I have an article on RealClearMarkets.com today, arguing that the health insurance plans that will be sold in the Obamacare exchanges next year are likely to be pricey – at least relative to the benefits they offer. Let me expand on the reasons why:
There’s an emerging consensus that the exchange-based health plans will offer narrow network of providers. The idea will be to limit choice of providers in order to cheapen the insurance products. After all, the Obamacare regulations around benefit design and co-pays are fairly restrictive.
(Photo credit: Mike Licht, NotionsCapital.com)
The rules largely prevent health plans from skinnying down benefits or raising co-pays as a way to control the price of the underlying insurance. So the only lever plans have to control costs is by closely managing down the networks that they offer, to get more leverage over providers and squeeze medical utilization.
Many analysts now agree that this is precisely what’s going to happen. But there’s an assumption that the cost savings that accrue by limiting networks and sanding down what’s paid to providers will be passed onto consumers in the form of lower premiums. The view seems to be that the plans in the exchanges will compete on price alone. That there will be a race to offer the cheapest network (and, in turn, the lowest cost product) in order to capture market share. But there’s good reason to believe that the plans won’t be priced all that competitively relative to the benefits (and narrow networks) they’re offering.
That's because there are powerful, countervailing economic forces at work that will drive health plans to price their insurance products richly, to leave themselves room for error.
For one thing, insurers will want to protect against the risk that people entering the exchanges are going to be sicker and more costly to insure. There's a good chance that the early customers will be folks in greatest need of medical care, who also have the highest medical costs.
The health plans were banking on lots of young, healthy individuals entering the exchanges, to subsidize older, and perhaps sicker members. But it seems increasingly unlikely that younger members won't get into this market in big numbers. It's simple a bad economic decision for them to buy Obamacare.
The individual mandate (ahem, tax) that was supposed to entice healthy people into these insurance pools was always weak. And many people are going to be exempt from it anyway. For many young people, the insurance will simply be a raw deal. The coverage simply won't be worth its cost.
The Obamacare scheme was always dependent on low-cost consumers subsidizing the high cost ones. That’s why the legislation's architects needed a tax -- to force healthy people into the market. But so long as consumers can opt in after they get sick (guaranteed issue) there’s less incentive for them to buy the insurance up front. If the healthy people stay out of the market, leaving only the sick, then this sort of “adverse selection” will raise costs to insurers. To guard against this, the health plans will price their products at a premium to offset the potentially higher claims.
Second, health plans want to reduce uncertainty around how all the risk-sharing provisions in Obamacare will eventually play out. These are the mechanisms that the legislation puts in place to have the federal government share with health plans some of the cost of the covering the sickest beneficiaries. But the regulations outlining these parameters were only released last Friday. Health plans will have little time to digest the provisions before they need to design their benefits and price their insurance products. And nobody yet trusts how these provisions will work.
Health plans are likely to price their insurance products higher, to once again leave themselves some additional margin for error. Insurers also know that any excess profits must be paid back to the government, anyway. This owes to the caps that Obamacare places on how much profit health plans can earn. These are the limits on the plans' so-called Medical Loss Ratio – how much money health plans need to spend on healthcare versus how much they can retain for profits and use to pay overhead costs. Since plan profitability is capped, and any excess earnings are clawed back by Washington, the insurers are better off aiming high when it comes to setting premiums (and owing an excess revenue back to Washington) then getting themselves caught underwater.
Third, health insurers want to reduce the incentive for employers to drop coverage and dump employees into the exchanges. This is especially true when it comes to insurers’ lucrative small group and large group segments. The insurers make more money in these segments than what they will earn in the exchanges. They won’t want to swap lives in the small group market for customers in the exchanges.If insurers price the exchange products too low, they’ll give employers another inducement to do this sort of dropping. By pricing exchange products higher relative to the insurance offered in the private market, they reduce this incentive.
Finally, the providers that Obamacare plans must contract with are unlikely to offer significant price cuts to attract this volume. For one thing, providers will be weary that the exchange-based beneficiaries could cost more to treat. Like insurers, the providers will want to leave themselves some room for error, and the prospect that there could be adverse selection on the exchanges.
Moreover, since the Obamacare plans are likely to pay providers less than rates offered by standard private coverage (and maybe even less than Medicare rates) many of the most efficient doctors could simply refuse to accept Obamacare, just like they refuse Medicaid.
The architects of Obamacare designed the scheme without enough thought to how its overlapping incentives would discourage competition on the price of the new coverage. Health plans will try to drive down costs by offering very narrow networks of providers that they can more easily control. It will be a race to the bottom to see which plan can offer the cheapest benefit, while still meeting minimum standards. But it won’t be a race to the bottom on price. Insurers are likely to keep some of the profits and simply pay it back to the government at year-end. Health plans would rather guess high when it comes to rate setting, than guess low. After all, the government only shares in the profits, but not the losses.
