Pursuit of Truthiness

my gut tells me I know economics

Romneycare vs Obamacare

with one comment

Back in the 2012 election, Mitt Romney was in the unenviable position of trying to attack the Affordable Care Act without implicating his own reform in Massachusetts. At the time, like most people, I assumed this attempt to differentiate the two was pure cynical politics. Johnathan Gruber worked on both bills and famously said “Its the same damn law”.

But recently, and actually thanks to the same Johnathan Gruber, I’ve realized there is one very important difference. First, there are some quantitative differences. Some of the ACA’s penalties are much larger, which may lead to more substantial disemployment effects. Also, Massachusetts had a much higher rate of employer-based insurance than the rest of the country to start with, so they had a smaller gap to close with government subsidies (making their reform the cheaper one).

The biggest difference though, and the one I hadn’t thought about until I saw Gruber talk at the American Economic Association meetings, is that Massachusetts had a guaranteed issue law for years before Romneycare. Guaranteed issue means that insurers must cover anyone, regardless of pre-existing conditions or expected costs.

By itself, guaranteed issue ruins health insurance markets. It allows people to go without insurance and pay no premiums until they get sick, then sign up and get huge benefits, then drop insurance again once they are recovered. For guaranteed issue to work, it needs an individual mandate to prevent people from gaming the system; for the individual mandate to work we need subsidies, so that poor people can actually get the insurance they are required to. This trio of reforms- guaranteed issue, the individual mandate, and subsidies- is what Gruber calls the 3-legged stool. Massachusetts only had one leg, and this means individual premiums were sky-high until Romneycare brought the other two legs.

Almost no other states, though, had their own guaranteed issue laws before the ACA- their individual health insurance markets were not nearly as broken as Massachusetts’ was.

Consider 3 policy packages:

1. No Reform

2. Guaranteed issue, individual mandate, subsidized exchanges

3. Guaranteed issue only

Before 2006, most states were at 1, but Mass was at 3. 3 is clearly inferior to both 1 and 2; the choice between 1 and 2 is a tougher one. Romneycare moved Mass from 3 to 2, clearly an improvement that fixed a totally broken individual market. Obamacare moved the rest of the country from 1 to 2, which is much more of a mixed bag. So for once, I think I overestimated the cynicism of a politician; the two laws in effect really were different.


Written by James Bailey

January 20, 2015 at 5:58 pm

One Response

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  1. […] I can see the political appeal of doing guaranteed issue but dropping the individual mandate; it sounds like a compromise, and dropping guaranteed issue sounds mean (you must hate sick people) while dropping the mandate sounds nice (freedom!). But it is likely to be the worst of both worlds. Several states have found this out the hard way, including Massachusetts (in a fascinating political twist, this was actually why Romneycare really was different from and better than Obamacare). […]

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