Why Obamacare is Awesome 101

There’s a lot of misinformation out there about the Affordable Care Act, and as a result there are a lot of people who oppose it, but don’t really know why. This is pretty bad in general — it leads to a lot of unnecessary ugly political fights and a lot of unnecessary litigation (the act has already been ruled on in the Supreme Court — three times!). In an election season, it is a really bad state of affairs. So I’m going to try to explain why I think Obamacare — even in the horribly compromised form it had to take in order to get through Congress — is the best thing that’s ever happened to the American insurance market.

(Credibility check: I’m a law professor and a political scientist. They pay me to think about things like good public policy.)

It all starts with a fundamental problem in insurance markets that economists call “adverse selection.”

Here’s the basic way it works:

1. You (Sick Sam) know things about your health that the insurance company doesn’t know. For example, you smoke six packs a day, and you like to go skydiving.
2. That means that your health care is likely to get really expensive in the future. You participate in dangerous activities, sooner or later, it’s going to be time to pay the bill.
3. Because your insurance company doesn’t know this, it can’t charge you a bigger premium than it charges other customers, so it’s going to lose money on you.

Standing on its own, that just looks like it’s a problem for the insurance company. And the company might be able to get around it by averaging its premiums over the whole pool of people, so you get charged a little less than you cost them, the healthy person next door gets charged a little more than she costs them, and it all works out in the end (the insurance company gets to stay in business).

But the healthy person (Healthy Helen) next door isn’t stupid. She’s a vegetarian. She works out in a no-impact high-intensity exercise program every day. She has a low-stress job. She always wears a helmet. Chances are, her medical costs are going to be really low. But the insurance company is asking her to pay how much?!? She has a pretty good reason to just say “forget it” and stop buying insurance. After all, she expects her health care costs to be pretty low, she can just “self-insure” (which is insurance jargon for “put some money in a savings account, so that when you get sick, you can use that money to pay for care”), and it’ll probably be cheaper on the whole than paying the premium.*

(You see that asterisk? It’s my attempt at a footnote. Click the little speech bubble icon in the sidebar to the paragraph for a note explaining a little more. There are a couple more of those below.)

But wait. The insurance company was relying on Healthy Helen to subsidize Sick Sam. If the healthiest people quit buying the policy, then the average cost to the insurance company to cover the people who are left goes up, so premiums have to go up if the company wants to stay in business.

So now Healthy Helen is gone, and the premiums went up. One day, Kinda-Healthy Ken, who just goes to the gym every other day and likes a steak every once in a while, gets a letter from his insurance company. “Woah, my rates have gone up!” Now it’s too expensive for Ken, given how much he expects to spend on health care (more than Helen, lots less than Sam), so he cancels his policy too.

You see where this is going. With Ken and people like him gone, rates go up again, and then Only-A-Little-Healthy-Olive, who saw the inside of a gym once, drops out, and then rates go up again, and then insurers go out of business… this is the “death spiral” that all the health insurance policy wonks talk about all the time.

Ok, so what do you do about it? Well, here are some options.

First, the government can just regulate the market and set premiums, and/or make rules about who has to be insured. But standing alone, everyone agrees that this is even worse than no regulation, and a pretty good way to guarantee death spirals. No matter what premium the government sets, either it won’t be worth paying for people who know that they’re healthy, or it will be so cheap that the insurers lose a ton of money on people who know that they’re not healthy. When governments have tried this in the past, one of two things have happened. Either insurance rates went through the roof (with the assent of rate regulators) and coverage went way down, or insurers were driven out of business.

Second, the insurance companies can try to solve the problem with smarter business practices and technology. With the “big data” revolution, it’s possible (in principle) to get all that private information about people and build it into insurance premium prices. Post a picture of your skydiving trip on Facebook? You’re probably riskier, jack up your premiums. Member of Mothers Against Drunk Driving? Probably less likely to end up with an expensive hospital bill, charge you less.

But there are several big problems with this approach:

1. Goodbye privacy. Do we really want insurance companies monitoring the tiny details of our lives?
2. Poor people are unhealthier. People of color are unhealthier. It turns out that not being able to get access to healthy food, experiencing the stress of discrimination, being more susceptible to violence, living in cheap places near toxic waste dumps, working hard dangerous jobs, all those kinds of social injustice — they make you sick! So this is a recipe for taking those whom our society has already been ignoring and kicking them while they’re down. Surprise, poor person living in a segregated neighborhood, you thought your health insurance was expensive before? Enjoy your painful death!
3. It has all kinds of bad knock-on effects. What do you do when the sick person who couldn’t afford health insurance shows up at the hospital? Do you require the hospital to care for them for free (raising prices for everyone else)? Do you set them loose, possibly with a contagious disease, in the community?

Part of the reason we say that health care is a human right, I think, is because a society that can’t or won’t supply it to its citizens starts to look like a really ugly place.

So straight-up rate regulation is out. The technocratic free market solution is out. What’s left?*

Well, way back in 2006, Massachusetts (in the Mitt Romney administration!) came up with a novel solution to the problem of adverse selection. Why not just keep the healthy people from dropping out? With the healthy people in the pool, the prices can be kept low, and so the sick people can actually receive care. To make sure that everyone gets covered, the government kicks in some cash for the poorest citizens, who wouldn’t otherwise be able to afford insurance, but then it requires everyone to buy insurance.

It worked. Uninsured rates plummeted, sick people got the care they needed.

And this is exactly the model Obamacare is built on. It has three components:

1. Insurers have to cover everyone, and the rates are controlled. The big data pricing strategy is right out.
2. People have to buy insurance, or they pay a penalty. This is the direct attack on adverse selection.
3. There are tons of subsidies to allow the poor to actually buy insurance.

Let me be blunt about one thing. This is a form of economic redistribution. And not just in the obvious way (by taxing people to subsidize health insurance to the poor). It’s also redistribution in a more subtle way: by forcing the healthy to buy insurance, the government is making them subsidize the sick. And that’s not without its worries.* But, on the whole, this kind of redistribution is a good thing, because the alternative is either:

1. leaving the poorest and the sickest among us to die, or
2. doing redistribution anyway, but in an ad hoc and inefficient way, like by requiring emergency rooms to eat the cost of providing care to “stabilize” the poor people who walk in the door, or
3. going to single-payer like other developed countries (or, what amounts to the same thing, having the insurance companies all get together and negotiate rates for care) — would be nice, but try to get that past the pharmaceutical lobby.

So, you choose: corpses lining the streets, spiraling costs, political fantasyland, or Obamacare. And then when you choose, tell the libertarian ideologues who keep filing lawsuits,* the election season demagogues who campaign against it, and the irresponsible governors who have been doing everything they can to impede the implementation of this act to make the right choices too.