Replacing ObamaCare: Republican Answer to Pre-Existing Conditions

This is the final post exploring the Republican Study Committee’s proposal for replacing ObamaCare.

The Republican Study Committee’s recently introduced comprehensive health care proposal titled the American Health Care Reform Act of 2013 (AHCRA), H.R. 3121, repeals ObamaCare and offers the best set of proposals to date toward establishing a Republican consumer-driven health care narrative.  Its core features include the Standard Deduction for Health Insurance, which would unchain the tax advantages for purchasing health insurance from employer-sponsored coverage, and its HSA enhancements to to unleash the power of the market in combating the skyrocketing costs of care and empower individuals to control their own medical savings and expenses.

AHCRA also includes a number of crucial market reforms that can answer some of the basic questions like “How do you address pre-existing condition exclusions without outright banning them like in ObamaCare?” or “If I can’t get coverage on an ObamaCare exchange, what would my options be?”  These proposals are important steps in showing that the federal government can act in unintrusive ways to improve the pre-ObamaCare health coverage landscape, and without the endless and heavy-handed stockpile of mandates that define ObamaCare’s failures.

Some of the highlights include:

- Expanding HIPAA’s Pre-Existing Condition Protections: Let’s first acknowledge that a very small percentage of Americans were denied health coverage because of a pre-existing condition exclusion before ObamaCare imposed its regulatory takeover of the private health insurance industry.  It’s a hard number to precisely identify, and there have been numerous estimates, but Paul Roderick Gregory at Forbes recently pegged the number at roughly 1.5 million people denied.  Out of a population of 316 million.  That’s less than 0.5%.  Sound like a problem worthy of radically transforming our entire health system?  Remember, as Sen. Ted Cruz (R-TX) outlined in his back and forth with Sen. Tim Kaine (D-VA) during his marathon speech to defund ObamaCare, the laws of economics make it impossible to impose a ban on pre-existing condition exclusions without also imposing the iron-fisted individual mandate.

Why are so few unable to access health coverage as a result of pre-existing conditions?  As Gregory further points out, 96% of Americans with health insurance are covered through government programs (e.g., Medicare, Medicaid, TRICARE) or employer-sponsored coverage.   Government programs outright prohibit pre-existing condition exclusions.  For employer-sponsored group health coverage, HIPAA has long made plans extremely limited in their ability to deny coverage based on a pre-existing condition.  Essentially, if you maintained health coverage without a significant break (defined as 63 days), it’s a non-issue.  Only 12 million Americans, or roughly 3.5% of the population, purchase the type of individual policies where pre-existing conditions are an issue.

HIPAA also has long provided pre-existing condition protections for people transitioning from employer-sponsored coverage to individual coverage.  Under the current rules, individuals who elect and exhaust COBRA (generally 18 months) after leaving the job are eligible for a guaranteed availability policy in the individual market without any pre-existing condition exclusions.

AHCRA improves upon this HIPAA guaranteed availability protection in two important ways:

1) AHCRA removes the requirement that the prior coverage be from an employer/church/government plan in order to be eligible for the guaranteed availability policy in the individual market.  In other words, it allows individuals to receive those same pre-existing condition protections regardless of the source of their prior coverage, even if the prior coverage was on the individual market.  The only requirement is that you maintained the prior coverage for a period of at least 18 months.

2) AHCRA also removes the requirement that the individual exhaust COBRA to become eligible for the guaranteed availability policy.  Employer-sponsored coverage is generally more expensive than pre-ObamaCare individual policies, in large part because of the tax advantages that employers and employees receive to pay for the coverage.  Those tax advantages are not available for individuals purchasing coverage (which is one of the main reasons AHCRA replaces the employer tax exclusion for health coverage with the Standard Deduction for Health Insurance).  Furthermore, the cost of COBRA is not the employee-share of the premium, it’s the full 102% of the premium without any employer contribution.  That’s a steep price tag to pay without any tax advantages and for coverage that may not be ideally tailored to your needs.  In many cases, the cost is too high for individuals to afford 18 months of COBRA, which means they never become eligible for the HIPAA guaranteed policy.  AHCRA fixes that.

