Paul Ryan Explains How Obamacare Incentivizes Healthy People Out of the Market

House speaker Paul Ryan got himself into trouble Thursday for broadly describing why the GOP considers the risk-sharing under Obamacare between younger and older consumers a failure, leaving out the details that got reporters questioning his understanding of insurance.

Ryan broadly described what he sees as the imbalance between healthy and high-risk people in the individual market under Obamacare. “Under the current system, the fatal conceit of Obamacare is that we're just going to make everybody buy our health insurance at the federal government level—young and healthy people are going to go into the market and pay for the older, sicker people," he said. "So the young, healthy person's going to be made to buy health care and pay for the person who gets breast cancer in her 40s, or who gets heart disease in his 50s."

The arrangement, Ryan and other Republicans have argued, isn't working. But it's for reasons beyond what he mentioned during the relevant portion of a 35-minute presentation he provided to reporters. Obamacare prohibits insurers on the exchange from charging high-risk consumers a higher premium than low-risk ones of a similar age, and it forces them to offer coverage to the uninsured even if they have "preexisting conditions". This incentivizes young and healthy individuals to go uninsured; why waste money on coverage you rarely use if you can just purchase it after you get sick? The lack of such attractive customers in the market puts upward pressure on premiums, since the people who remain are relatively costlier. The interaction between these two forces is liable to collapse the market (a "death spiral")—thus why Obamacare included an individual mandate to try forcing the young and healthy to become insured, helping suppress premiums market-wide.

Republicans have argued the policy hasn't achieved a good enough ratio of high-to-low-risk consumers: Simply, as Ryan stated, "The people who are healthy pay for the people who are sick. It's not working. That's why [Obamacare's] in a death spiral." He took a good deal of heat in the press for how he simplified his framing.

Without addressing the aforementioned regulations on insurers, Ryan's idea is to allocate money to states to help foot the bill for high-risk consumers, through mechanisms like separate risk pools and reinsurance. "By having state innovation funds," he's calling them, "to go to the states to set up these reinsurance programs, we would directly subsidize the people who have preexisting conditions—direct support for the people with preexisting conditions so that everybody else has cheaper health insurance."