Economics

Will You Be Able to Keep Your Plan? The Economics Behind the Obama Administration’s Latest Problem

By now you’ve certainly seen the headlines: “Obama administration knew millions could not keep their health insurance,” or “Report: Millions will lose health plans as ObamaCare takes hold.”

This is not just the rumblings of right wing media outlets or scare tactics, it is now becoming clear that millions of individuals who used to buy their insurance in the individual market will not be able to keep their old plans. As a result of minimum standard for health insurance “quality,” between 50 and 75 percent of existing individual insurance plans will be canceled.

White House Spokesperson Jay Carney said that these cancellations will only affect “substandard policies that don’t provide minimum services.” But again, the devil here is in the undiscussed details. The “minimum services” bar for the Affordable Care Act is actually very high and as a result the new policies that replace those being canceled can be quite expensive.

For people who are in the unsubsidized portion of the exchanges, or even those who qualify for smaller subsidies, these minimum requirements are going to result in large premium increases. While many people might all believe that these individuals be buying better insurance, this is not the argument used to gain public support for the ACA.

We’ve both been vocal in our support of moving people onto the exchanges and away from employer provided coverage. One reason for that support has been that the exchanges allow a far better matching of individual preferences for health insurance and the products that people can purchase. Certainly that was our basis for our strong support of narrow network plans on the exchanges.

Beyond the size of the network, some people don’t want to pay for generous first dollar coverage. Instead, these consumers are willing to exchange lower premiums for higher deductibles or other forms of cost sharing. Others might not be interested in having coverage for every possible service, but instead might opt for a less generous set of benefits.

They will be thwarted by the ACA.


There might be some method in this madness. Supporters of the ACA took a lot of flak for mandating that everyone buy insurance. By now, we all understand that the idea behind the mandate is to create stable risk pools. Minimum coverage requirements could serve much the same purpose; insurers may offer limited benefit plans in order to cream skim healthier enrollees. Banning limited benefit plans helps assure that the healthy and the sick are in the same risk pool.

This argument is based on a time-honored economic theory, and we are somewhat sympathetic to it. (Frankly, we are skeptical about whether this is the rationale behind the plan restrictions; it may simply be the case that the ACA designers think they know best what constitutes a “good plan.”)

But our sympathy is limited. Plans that have extremely low annual and lifetime caps may be little more than exercises in cream skimming and perhaps should be banned. But bans on high deductible plans and broad benefit mandates for features such as free preventative care or contraceptive services fly in the face of other powerful economic theories.

High deductible plans, and plans with substantial copayments, greatly limit moral hazard and hold down costs. At the same time, research evidence suggests that high deductible health plans are only weakly preferred by healthier enrollees. With little to fear in terms of cream skimming, why not let enrollees who prefer the low premium/high cost sharing tradeoff choose the plan that best matches their preferences?

It seems that the architects of the ACA have let concerns about one economic theory (cream skimming) dominate another (moral hazard). And while plans that do not offer generous coverage of a wide range of medical services may enjoy some favorable selection, some enrollees may not value this coverage because of personal preferences independent of their medical needs.

A great benefit of exchanges is that they enable matching of consumer preferences and plan characteristics. This holds the potential for substantial cost savings. But the current regulations of the ACA force insurers must sell identical products, which is antithetical to matching. Once again we are reminded of President Obama’s promise when he was promoting the ACA: “If you like your health care plan, you will be able to keep your health care plan. Period.” Surely the President knew this would not be the case. Not even close.

But it sure made for a better sound bite than: “If you like your health plan, then we have bad news for you. You will only be able to keep your plan if it meets the United States government’s definition of what you need. We don’t believe that you are able to make the decision for yourself, so we took care of that for you.” This would be far less popular, but has the advantage of being more accurate. Were right wing claims about death panels any less accurate?

We have not even mentioned the impact of plan limitations on innovation. Had the ACA been in place 15 years ago, no one today would even know about high deductible health plans. We can only speculate about the plan designs that we will never see in the future thanks to the ACA.

Forgive us if we are not comforted by this paternalistic approach.

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.

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

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34 replies »

  1. You could definitrely see yor enthusiasm in the work you write.

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  2. note to 2cents —

    I learn something new every day about the ACA. I had no idea that insurers would have to pay fees to continue ‘substandard’ plans.

    Many insurers are just taking an opportunity to try and steer their existing customers into more expensive plans. The Obama administration is going to regret for years that they decided to preserve private insurers rather than expand Medicare in some fashion.

