When the Affordable Care Act (ACA) was being assembled in 2010, presidential advisor Jason Furman said, “President Obama often told us he wanted us to design a Yugo of a plan, referring to a basic, inexpensive Yugoslavian car.” Things didn’t work out that way because “just about every outside group and person engaged with the plan design took the opposite view, arguing that it should cover a very wide range of medical treatments and choices.”
Yugos are no longer available, but the auto industry still offers a variety of options targeted at different market segments. The price of new cars range from the Kia K4 sedan, starting at $22,290, to the Bugatti Tourbillon, at $4.6 million. The Bugatti might be more fun and stylish, but both take about the same time to get you from Connecticut to Manhattan during rush hour.
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If we can produce cars for such different price ranges, why can’t we do the same for health care?
This year, the benchmark health insurance premium on the individual market rose to $7,500. Health insurance costs are rising because of the growing use of expensive new medical services. As people get wealthier, they spend more on health care. A recent Harvard study estimated that the surge in U.S. health-care spending from 1970 to 2019 owed mostly to rising incomes (43 percent) and expanded medical capabilities (35 percent) rather than demographic changes (9 percent) and price increases (8 percent).
Health care is not an all-or-nothing commodity, but an array of goods and services with differing levels of cost, effectiveness, and convenience. Highly effective antibiotics costing a few dollars occupy one end of the spectrum; cancer drugs that extend life by only a month or two but cost $200,000 occupy the other.
Hospitals adjust their operating expenses in response to patient fees. High-priced facilities have more up-to-date technology, better credentialed physicians, shorter emergency room wait times, and better heart attack survival rates. Private rooms cost more but allow patients to recover with better sleep and lower infection rates. Hospitals also compete for well-insured patients with gourmet food and impressive architecture.
The willingness to pay for marginal improvements in health care varies significantly with income. A household earning $250,000 can reasonably see health insurance costing $25,000 as a prudent use of 10 percent of its income, but a family earning $50,000 could struggle to afford housing, food, and basic utilities if forced to purchase the same package of benefits. Economists Mark Shepard, Katherine Baicker, and Jonathan Skinner note that “rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people.”
Many Americans laud the low cost of Canada’s single-payer health-care system, which imposes a low level of consumption on everyone. It costs half as much per capita as America’s but rations access to specialty care and limits access to treatment with waiting lists, producing consistently worse outcomes for seriously ill patients. Canada also prohibits the sale of supplemental private insurance to stop wealthier patients from bypassing wait times, which would distort the intended rationing of medical resources.
The United States does not try to ration medical care. It suffers from the opposite problem—people lack any alternative to comprehensive health-care plans that they can’t afford. Insurance legally must finance all “medically necessary” goods and services, regardless of their cost or effectiveness. This is why many economists support letting people choose between different tiers of health insurance coverage with varying cost levels. A 2010 study estimated that workers would be willing to forgo 10 percent to 40 percent or more of their employer funds for the right to choose their own plans.
Why can’t Americans buy more affordable plans here? And why is there no insurance option that covers just the medical services available in the 1990s, at an equivalent price?
The Affordable Care Act is part of the problem. The legislation required insurers to sell plans on the same terms without regard to enrollees’ medical risks, which incentivized plans to eliminate benefits that would be disproportionately appealing to seriously ill enrollees. Sicker patients are willing to pay almost twice as much for the same improvements in health. In Massachusetts, when an insurance plan began to cover the best cancer hospitals, its cost surged as it attracted a rush of seriously ill enrollees.
To stop a race to the bottom in the scope of benefits, the ACA imposes highly prescriptive benefit mandates and network-adequacy requirements. This has frustrated both affluent individuals willing to pay a premium for top-tier medical access and those with modest incomes who prefer more affordable health-care options.
A better alternative? Let households purchase insurance options exempt from ACA rules. This shift would enable plans to offer higher-quality benefits without attracting an influx of beneficiaries who waited until they’re seriously ill to enroll. While some progressives have disparaged non-ACA plans as “junk insurance,” these plans provide access to the highest-rated national facilities such as the Cleveland Clinic, Memorial Sloan Kettering, and Mass General Hospital—which ACA plans typically lack.
One-size-fits-all coverage may be an inevitable consequence of single-payer health care systems. It need not be a feature of American private insurance.