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.