  3. The ACA establishes fees for insurers that keep plans that do not comply with the law. I don’t think anyone predicted that insurance companies would just dump these policies rather than keep them and pay the fees. ie fees tied to ‘cadillac’ insurance plans, fees tied to ‘hospitalization’ only plans, fees tied to plans in which the insured pays over 9.5% of household income in premiums. Since the insurance companies are dumping policies to avoid these fees, will we see some changes to the act to compensate for the loss in fees that was expected.?

  4. I read the other day in the LA Times about a lawyer crabbing about her old policy at $98 and the new one at $238. (And she was pregnant.) The horror. With a pre-existing condition (picked up in the military), I was paying $1,350 a month until I had to drop coverage because of cost.

    Many of the horror stories we’re seeing in the media don’t hold water when you do a shopping comparison on the Obamacare sites. Things change. Things change when you change jobs. When your company buys cheaper insurance. And rates go up, way up, with annual policy changes as they have for decades. The whining is incredible.

  5. Erica, it would help to explain what you have (deductibles, exclusions, access, inclusions, etc.) and at what cost.

  6. My POV as far as being able to keep my previous insurance plan before the Affordable Healthcare Act, I would love to have the choice to keep my plan. I believe in the saying, “If it’s not broke, don’t fix it.” If your healthcare plan is working for you and you deem it affordable with your finances you should be able to keep it. I do not think the government should “dictate” how we opt for health insurance. Where is the freedom America?

    The Affordable Healthcare Act is a good policy. I think it is a wonderful for those who are looking for cheaper, more affordable plans and for those who are currently without health insurance. I like that we have the opportunity of a healthcare marketplace rather than having limited choices. Yet, I believe that citizens should have the to keep their current healthcare plans “as is”, without having to comply with the changes that are being made around us.

  7. Note to Al:

    The Coventry policy for $412 a month would have been subject to strict medical underwriting. In other words, only healthy people could get the policy,

    This just points up the problem that the ACA has created.

    Some people really got these Coventry policies. Telling these people that they have to go the Exchanges is what is creating all the anger.

    Look at life insurance for analogies. A healthy person can buy life insurance for very low premiums, i.e. $1000 a year for $1 million term life at age 35.

    There are a few insurance companies that sell life insurance with no medical questions. Their premiums would be at least $5000 a year for the same policy

    Now imagine the ruckus if those who had the cheap underwritten policy were told that their coverage was going away, and in effect they had to buy from the guaranteed-issue company at $5K a year.

    As I have said before, the best solution would have been for the government to fund the guaranteed issue company with broad based taxes, and let the cheap underwritten policies remain in force.

    But that would have meant an on-budget spending increase, oh the horrors.

  8. On a single search: ehealth insurance zip 61053

    Coventry One $412 per month family policy $3,000/$6,000; OOP limit $12,000

    vs the exchange $900 per month deductible $12,000 per your comment.

    Maybe you should broaden your horizons.

  9. Sorry lots of typos..long on call and haven’t slept in a while

    But I do appreciate your blog and everyone’s comments.
    Respectfully, while I am thankful not to have to work as a healthcare provider in your current system( from an ethical perspective I would find it very challenging) I think it’s great o have forums like this one to hear people’s different views.

  10. A very interesting read

    I agree that personal autonomy is important. Coming froma a country of socialized medicine (blasphemy from what I hear in the USA) I can tell you the we take great comfort in knowing that patients and their families can focus on the getting better and not agonize over the bill that awaits them at th end of their hospital stay. I don’t believe universal health care purports a promise of good health. I think it just humane that regardless of the circumstances that brought you to illness, in this state your brethren don’t wish for you to without care. If I used my own life choices as a means to judge others as to whether they are deserving of treatment, let’s say I’d never treat a non-vegetarian.

    I’d caution you against your own moral relativism where you are judge and jury of who is carrying out a healthy life. Just as you espouse personal autonomy, I’d be hesistant to defer alone, to guidelines of medical organizations…these are highly politically motivated both in their generation and execution.

    You’d might be surprised that high blood pressure, just as an example you cited, is far more familial then a reflection of personal choices alone. Of course, this can’t be said for all medical entities. But, that is just the point. Sweeping generalizations about how someone comes into their state of health can be dangerous. I think the best approach is to of course to promote choices for you and your family which is feel area right. But when that patient shows up at your er door, toss that out the window and treat all the same but it’s the human thing to do.

  11. Ginger, what ailments has your family had – anything?

    No one in my family has ever been hit by a car, why should I buy a policy that covers that?

