The Business of Health Care

What Happens In New York Stays In New York

While sitting in the crowded waiting room of a medical specialist’s office I was forced to listen to the television set directly over my head. Cranked up so that everyone could listen above the din of conversation, Wolf Blitzer introduced a video clip of the President hailing the latest news from New York about health insurance exchanges.

Speaking as if he was still on the campaign trail, the President’s words came through loud and clear over the television: thanks to his health reform, premiums in the New York exchange would be half that of premiums in the individual market. This was a model the entire nation should embrace.

No one heard me mutter under my breath that this was a model for New York and a small handful of other states that previously regulated their individual insurance markets effectively out of existence.

What the President undoubtedly knows, but dared not say, is that New York’s individual insurance market is unlike any other state. In New York, insurers cannot charge higher premiums to high risk enrollees.

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As a result of this aggressive community rating, high risk individuals are disproportionately represented in New York’s individual policy risk pools. This drives up premiums, which drives away low risks, driving premiums even higher. Insurers in New York are counting on the purchase mandate, combined with purchase subsidies, to lure low risks into the pool.

This is why they have lowered premiums.

That may be how things play out in New York, but will they play out that way in Peoria, or anywhere else?

Elsewhere in the U.S., insurers can experience rate to varying degrees. The result is that low risks are able to purchase insurance at rates far below the rates in New York.

The Affordable Care Act places limits on experience rating, forcing the pooling of low risks and high risks. For many, perhaps most individuals, the result will be higher rates. What happens in New York stays in New York.

I am not saying that such pooling is either good or bad. In an economist’s dream, we would have one market for short term health insurance and one market for insurance against premium reclassification risk. Under this system, if you get sick, the premiums on your short term health insurance will go up, but you receive a payout from your reclassification risk insurance to cover the higher premiums.

John Cochrane has long argued for such a system, which protects against reclassification risk without introducing distortions into the short term health insurance market. But this system has some practical complications – I’d pity anyone who gets sick and now has to argue with two insurance companies!

Barring the emergence of such a market, I favor some forced pooling to protect against some reclassification risk. New research by Igal Handel, Ben Hendel and Mike Whinston even suggests that within health insurance exchanges such pooling will be vastly welfare enhancing. (In effect, I like a system where my older self is subsidized by my younger self. But I wonder if I would feel the same way if I was not 57 years old sitting in a specialist’s office?)

What I am saying is that the President was grandstanding about something of no substance and that he surely knew it. I am not surprised that that the President was working this nonstory for all the political benefit he could. But I don’t have to like it.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

4 replies »

  1. As a New York resident who has to buy individual insurance because I work as a temporary contractor, I welcome this change. Even with group rates from the Freelancers Insurance Company, NY premiums were just rising too high. I suffered premium shock when I moved from out of state, so anything to ease the pain of paying unreasonably high premiums is ok with me, even if it didn’t originate from the NY state legislature.

  2. The plans will still deliver $ hundreds of millions to the pockets of the insurance companys’ CEOs, regardles of the price.

  3. In the first year that the exchanges will be available, insurers trying to price policies at rates that will cover medical claims costs, administrative costs and provide a modest profit will have no experience work with because they have no way of knowing how many young, healthy people will sign up relative to the number of people who need more care. At the same time, the rules around risk adjustment, risk corridors and reinsurance have still not been finalized. The vast majority of plans to be offered on the exchanges will be narrow network products. In CA, for example, all 13 insurers offering insurance through the exchanges will not allow members to access Cedars Sinai in LA and 12 of the 13 will not allow access to the UCLA Medical Center which has a reputation for high costs and a culture of aggressive treatment.

    In the Medicare Advantage market, insurers sometimes make mistakes in pricing some plans in some markets and wind up losing money, sometimes quite a bit of money. When that happens, the insurance plan is not offered the next year, the benefits are reduced, or the premium is increased to produce a more satisfactory medical cost ratio.

    The more interesting question regarding policies offered on the exchanges will be what will pricing look like in year two (2015)?

  4. I think your article is more mis-leading than the President.

    Let’s look at the situation you posed – “Peoria”. In the case of a state that let insurance companies discriminate on pre-existing conditions, “experience rate” – the people that couldn’t afford insurance b/c they were locked out by “experience rating” now will be able to buy coverage at reasonable rates. This is thousands of people that were forgoing treatments or struggling through our ERs.

    In either scenario – New York or “Peoria” the President (and Congress) was trying to do something that would create a better overall outcome for all of us.

    We might see a few states show small increases in rates (new more expensive people are re-entering the system) – but I actually think we are going to see decreases in prices in almost every state (do to more transparent and competitive insurance markets).

    I don’t think there is a reasonable scenario where a serious economist can claim that the ACA is not better than the system we had before.

    Is it perfect, not close. But is it awesome that people that most need insurance can get it now and that it is going to be easy for individual to buy insurance online…

    There is a lot of grandstanding going on in this debate, but I think you are playing a part in it. And in the end the results are going to speak for them-self.