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A Long-Term Solution to Insuring the Sick

The Affordable Care Act prevented insurers from charging higher rates to consumers with pre-existing conditions or who become sick, and sought to control costs with an individual mandate—which was effectively repealed in 2017. In a new paper, Yale SOM’s Soheil Ghili and his co-authors offer a different approach, showing that longer health insurance contracts could protect consumers who are or become ill against sudden premium spikes.

A patient in a hospital bed with a nurse looking at a rolling monitor
Jeffrey Isaac Greenberg 8+/Alamy Stock Photo

Until the passage of the Affordable Care Act (ACA) in 2010, being or becoming sick posed a major peril to Americans without employer- or government-sponsored health insurance. Insurers could charge much higher premiums to people with preexisting conditions or those who’d developed new health issues over the previous year.

But the ACA changed all that. The new law said insurers couldn’t, except in very limited circumstances, charge people different premiums based on their health status. On its own, such a requirement could have sent insurers into what is sometimes called a “death spiral.” To cover the cost of insuring more sick people, insurers need to raise premiums for everyone—which triggers healthier enrollees to exit the market, leaving only sicker people in the insurance pool, necessitating additional premium increases, and on and on. The ACA sought to avoid death spirals through the individual mandate—a requirement that everyone must either carry insurance or pay a penalty, preventing healthy people from skipping out.

But the individual mandate has proved politically divisive; it was subject to a series of legal challenges and was effectively repealed by Congress in 2017. “So,” asks Yale SOM’s Soheil Ghili, “is there anything less regulatorily heavy that we could do to deal with this problem?”

In a new paper, Ghili and his co-authors—Ben Handel of the University of California, Berkeley; Igal Hendel of Northwestern University; and Michael D. Whinston of the Massachusetts Institute of Technology—propose a new way of addressing these challenges. By using long-term contracts rather than the one-year contracts common in the ACA marketplace today, the researchers suggest, insurers can cover their costs while enrollees are protected against massive premium increases if they get sick. Using data from Utah’s private insurance market, Ghili and his co-authors found that moving from year-to-year to long-term contracts would benefit some 90% of enrollees.

“When it comes to health policy design, we have always struggled with the issue of preexisting conditions,” Ghili explains. Whether people arrive to the market with a preexisting condition or develop one over the course of a one-year insurance contract, “it’s not an easy problem to solve…In this paper, we offer one possible solution.”

Instead of signing up for a new plan every year, Ghili and his co-authors suggest, enrollees could sign up for a multiyear plan that limits future premium increases. In theory, contracts could be any length; in the U.S. context, one could even imagine plans that span several decades, until the enrollee turns 65 and becomes eligible for Medicare. Under the researchers’ proposal, enrollees could leave the plan at any time if they found a better option, but insurers could not terminate the contracts at will.

Insurers would price the plans in ways that build in the cost and risk of future illness. “If I’m in good health, the insurer could charge me a little bit more than what I’m paying now for a one-year contract,” Ghili explains. In return, “the insurer will promise me they’re not going to increase premiums by a crazy amount if I come down with something serious and may even decrease premiums if my health improves.”

In theory, it’s a win-win, but Ghili and his co-authors wanted to test how it would work in the messy context of the real world. So, they gathered data on all privately insured men ages 25 to 64 in Utah from 2013 to 2015—212,265 people in all. They used health expenditures as a proxy for overall healthiness, and divided people into seven “bins” ranging from sickest to healthiest.

Then, they devised a statistical way to measure consumer welfare, using two benchmarks: a worst-case scenario in which people who have or develop preexisting conditions must contend with whatever insurers want to charge them, and an imaginary best-case scenario in which it would be possible to cover people who have or develop preexisting conditions without a mandate and without the risk of a death spiral.

“Let’s call the gap between these two the damage to consumers from preexisting conditions,” Ghili explains, “and let’s see how much of that gap our method recovers”—in other words, how close to the best-case scenario (and far from the worst-case scenario) it is.

For a large majority of consumers—those who arrive to the market in relatively good health—long-term contracts get very close to the best-case scenario, making up 95.1% of the gap. But people who arrive to the market already sick don’t fare well so well. For this small group, long-term contracts recover just 7.6% of the gap between the worst- and best-case scenarios.

That’s an important finding. “If you’re not protecting sick people, then there’s something of first-order importance that this policy doesn’t resolve,” Ghili says. So he and his co-authors propose special protection for people in poor health that would accompany long-term contracts. Government subsidies on insurance plans offered to the very sickest consumers (so-called high-risk pool subsidies) would be one way to address the challenge, allowing insurers to meet the high costs of insuring the sick without charging them exorbitant premiums.

There are other important questions yet to be answered about how long-term contracts would work in practice. For instance, how would the employer-sponsored health market interact with the long-term contract market, especially when people go in and out of employment? To strengthen the policy, Ghili says, “I would like a more thorough examination of this interaction between the two markets.”

Despite these unresolved issues, Ghili sees potential in long-term contracts. “We don’t say we’ve solved the problem,” he says. “But we’re starting a scholarly discussion.”

Department: Research