  12. Health Care Plans change ALL the time. All Health Care plans are going to continuously change – and should change- Isn’t that painfully obvious?

    The heady frothy days of “everything for everyone-more is always better” in the the past are gone (RIP) unless of course you wish to pay out of your own pocket for a health care service that you believe that you need (most of which you don’t need or which may actually harm you)

    Dr Rick Lippin
    Southampton,Pa

  13. Nobody in my family has ever had heart problems, why should I buy a policy that covers heart attacks?

  14. When ACORN was busy forcing banks to make home loans to people who couldn’t possibly afford them, that was considered good policy. At one time Obama even provided legal services to ACORN.

    Presently we have the opposite situation where some are worried about the free rider effect. What about those that are underinsured? Should they be forced to place a ‘bond’ as well? Those that get sick on Medicare have huge bills. Not all of those bills are covered by Medicare and many default on them. What about others that don’t pay their deductibles or stop paying their premiums under the ACA. Should they have some sort of ‘bond’ as well?

    The correctible uninsured free rider effect is minimal and costs society very little if anything.

  15. Thanks for your comments, T.

    Actually by my old fashioned standards, the Exchange plans do not have such low deductibles. I have had health insurance since 1974 so I may be ‘spoiled’, but to me $250 is a low deductible. $2000 is a high deductible to me.

    I liked your comment that the cost of eliminating pre-ex conditions is being dropped on other buyers in the individual market.

    This is what happens when we try to help sicker people by insurance regulations, rather than taxes and vouchers. When we go to guaranteed issue, this raises prices for everyone who buys individual insurance.

    Meanwhile the persons on Medicare or on self-funded large corporate plans are not impacted at all. In this sense you are correct.

    And it is why I continue to advocate for broad based increases in the income tax to help pay for insurance reform. In this way the costs of reform are shared by everyone with a higher income, not just those stuck in the same insurance market.

  16. “In short, no one cared about us then. But now that this sector has been shoved to the forefront due to the ACA, suddenly everyone is paying attention – because they think we are getting screwed, and because it’s polticially expedient to pay attention to us.”

    Exactly Bev. Republicans all of a sudden “care” about our health care needs and costs. Hell, for years they just wanted us thrown under the bus. We had no political worth or sizable campaign donations. Maybe someone should ask them what they plan on doing for us if they kill the ACA.

  17. Victoria, I’m a male, I don’t want to pay for breast or uterine cancer, what say you to that?

  18. I wasn’t happy with my policy. It was too expensive and provided very little up-front coverage. And yes, I had claims, surgeries, some fairly expensive care. All were paid on time and well.

    Now with the “ACA,” my plan is even more expensive and provides NO up-front coverage. And I’m going to have to pay a whole lot more before I get any care.

    But I have maternity coverage! As a 50 year old male with no children and a wife with no children, that’s really valuable to me.

    The elimination of pre-existing exclusion was an awesome thing, but the country needed to SHARE the expense. Instead it’s all being heaped onto people on the individual market. That is where the problem with THAT aspect lies. You can’t just say, isn’t it wonderful? Yes, it would have been wonderful if our national idiots had structured it better.

    The Exchange plans are outrageously bad with their awful doctor access. Yes, they have low deductibles and copays, but Medicaid has NO deductible or copays, but that doesn’t mean doctor access. And it won’t mean doctor access with these plans either.

    It will be interesting to see what happens for people. I am thankful to say I will see it all as a spectator rather than a participant. I’m foregoing subsidies and keeping my inflatedly-priced worse plan. I fear, tho, for my fellow Americans who have no choice but to put up with the lousy Exchange plans.

  19. Barry;

    Many thanks for your always well-informed comments. They add a sorely needed element of rationality to the discussion.

  20. If the man from Illinois had never filed a claim, then he probably was happy with his policy.

    Remember the old saying that a conservative is a liberal who has been mugged?

    Or that a liberal is a conservative who has been through treatment?

    Maybe a defender of the old individual market is someone who never filed a large claim.

  21. Bob –

    The family policy for $580 per month doesn’t pass the smell test to me. Perhaps there were strict limits on hospital coverage or a low benefits cap per year or no drug coverage. Who knows?
    That’s why it’s nice to see side by side comparisons like Paul Levy posted on his Not Running a Hospital blog a few days ago. That comparison showed the new policy costing more than the old one for somewhat worse coverage. The main reason was that the old policy was based on his wife’s age alone since the policy is in her name and she is younger than he is. The new policy will incorporate the ages of everyone on the policy which, in his case, is him and his wife.
    One thing that many people may not appreciate is that insurers who are cautiously entering the exchanges are flying blind in trying to estimate their medical claims costs this first year because they have no idea what the mix of healthy vs. sick people signing up for their plans will be. This creates an incentive to price policies on the high side. They would much rather pay rebates to policyholders a year from now than get stuck with a very high medical cost ratio that will result in an overall financial loss on that block of business. Most of the for profit insurers like United, Humana and Aetna are entering very few markets or none at all until they see how things shake out. They can always enter in 2015 with a much more robust knowledge base to work with.

