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Unaffordable Care Act
The defenders of the Affordable Care Act are running out of excuses for the dismal performance of its health care exchanges. It is now old news that many uninsured individuals are unable, even with sizeable subsidies, to purchase health care coverage from private health care providers. As Yale Professor Jacob Hacker notes in his recent op-ed for the New York Times, the ACA has indeed faced “a rocky six months.” Average anticipated premium increases are running at 25 percent; major insurers like Aetna, UnitedHealth, and Humana have either pulled out of the program entirely or cut back their operations; and one recent tally reports that 16 of the 23 health care co-ops, with over 800,000 enrollees, have shut down, with at least six others on economic life support.
What should be done to respond to this unfortunate situation? The defenders of the ACA want to double-down on the current system by introducing a “public option” that was excluded from the original legislation. President Obama endorsed that position in a communication published recently in the Journal of the American Medical Association. After ignoring the problems with the individual health care exchanges, he suggests “Congress should revisit a public plan to compete alongside private insurers in areas of the country where competition is limited. Adding a public plan in such areas would strengthen the Marketplace approach, giving consumers more affordable options while also creating savings for the federal government.” That same line is echoed by Hacker who dismisses any notion that the public option will lead to a single-payer system, by making the tart observation that the wholesale withdrawal of private insurers from the marketplace has already resulted in a single-payer system in the five states whose exchanges will be serviced by only a single ACA provider next year, with the prospect of still more to come.
Unfortunately, President Obama and Professor Hacker, with their public option rescue plan, misunderstand the source of the current difficulties. The key problem is not monopoly power. It is runaway costs brought on by foolish regulations that no public option can cure. If the system is to survive, which is doubtful, it needs to be fundamentally redesigned.
In principle, there is no doubt that the exit of multiple players from any given market gives the survivors the opportunity to engage in monopoly pricing, which may allow them to increase profits. Yet current companies are leaving the ACA en masse because of developments on the cost side. They cannot make money when they have to play by onerous government rules in supplying health care insurance. Even in a perfectly competitive market, with free entry and exit, no one will sell any product for a price below its anticipated cost, plus an allowance for a risk-adjusted rate of return on invested capital. The firms that left concluded they could not provide a product consumers wanted at a price that would allow them to remain in the market. If there were monopoly profits to be made in this industry, new firms would enter as the old firms left. But the level of private entry into this market has been effectively zero, which is a strong signal there are no profits to be made.
Indeed, the situation is even more dire than this account suggests, because the individual health care market is not viable, even with the enormous public subsidies that are available to a large fraction of the insured population. According to figures from earlier this year, about 9.4 million enrollees (out of 11.1 million) on the ACA exchanges receive a government subsidy that averages $291 per month on policies that cost an average of $386 per month. That means that close to 85 percent of the enrollees receive an average subsidy of $4,632 per year, or close to 75 percent of the total price, for a grand total of about $43.5 billion in annual subsidies for their combined coverage. The situation looks even worse when you recall that the private plans of about six million people were canceled because they did not comply with the minimum standards set under the ACA. Those plans made money and contributed tax revenues to the government. So at a minimum, the $43.5 billion in subsidy dollars only increased the total exchange enrollment by about 3.5 million recipients. The rest of the reduction in the number of the uninsured comes not from the operation of the exchanges, but from the expansion of Medicaid by about 15 million enrollees, placing even more strain on an already overworked system.
The obvious inquiry here is why the President, or anyone else, should think the public option will be able to cure the underlying ACA cost problem and help the government save money. Private health insurers work in many complex markets, where they manage to turn a profit. Is there any reason to think that a new and untested government provider will be able to succeed where the companies have failed? That rosy and improbable scenario would only be possible if the government received a complex set of privileges and advantages denied to their private competitors. These subsidies could take the form of receiving free or below-cost services from other government agencies—or being exempted from the various regulatory reviews and requirements imposed on their private competitors. In other words, the few surviving private firms will be competing on an uneven playing field against coddled government entities. The rise of the public option would mean virtually all private insurers exit the field. Hacker is unduly optimistic when he thinks that the outcome will be a stable equilibrium with public and private carriers. A single-payer system, with its massive inefficiencies, is the more likely result.
It is therefore necessary to rethink the problem from the ground up. The only way to do that is to examine the devastating constraints the ACA places on the overall health-care marketplace. The first point to note is that parties in competitive markets are not told the dimensions on which they are allowed to compete. They can offer whatever mix of goods and services they choose for whatever price they charge. They can target the entire market or only a single portion of it. They can enter and exit at will. They receive no direct subsidies from the government for the services they supply.
As I have long argued, the ACA flouts these basic principles. The first point is that each of the ACA’s bloated four-tier plans—Bronze, Silver, Gold, and Platinum—have to offer 10 key essential services. As reported by Healthinsurance.org, these include “outpatient care, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse disorder services, behavioral health treatment, prescription drugs, rehabilitative services, laboratory services, preventative care and pediatric services, including oral and vision care for children.” Some of these services are not found in any voluntary market, yet all of them must be made available at a high level that is determined by government regulation, and which is not sustainable in voluntary markets.
