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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Georgia2centsACA GlennErica M.Dr RA Recent comment authors
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Georgia
Guest

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

The sector hopes for more passionate writers like you
who are noot afraid to say how they believe. All thhe time go after
your heart.

Feel freee to visit my site: ICstrategy (Georgia)

Bob Hertz
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Bob Hertz

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.

2cents
Guest
2cents

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.?

ACA Glenn
Guest

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… Read more »

Erica M.
Guest

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… Read more »

Peter1
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Peter1

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

Bob Hertz
Guest
Bob Hertz

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… Read more »

Dr RA
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Dr RA

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.

Dr RA
Guest
Dr RA

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… Read more »

Dr. Rick Lippin
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Dr. Rick Lippin

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

spike
Guest
spike

Well, if the access is that bad, at least the rebate checks will be huge! 🙂

Bob Hertz
Guest
Bob Hertz

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… Read more »

t
Guest
t

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… Read more »

bev M.D.
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bev M.D.

Barry;

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

Bob Hertz
Guest
Bob Hertz

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.

Barry Carol
Guest
Barry Carol

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… Read more »