  22. Every single day for the past two weeks I read angry anecdotes from people who say that the exchanges are much worse for them than their current plan.

    Tonite on NPR, a farmer from Illinois was interviewed. He said that his current family policy cost $580 a month and had a family deductible of $5200. When he looked into the exchanges, the best policy he could find had a premium of $900 a month and a family deductible of $12,000.

    Granted he might have meant out of pocket limits, but that is not what troubles me.

    Where did he get a family policy for $580 a month with a $5200 deductible?
    I have to assume that he and the other angry complainers are not just right wing “plants”, i.e. they are telling the truth.

    I spent my last five working years in the individual market. I also sold health insurance though not full time in Minnesota.

    I never saw such cheap family insurance. Maybe it was a state by state issue.

    I expected that even with guaranteed issue and maternity coverage, the new ACA would be cheaper than the awful policies I used to see every day in the individual market. I am stumped.

  23. bev M.D. –

    I understand your point about the traditional attitude of insurance executives and companies. However, if the market rules allowed for medical underwriting, no company felt it could afford to get stuck with a disproportionate number of high cost sick enrollees. So, they all used similar strategies, including helpful data from the Medical Information Bureau, to weed out as many sick people as possible.

    Under the new rules, they have to take all comers as they also had to do in a handful of states that had community rating and guaranteed issue. In those states, though, without a mandate to buy, there was adverse selection and very high premiums as a result. Insurers will adapt quickly and easily to the requirement to take all comers but they need that mandate to purchase insurance to ensure that the system will have a chance to work. They will also save money by no longer needing to underwrite.

    In Medicare Advantage, insurers have to take all comers but there is also individual risk rating which compensates them with additional payments for enrollees with higher than average risk scores. An average risk score, by the way, is 1.0. The two market leaders in this space, UnitedHealth Group and Humana are doing quite well and continue to grow. Pretax profit margins are targeted in the 5% range. Over 25% of Medicare beneficiaries are now in MA plans though my understanding is that the average risk score of this population is in the 0.80-0.85 range. People with significant medical issues are generally better off maximizing their choice of providers with standard Medicare and buying the supplemental plan which MA enrollees don’t need and can’t buy even if they wanted to. The MA plans are especially attractive to lower income older folks because they don’t have to buy the supplemental plan which can easily cost over $200 per month.

    Separately, it’s worth noting that large self-funded employers have always, in effect, used community rating in providing health insurance to their employees. From data that I’ve seen in the past, depending on the age and health status of the workforce, average spending per covered life, including children who are cheap to cover, ranges from $4,000 – $6.500. Employees effectively pay for this in the form of lower wages than they would otherwise be paid in the opinion of most reputable economists. Medicare spending, by contrast, averages about $11,000 per beneficiary per year and standard Medicare has an actuarial rating of less than 60% which is why most people buy supplemental plans or get them from an employer as a retiree benefit. The bottom line is that comprehensive insurance isn’t cheap any way you slice it at least until we figure out sensible ways to lower the cost of healthcare. We need to remember that health insurance is expensive because healthcare is expensive. It’s that simple.

  24. Barry, I don’t disagree about Medicare for all. I think whenever a government takes over health care you have horrible political pressures (just look at Medicare). I am speaking of something different and that is the mindset of insurance executives. They are used to doing everything to minimize their payouts and maximize the stability of their profits. We have seen in other industries the exit of companies from states where the risk is seen to be too high (homeowners’ for instance), cherry picking of insurees (auto), etc. As I said, this is irritating but acceptable where people are taking known risks, like bad drivers or beachfront homeowners. But illness (setting aside smokers, obese people etc for the moment) requires a different mindset which I don’t think traditional insurance workers understand. There should be some commitment to your client. I’d be interested to know if this mindset is different in other countries with health insurance companies. It just seems predatory here.

  25. Ron —

    The penalty in the first year is $95 or 1% of income, whichever is higher. So, at $30K of income, it’s $300. By year 3, it’s 2.5% of income.

