The Pointless Search for Meaning in Exchange Prices

With ten states and D.C. having reported preliminary information on the prices of plans in their new health insurance exchanges, partisans on both sides of the Affordable Care Act have pounced on the news to reinforce their preconceived notions.

Supporters of the law report that “rate shock is a crock” and that prices are “surprisingly low,” while opponents look at the same data and conclude that “Obamacare will increase individual health insurance premiums.” Gary Cohen of CCIIO’s recent announcement that rates on the federal exchange will be made public in September will surely raise the fevered pitch of commentary.

But what do these numbers actually represent? Carriers submitting bids start with the prices of their current products and then adjust them for the myriad changes in the insurance market that go into effect on January 1, 2014.

Those changes include: elimination of health status underwriting, compression of rates by age, partial standardization (and in most instances significant expansion) of the benefit package, expansion of the market to a largely unknown population due to premium subsidies, effects of the “three Rs” (risk adjustment, reinsurance, and risk corridors), a completely new product distribution system, and a host of other changes in the health care and health insurance environment.

Needless to say, these many changes introduce a tremendous amount of uncertainty.

Carriers want to price as low as possible to secure market share, but they also worry about losing money on this new line of business. Exchange administrators want low prices so they can gain customers, but they can’t push carriers too hard on price or they will scare them away and have no plans to offer.

I view the initial plan bids on the health insurance exchanges as somewhat akin to an initial public offering. In an IPO, the price is based on a complex set of known and unknown factors. There are negative consequences if the price is set too high or too low. The analogy is imperfect, but the critical shared feature is that the price is set in an environment of significant uncertainty before there is a market to determine the price.

The health insurance exchange prices we are observing today are not market prices; they are opening bids in a not-yet-existent marketplace.

Exchange prices matter—to those purchasing coverage and to taxpayers subsidizing that coverage. But the first round of exchange bids mostly tell us about the assumptions different health plans are making and how they want to position themselves in this new market. They tell us nothing about the ultimate prices in the exchange or the ability of competition within the exchanges to drive improvements in the health care system.

The promise of the health insurance exchanges is that they will create a more effective and efficient marketplace. I don’t know whether or not they will live up to the promise. And neither do the partisans touting initial exchange prices as evidence to support their claims.

Alan Weil is the executive director of the  National Academy for State Health Policy (NASHP). He writes periodically on state health policy at Once in A Weil.

11 replies »

  1. well, market dynamics are influenced by so many factors that are very hard to follow…it is quite hard to find any explanation for development of exchange prices.

  2. Not sure why the insurance companies are not being overhauled? That is where the problem lies as I have experienced for myself and in treating patients.

  3. As long as the CEOs of the companies selling the products make their $ 25 million per annum, the prices will all be the same for what the purchaser gets: outrageously high.

    And HIT care record systems will increase the costs of care and insurance, not decrease them.

  4. Dr Mike, I lost you on the concept of a ‘risk event.’

    A person who has congestive heart failure or advanced diabetes or MS
    or cancer in remission is going to be hospitalized sooner or later.
    Health insurance pays for their intervening treatments both to lessen their pain, and perhaps to delay the inevitable crisis.

    This is not the case with lightning or the car crashes that happen to safe drivers. Those really are risk events.

    That i think is why you see so little of the insurance you describe.

  5. This is a very good comment.

    BTTW: “Market competition” has gotten us 1,991 “complete ONC Certified” EHR systems to date (1,678 outpatient, 313 inpatient).

  6. The assumption of most proponents of ACA was that more “competition” will lead to lower prices. Meanwhile, many of the critics also advocate “market” based health care insurance using the same idea. I contend that both are wrong to make the assumption they rely on.
    The proponents have failed to grasp that most insurers do not necessarily want the largest “market share” – they really want the largest market share of healthy folks and as close to zero market share of unhealthy folks as possible.
    The opponents advocating more “market competition” fail to recognize that there is no real single product or service under the “health care” umbrella. Purchasers can’t feel, taste, see or value the various options in any meaningful way when it comes to ‘health care’ – most health care insurance plans are more like abstract “lumps” of goods and services and each “lump” has unique features that even vary by each customer’s unique characteristics.
    Both proponents and opponents overly rely on the concept of market competition – fundamentally US health care lacks the essential characteristics necessary to be subject to a functional competitive market as long articulated in virtually any economics text.

  7. I have never seen, and therefore assume they are rare, health insurance policies which only cover risk events except for major medical policies. There must be a reason for this and I assume that coverage for routine outpatient care and preventive services is very lucrative for the insurer. PPACA of course builds on this idea of “insurance” for services that are not the result of a risk event. This will always be more expensive than projected both in terms of total cost to society and individual cost in terms of premiums. The answer so far has been to raise the deductible while still having premiums that reflect coverage for non-risk services – an answer that remains lucrative for the insurance industry. It is therefore very lol funny to see all the mental energy going into how to “tweak” a system of healthcare payment that can never do anything other than cost increasingly more no matter what. The poor do not need health insurance so much as they need health care, and until the two are separated there will forever be cost increases to the point of breaking.

  8. I believe that the government is projecting only 7 million persons in the Exchanges next year.

    At that low number, even a subsidy of $5000 per person or per family will not break the federal budget.

    But 7 million seems suspiciously low to me.

    Also,there is a universal phenomenon in health insurance called the aging curve. The longer you insure someone, the more they cost. The insureds just get older, plus they get comfortable with the coverage and learn how to file claims. Plus, any price increases tend to drive out the healthiest subscribers, and the unhealthiest hold on for dear life.

    The ACA is relying on private insurers, and nothing in the ACA repeals this aging curve. This is a long way of agreeing with Peter that prices will rise over time.

    Bob Hertz, The Health Care Crusade

  9. Your are darn right that the pricing is a pointless. The real point is that the government will compel people to pay whatever is the price. The investor/consumer, in face of all this uncertainty, will purchase an item at a price in which they have no clear idea of its value. In a normal market, an investor may sit out an IPO offering if it is overvalued (think Groupon, Facebook, or Zynga), or early releases of products if the consumer thinks is has “bugs” or other defects. Or think of the scenario in which the consumer/investor gets a great deal at a low price. They still lose because the price they will have to pay next year will surely jump. The subsidies mean the taxpayer are required to assume part of this “pricing” risk.

  10. “Exchange prices matter—to those purchasing coverage and to taxpayers subsidizing that coverage.”

    Hardly not to those purchasing with a subsidy. As for taxpayers, do you think there will be a writing campaign if they feel we’re spending too much on subsidies – probably not because there is no direct connection to the subsidies on your tax return.

    How will industry consolidation effect prices – for the better?

    Prices will not come down – subsidies will increase.