- Re-Authorizing State High Risk Pools: There will always be cases where individuals aren’t eligible for HIPAA’s protections for pre-existing conditions, even under AHCRA’s expanded guaranteed availability provisions.  AHCRA addresses this concern by improving on the existing state high risk pool coverage model. These pools limit the premium cost for high risk individuals to no more than 200% of the average premium for policies in the state.

AHCRA re-authorizes these pre-ObamaCare state high risk pools with $25 billion in federal funding over the next ten years.  Not bad when compared to the $1.8 trillion price tag for a decade of ObamaCare.

- Selling Insurance Across State Lines: ACHRA amends the McCarran-Ferguson Act to apply federal antitrust laws to the health insurance, which would eradicate the current state monopolies that force a state’s mandate-laden coverage on its residents.  By removing the state trade barriers that use insurance-licensing laws to impose that state’s mandates on all policies sold to resident, residents would be able to shop for coverage in any of the other 49 states.

Under this approach, described as “regulatory federalism” by Michael Cannon at Cato, state insurance regulators would be forced to compete against each other for your health insurance premium dollars. Cannon estimates that this change alone could reduce the number of uninsured by 17 million by opening a broader market of policies and prices to the consumer.

- Small Business Association Health Plans: Small businesses pose a difficult risk profile for insurance companies because just a few employees with significant health expenses could make the policy unprofitable.  Like all forms of insurance, health coverage relies on risk pooling.  The smaller the pool, the greater the chance for a small number of cost outliers to disrupt the cost structure.  Unfortunately, current federal and state law makes it difficult and sometimes impossible for small businesses to band together in offering a joint health plan that can be rated on the combined employee base of multiple employers.

AHCRA allows small businesses to join together in offering Association Health Plans (AHPs) that leverage larger insurance pools into lower costs. ACHRA’s AHP amendments to ERISA are the most detailed and complex portion of the bill, but It appears that these AHPs would function much in the same manner as current multi-employer plans for union groups.

- Medical Malpractice Liability Cap: This is a tricky one.  AHCRA makes a number of solid policy proposals, such as limiting non-economic damages to $250,000 for any injury, proportional liability, restricting the plaintiff’s attorney fee percentage from 15% - 40% depending on the amount of the recovery, and limiting punitive damage awards to the greater of $250,000 or two times the amount of economic damages.

Furthermore, I recognize that the current medical malpractice situation is an expensive, time-consuming fiasco largely driven by attorneys in the plaintiffs’ bar.  In a piece at Forbes titled Medical Malpractice: Broken Beyond Repair? a doctor is quoted stating that “the average physician in the US, in every specialty, spends a significant portion of his or her career in court, defending claims of medical malpractice, the vast majority of which are found to be at best fruitless, at worst frivolous.”

The problem is that regulating tort law is not a federal function.  As Randy Barnett at Cato has strongly cautioned, the purported constitutional authority for federal medical malpractice reform is the Commerce Clause.  This would rely on the disastrous “substantial effects” doctrine derived from the 1942 landmark Wickard v. Filburn decision that almost infinitely broadened the scope of federal power in a manner that clearly was not originally intended by the Founders.  Barnett has gone so far as to call supporters of federal tort reform FINOs - Federalists in Name Only.  It’s hard to argue with him.

While I admire AHCRA’s attempt to address this concern from a policy perspective, the proper constitutional approach would be to encourage awareness and action on this issue in state legislatures—because the ends never justify the means when it comes the Constitution.  Texas has already implemented a successful medical malpractice policy, dubbed the “Texas Miracle” by Joseph Nixon writing for Heritage, that should serve as a model for other states to follow.

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