President-elect Donald Trump and President Obama meet at the White House. (Michael Reynolds/European Pressphoto Agency)
After reiterating his promise to repeal and replace the Affordable Care Act, President-elect Donald Trump has indicated that he may keep two of the law’s most popular provisions. One is straightforward enough — children up to the age of 26 being allowed to stay on their parents’ plan. The other — preventing insurance companies from denying coverage because of preexisting conditions — offers a perfect illustration of why Trump and most of the other Republicans critics of Obamacare don’t understand the health insurance market.
Let’s say that in the beautiful new world of “repeal and replace,” insurers are required to sell you insurance despite the fact that your kid has a brain tumor.  Insurance companies know what to do with that. Their actuaries can calculate that kids with brain tumors typically require (I’m making this number up) about $200,000 a year in medical care. So they’ll offer to sell you a policy at an annual premium of $240,000.
[Donald Trump and the end of history]
At this point your response will probably be that such an outcome is not fair. When the law says insurance companies can’t discriminate on the basis for pre-existing conditions, surely what it means is that they have to charge roughly the same price for health insurance, irrespective of your pre-existing condition. In the language of insurance, that’s called “guaranteed issue at community rates.”
Unfortunately, in the states that have tried guaranteed issues at community rates, the insurance markets have collapsed. That’s because if you guarantee everyone the right to buy health insurance at community rates, then some consumers will game the system. The young and healthy ones won’t buy any health insurance at all—they’ll go without until they are diagnosed with diabetes or a brain tumor or get hit by a truck crossing the street.  And when that happens, they will immediately call up Aetna or Anthem and exercise their right to buy health insurance at the low community rate, irrespective of their medical condition. It won’t be long before insurance companies begin losing a ton of money and are forced either to raise premiums through the roof or stop writing policies altogether.
[A new theory for why Trump voters are so angry — that actually makes sense]
So how do you prevent that kind of gaming of the system by consumers?  Well, that’s easy.  You require that everyone buy at least some minimal level of insurance at the beginning of every year, so they can’t buy insurance only after they get sick. Let’s call that an” individual mandate.”  But because you can’t expect poor people to pay $1,000 a month, they will require subsidies to keep their out-of-pocket costs to something like 10 percent of income.  To pay for the subsidies, a new tax will be required.
So let’s review what just happened. To guarantee that people with pre-existing conditions can get affordable health insurance, you need to have rules requiring guaranteed issue and community rating.  To keep insurance companies in business because of guaranteed issue and community rating, you need to have an individual mandate.  And because poor people can’t afford health insurance, you need subsidies. Combine all three, and what you have, in a nutshell, is ... Obamacare.
Yes, it’s a bit more complicated than that, but not much.  It’s possible to allow insurance companies charge twice or three times as much, to people who are older or sicker. You can let healthy people buy somewhat more barebones “catastrophic” policies to satisfying their obligation under the individual mandate.  You could even avoid community rating by sending sick people into “high risk pools” where their premiums would be subsidized by a tax on everyone else’s health care premiums.