The GOP’s new insurance penalty is harsh punishment for sick Americans

Republicans are grappling with an inconvenient truth as they seek to overhaul Obamacare: You need some kind of incentive for people to sign up for health insurance or else the market won’t work.

But, as Senate Republicans coalesce around a solution, they seem to be settling on a policy that would punish sick Americans far more than Obamacare ever did: forcing people to wait months for their coverage to kick in if they’ve gone two months without coverage in the past year.

Without an incentive, the markets would go into a death spiral. Sick people would buy coverage, but many healthy people would not. More sick people in the pool drives up the cost to insurers, which in turn increase premiums, causing more healthy people to drop out. Round and round it goes, until the market no longer functions.

The Affordable Care Act solved this problem through its individual mandate, a financial penalty Americans had to pay for every month they went without coverage. Republicans have slammed the mandate for years as an affront to personal liberty, an unconstitutional coercion by the federal government that forces people to buy a product they may or may not want.

So repealing the mandate was a given when Republicans started working this year on their proposal to repeal and replace Obamacare. But they still needed an incentive for people to buy insurance or else their plan wouldn’t work. This was especially true once Republicans decided it would be politically unpalatable to undo the Obamacare requirement that health plans cover everybody, no matter their health.

The House’s solution was a premium surcharge for people who had a lapse in coverage of at least two months — when they signed up, they would have to pay an extra 30 percent on their premiums for one year.

The idea was to encourage people to make sure they always had insurance, to avoid that penalty. But the Congressional Budget Office actually concluded it would adversely affect the market in the long term, because only sick people would have a reason to pay the surcharge. A lot of healthy people would decide to just stay uninsured.

So perhaps because of the CBO finding, perhaps because of the Senate’s complex procedural rules, perhaps because of input from health plans, perhaps because of all of the above, Senate Republicans came up with a different proposal and added it to their health care bill on Monday.

Under the latest Senate bill, Americans who have a two-month lapse in coverage or more would have to wait a full six months for their coverage to start the next time they enrolled in health insurance. So if you signed up for coverage that was supposed to start in January, it wouldn’t actually take effect until July under the GOP plan.

That’s a stark difference from Obamacare’s individual mandate or even the House legislation’s premium surcharge. Under both those policies, there is a financial penalty for going uninsured, but a person’s coverage starts on time when they sign up during open enrollment.

Under the Senate’s bill, the same person would have to wait six months before their insurance would start covering their medical bills. That’s six months that they could have to bear the full cost of their health care — an especially acute risk if some kind of medical emergency is what prompted them to sign up in the first place.

“A waiting period is definitely harder on sick people than either the individual mandate or a late enrollment surcharge,” Larry Levitt, senior vice president at the Kaiser Family Foundation, told me.

As always, sicker people would have more incentive to stay insured in the first place. But some people would inevitably fall through the cracks. They might lose their job or change jobs. Their income might increase and they have to switch from Medicaid to private health insurance. They might simply have a couple months where they can’t afford their premiums.

“People who are sick will do everything they can to maintain continuous coverage,” Levitt said, “but some won’t succeed because of unforeseen financial circumstances.”

Other health care experts also said the Republican plan could end up being more punitive to the sick.

“For the sick, it means you are paying full freight, not a volume-negotiated rate your insurer might have been able to get,” John Graves, a health policy professor at Vanderbilt University, told me. “So you pay more for the care you get while locked out.”

Avik Roy, a conservative health care expert who strongly supports the Senate plan, disagreed, alluding to the CBO’s finding that the House bill’s premium surcharge would actually have hurt the market.

“The premium surcharge is a recipe for adverse selection that will send premiums spiraling and therefore help no one,” he said in an email.

CBO concluded that, in the aggregate, the waiting period would help increase coverage over the next 10 years. But its analysts did note that some sick people would likely end up going without coverage:

Some people who were uninsured for more than 63 days in a given year and expected to incur major health care costs during the first six months of the next year would, with the waiting period, remain uninsured during that time—whereas without the waiting period, they would have purchased insurance at the beginning of the next year to help cover those costs.

There is another consequence of the Republican proposal. It would lower health care costs for insurance companies by locking people out of coverage for six months, particularly if those people have gotten sick and are accruing medical bills.

“I think the big effect here is to lower health care costs for insurers,” Levitt said. “The waiting period will prevent some sick people from getting care immediately after signing up for coverage.”

The GOP’s efforts to replace Obamacare, and its individual mandate, have revealed an uncomfortable truth for Republicans: That hated policy might be better at doing what it’s supposed to than anything they’ve come up with to replace it.

“A strong individual mandate, probably stronger than what now exists, is likely the most effective way to create a balanced risk pool,” Levitt said. “But, the individual mandate has little political support, especially among conservatives.”