  26. Would the ACA allow for people who don’t want to purchase ACA-compliant coverage to continue to purchase whatever they’re buying and just pay the $95 annual penalty?

    Then it’s just up to insurers to continue to offer such plans.

    Seems like a market opportunity!

    Ron

  27. I’m glad to see pre-existing conditions eliminated from the process of obtaining health insurance. While this provision is understandably wildly popular, we should note that it needs to be coupled with a mandate to purchase insurance in order to avoid an adverse selection driven death spiral. We can’t just let people wait until they’re sick to buy insurance. It won’t work.

    There is no question that the new law is a good deal for older people, especially those with significant medical issues. They cannot be charged more than three times what a young person would pay for the same coverage even though insurers tell us that the older group incurs 5-7 times more costs for medical claims.

    We should also remember that health insurance is a 5-50 business which means 5% of the members of the risk pool incur 50% of the costs in any given year and the most expensive 1% accounts for 20% of the costs. So, it wouldn’t take very many more sick people that an insurer budgeted for as a percentage of the total number of people signing up to drive medical claims as a percentage of premiums to a level that causes significant losses. In Germany, people are given risk scores that incorporate 80 separate metrics and insurers who wind up with too many sicker than average people are given extra payments to compensate them for their higher costs.

    I have no problem with private insurers whether for profit or non-profit participating in this business. Medicare for all would be an open ended entitlement with huge but difficult to quantify fraud coupled with dislocations from pricing some services, tests and procedures too low while overpaying for others. Hospitals already claim that Medicare doesn’t pay them enough to cover their full costs, especially for outpatient services yet when Medicare costs are thought to be growing too fast, the only thing that Congress seems to how to do is squeeze provider payments further. Even liberal expert Ezekiel Emanuel opposes a Medicare for All style single payer system because it would freeze most of the current inefficiencies in place, would have an adverse impact on medical innovation and would likely be riddled with fraud as well.

  28. Quite amusing that everyone basically ignored the individual insurance plan sector, complete with its egregious pre-existing condition requirements, because it covered such a small portion of the populace. In short, no one cared about us then. But now that this sector has been shoved to the forefront due to the ACA, suddenly everyone is paying attention – because they think we are getting screwed, and because it’s polticially expedient to pay attention to us.
    I for one will take the pre-existing condition exclusion and run. Pffft to all of you who didn’t care before. Yes, Barry, I would like a high deductible option because I can afford it, but the essential unfairness of pre-existing condition exclusions trumps all for me.

    And btw, I have been saying for years that traditional insurance executives and health care do not belong together. Raising your rates or rejecting you for being a bad driver is one thing; doing so for getting sick is another whole ball game. Let’s think of something different for the long term, huh?

  29. A middle ground approach might be to allow people who can show that they have some acceptable level of income and/or assets excluding the equity in their home to buy a high deductible plan instead of the more comprehensive choices offered through the exchanges.

    Those who can afford to self-insure up to, say, the first $10K of medical expenses per year should be allowed to do so if they want to. They should also have to commit to the high deductible plan for at least three years so they can’t just go back to the more comprehensive plan as soon as they get sick and incur much higher medical claims.

  30. Insurers have been doing this for years on their own and part of the ACA act was to also help avoid “under insured” policies…lots of those out there…bare bones..had it happen to me long before Obamacare was even around.

    http://ducknetweb.blogspot.com/2013/10/provisions-of-affordable-care.html

    Insurer algorithms still do the calculating on new policy costs too with “their” risk pools…so be a skeptic if it doesn’t look right and ask questions…who knows what risk assessments insurers now have added, so are they doing mortality assessments now that they feel there’s more risk?

    The MIB has done those for years for insurers who buy the data and with the insatiable addiction insurers have to all kinds of data would not surprise me. For anyone who forgot about them and what they do…

    http://ducknetweb.blogspot.com/2010/06/mib-solutions-and-hooper-holmes-working.html

  31. Someone on CNN was saying you can keep your old insurance. That is a big lie. My Blue Cross plan will be closed in 2014 and I have to apply for a subsidy. The new premium without this subsidy for one person is $610. I was told by my insurance agent that the policies now include maternity and pediatric care even if you are past child bearing years and do not have any children. Ridiculous.

  32. $6,500 out of pocket maximum isn’t enough moral hazard for you??

    This is all getting ridiculous. The individual market for health insurance has been a shark tank for decades, letting people get screwed in any number of ways.

    ACA does a tremendous amount to prevent that and all anyone wants to do is complain that they’re not free to get screwed anymore.

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