How markets could provide affordable health insurance

A major problem with our health care system is that it costs much more to insure people with major health problems than it does to insure the majority who are in reasonably good health. Over the years, governments have used a variety of regulations and subsidies to make it easier for sicker members of the population to afford health insurance. These government regulations and subsidies, however, incentivize people to spend more on health care, raising the average cost of health insurance for everyone. Without the various government regulations and subsidies, markets could provide affordable health insurance for almost everyone by making it possible for people to insure against changes in their health status.
One way that the cost of health insurance is kept down for sicker people is through employer sponsored health insurance plans. Although these plans arose in response to wage controls during World War II, they have grown in importance because of tax deductions and a variety of regulations that have been implemented since then. If the tax deduction was not limited to group health insurance plans offered by employers, many of the healthiest workers would buy their own low cost health insurance in exchange for a higher wage from their employers, who would save the cost of premiums on those workers. If health insurance were not tax deductible, many people would choose less generous coverage for lower premiums than what employers now pay.
Employer sponsored insurance (ESI) works fairly well for those working for large corporations. One drawback is that it discourages workers from changing jobs, particularly if they develop a health condition that will increase the likelihood that they will incur major healthcare expenses. To keep premiums from rising for ESI plans before the Affordable Care Act prohibited them from doing so, health insurers often chose not to cover pre-existing conditions of newly hired workers.
Small companies that provide ESI have an incentive to hire only healthy workers if regulations do not permit insurance companies to exclude pre-existing conditions from the coverage they offer. A small firm also has an incentive to find an excuse to lay off a worker who develops costly health problems while employed, since insurers are likely to raise premiums for firms whose workers incur higher health costs.
Because all of the existing subsidies and regulations are not enough to keep those with chronic health problems from facing premiums that are much higher than average, the Affordable Care Act (ACA) requires insurance companies to provide full coverage for everyone who applies, regardless of health status, and it prohibits companies from varying premiums except based on age or whether the insured smokes. It includes an individual mandate so that healthy people will not opt out of buying insurance. The greater the percentage of healthy people paying premiums, the lower will be the premiums for everyone, including those with chronic illnesses.
Insurance companies will do everything possible to avoid providing insurance to people with chronic health conditions, if they expect to spend more on their care than the premiums they are permitted to charge. The ACA had to devise a complicated system of cross subsidies to get insurance companies to cover those with chronic health conditions at the same prices as everyone else. Government may be able to force insurance companies to provide affordable coverage to high risk people, but without adequate incentives, don’t be surprised if the insurance pays for care from a very limited network of health care providers, severely limiting the options of high risk clients.
Rather than fighting market forces, the best way to promote affordable health care for everyone is to allow entrepreneurs competing in the market to devise a solution that would make it profitable for insurance companies to cover those with high healthcare costs. One solution, proposed by the Heritage Foundation, is health status insurance, whereby people insure against declines in their health status. If early in their lives people could pay extra for insurance against developing a chronic health condition in the future, then insurance companies could afford to cover everyone regardless of what happens to their health over their lives. Premiums for health status insurance would be affordable, even if set high enough to compensate insurance companies for the expected cost of providing high quality care for chronic illnesses, because only a relatively small fraction of a pool of originally healthy young people will eventually develop chronic illnesses that are costly to treat.

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