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The Affordable Care Act and the Burning House Dilemma. Why the Government is Having so Much Trouble Getting Rid of the ACA.

Posted by Matt Schmidt | Apr 05, 2017 | 0 Comments

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One Reason the Government is Having Trouble Getting Rid of the Affordable Care Act? The Pre-existing Condition (Popular) v. Mandate (Unpopular) Dilemma.

By now, everyone has heard this line of thought from someone: “Insurance should still cover someone with a pre-existing condition, but get rid of the mandate. I shouldn't be required to have health insurance or pay a penalty if I don't.”  Without an alternative source of income to cover the higher healthcare costs of at-risk patients, however, covering pre-existing conditions without a mandate is not possible—hence the problem the government is facing in its attempt to keep something that is popular and do away with something that is not.

The Affordable Care Act (ACA) does not work like traditional insurance.  In traditional insurance, people of all risk types put money in a pot to cover a type of risk that will possibly occur. The higher the risk a person poses, the more money they have to put in the pot. The insurance company then relies on the notion that not all homes typically burn down at once (or at all), and because there are enough people contributing to the pot, a portion of the money can be taken from it whenever a home does burn down. While it is unlikely your house will ever burn down and more likely that your money is going to help another person, you can also rest assured that other people will be paying for your home too if and when the time comes. 

Because insurance companies have become masters of predicting risk, they have also become pretty good at knowing how much money each person needs to put into the pot, as well as how much money needs to be in the pot at any given time.

In the medical context, the idea is the money coming from healthy people assist in supplementing the pot for the sick--those that really need it. When the healthy people get older or become sick, they rest easy knowing that it is their turn to be taken care of by the young and healthy. In the past, the enticement for healthy people to get insurance was the pre-existing condition exclusion. If a healthy person had insurance and got sick, their insurer would cover them. If a healthy person did not have insurance and got sick, however, insurers were allowed to turn their application down and refuse to cover them for the existing condition. Healthy people paid for protecting a risk that could occur, knowing they would require being covered if the risk in fact did occur.

The ACA works differently. In addition to covering risks that will possibly occur, health insurers are also required to cover an event that is already occurring—patients with pre-existing conditions must be covered for their condition. Back to our analogy, while traditional insurance covers houses that may or may not burn down, this system requires insurers to also cover houses that are already on fire. Because this system requires the coverage of both potential and already occurring events, it also requires a bigger pot of cash from a larger pool of people. Hence the mandate requiring everyone contribute to the pot or face a penalty (the mandate is not a foreign or new concept. Arizona, for example, requires anyone who drives a car to pay for car insurance).

Consider our analogy in the context of what people want and don't want out of the ACA, and then realize why this would fail. If people were not legally required to cover their homes and insurers were required to cover any house that is on fire, people would only purchase the insurance when their house was burning. This would create a situation where the houses insurers must cover are in fact all burning down at once. Without a large pool of people contributing to the pot, the amount required from those that were contributing to the pot would be astronomical to a point that defeats the purpose of insurance and renders it obsolete.

In other words, without any sort of mandate or penalty, healthy people have no incentive to purchase insurance until or unless they get sick, because they know insurers are now required to cover them under any unfortunate circumstance, whenever they choose to get coverage. The mandate is the incentive that requires them to contribute to the pot and make the pool larger.  Without a mandate or some source of extra money, the pool would only be full of sick people, causing health costs to sky rocket and creating premiums that are through the roof.

This is not to say that covering people with pre-existing conditions is a bad thing. To the contrary, public policy and morality argue reasonable healthcare should be available to all, healthy or ill. It does, however, require an extra helping hand or source of income from somewhere for it to work. Though there are some other options other than individual mandates, the current government is not  interested in those other options.  

About the Author

Matt Schmidt

Matt graduated from the James E Rogers College of Law at the University of Arizona in passing the Arizona bar exam in 2010. Matt's primary interest in law focuses on general personal injury and insurance bad faith.

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