community rating based on age and tobacco use. This means they can charge smokers more, and older people up to three times more than younger people. What they can’t do is make sick people pay higher premiums.
As a result, individuals with preexisting conditions find insurance more affordable under the ACA than before. But it’s also a big reason why insurance companies have been losing money. The ACA had several safeguards, such as risk corridors, to protect insurers against large losses, but government changes to the program eroded these safeguards and led to higher-than-expected premium increases.
If these safeguards are not repaired, history suggests that the number of plans offered on the ACA exchanges will continue to dwindle. In the 1940s and 1950s, Blue Cross plans engaged in community rating, while commercial plans operated as for-profit companies. Commercial plans realized they could “steal” the Blues’ best customers by offering healthier people lower rates. In response, the Blues were forced to raise rates, which eventually left them with only the sickest people as clients. Premiums became so high that they could no longer offer coverage.
This eventually drove Blue Cross to abandon community rating. In other words, a free market for health care developed, in which healthy people who were working could find affordable coverage and sick people could not. This could happen today without risk safeguards in place and if the individual mandate is repealed.
Republican alternatives to the ACA include proposals that eliminate the regulation that insurers can charge older people only up to three times more than younger people. Some proposals would allow insurance companies to charge older people up to five times more than younger individuals. If such proposals pass, it would move us back to the time when healthy people could afford insurance, and sick, older people could not.
These gaps in coverage have always existed under our employment-based system. Attempts to close the gaps occurred in the 1930s, 1940s, and 1950s, but were always met with fierce opposition by the American Medical Association. It worried that government interference would undermine their professional power.
In the 1960s, government enacted the Medicare and Medicaid programs over opposition from the AMA. The AMA’s nearly century-old opposition to government-provided insurance has barely waned.
Trump’s secretary of Health and Human Services, Tom Price, is a physician and AMA member who opposes the ACA based on his assertion that it interferes with the doctor-patient relationship. This kind of interest group politics has strongly shaped the health system.
The imperfection of the ACA is a direct result of the deal-making that goes on in Washington. For example, an early draft of the ACA suggested that the uninsured be given access to the Federal Employees Health Benefits Program — the so-called public option. Lobbying by insurance companies killed this feature.
Since its inception, the employment-based system of health insurance in the United States has meant that certain people will have a hard time finding coverage in the free market. While Medicare and Medicaid provide coverage to the elderly and certain very poor people, they leave large numbers of people without the ability to obtain health insurance. In 2013, the year before the ACA was enacted, 41 million people lacked coverage. The passage of the ACA cut that number in half as people gained coverage through the health insurance marketplace and expansions of Medicaid.
What’s the bottom line? Far from delivering the less expensive and universal coverage promised by Trump, repealing key provisions of the ACA will make it more expensive for older individuals and people with preexisting conditions to buy coverage. A recent report by the Congressional Budget Office suggests that if the ACA is repealed, 32 million people would lose health coverage and the price of insurance would double within 10 years.
History tells us that repealing the ACA will not make America great again. It will just make health insurance more expensive.
Melissa Thomasson, PhD, is professor of economics at Miami University’s Farmer School of Business and a research associate for the National Bureau of Economic Research.