In addition, everyone must be accepted into every plan, regardless of whether they have a preexisting condition. Most potential insureds know about their anticipated risk profiles and thus enroll in plans when they expect to face heavy expenses that the insurers cannot take into account. Beyond that, all insurance carriers are required to ignore both age and sex, even though these are powerful predictors of future health care costs. An adverse selection problem arises because both old and young are most likely to enroll when the costs of their plan are smaller than their benefits.
Faced with these constraints, private insurers have to make choices their customers won’t like. They can restrict the choice of physicians, and they can increase the level of deductibles, both of which make the plans less attractive and speed the rate of exit. Recall that enrollments are done on an annual basis, so people who have lost coverage the first time will not enroll a second time, especially if the terms of the new plan are less attractive than those of the previous one. By the same token, various patient groups for assorted ailments will steer their members to their preferred plans because the cost of a sick person’s care is far lower on the exchange. Any public option that operates under ACA rules will be vulnerable to the identical pressures that have driven the individual exchanges to the brink.
The planners of the ACA had enough foresight to realize that its open enrollment system could lead to winners and losers. They therefore designed a “risk corridor” program, which is intended to require side payments from those insurers that have drawn a good group of insureds to those insurers that have drawn a more expensive group. The implicit assumption behind this strategy is that system-wide receipts will exceed system-wide costs. But, of course, that need not be the case. Some plans will indeed do better than others, but the overall costs of running the exchanges could nonetheless still be negative, which in practice means that as the overall losses get greater, it becomes more and more difficult to fund transfer payments solely from revenue sources within the exchanges. In order to stem the shortfall, the Obama administration sought to make payments to insurers that were not authorized by Congress, only to be slapped down in court.
If the public option will accomplish nothing, then what should be done? As I have long argued, the only solutions worth considering are those that reverse the major structural failings of the current system. In the short run, the list of required benefits has to be pruned; greater price freedom has to be restored; new enrollees must be required to stay for minimum periods to counteract the adverse selection problem; insurers have to be able to more accurately price in ways that reduce the cross-subsidies currently built into the system; and transfer payments among insurers have to be scrapped.
It is an open question whether these and similar reforms can remove the rot that has worked its way into the system. Yet by the same token, it will be difficult to push for a wholesale repeal of the ACA, given that it is no longer an option for people who have been forced out of the private market to return to the plans the ACA shut down years ago. After all, any new statutory reform could be so short-lived that new entrants might be hit hard by unanticipated restrictions before they can recoup their investments.
There is a sober lesson to learn from this sorry situation. None of the ACA’s shortfalls should have been a surprise to people who understand how insurance markets operate. The basic proposition remains that market liberalization always beats increased regulation. The former reduces administrative costs and creates desirable incentives. The latter leads to heavy cross-subsidies, endless compliance rules, and systematic deficits. It is also hard to reverse course when the strongest proponents of the given program ignore its manifest structural deficits, which is exactly what the incorrigible President Obama and Professor Hacker have done in calling for a public option that will only make a bad situation worse.
© 2016 by the Board of Trustees of Leland Stanford Junior University
Published in Healthcare, Law
Richard,
This is perhaps the worst of a myriad of Obama Administration travesties. One-sixth of the American economy. All of the Health Resources available in the United States. The Health Care of every man, woman, and child in America. Gruber told the story. They knew what was going to happen, lied about it to get the bill passed, and are still lying to this day. The ACA has undoubtedly caused the deaths of many people already. To stop it from continuing to cause many many more deaths into the future we have only one possible hope. Hillary Clinton must lose the election or we will seal the fate of many lives.
Regards,
Jim
Insert [laugh track ….]
Most esteemed Dr. Gawron … Great minds think alike.
The Obama Administration is getting exactly what it wants, the end of the private health-insurance industry. The ACA was designed with that in mind, and it is working. For them the ACA is in no way a failure. For going along with it in the first place, those companies sort of deserve what they get. The only ones who don’t deserve what they get are the public, the real small-business-owners of the United States.
One of our members did a post over on the Member Feed about her experience. JOIN RICOCHET to read her story.
Rush,
Given the mentality of the hopelessly trivial brains that populate Obamaland, this scenario is quite possible. I just would like to remind everyone of the number of deaths that such a little ruse could cause to obtain Single Payer. Of course, we know that socialism doesn’t work period so the deaths would continue under Single Payer and get worse. Gruber revealed that they were well aware of the consequences and lied anyway. One can only conclude that they harbor some sort of genocidal motive. Although stopping the ACA would be a miracle in itself, one might entertain the thought of putting Gruber, Zeke Emanuel, Obama..etc. on trial. You know sort of like the Nuremberg Trial.
Well, if HRC loses and Trump cancels the ACA it will at least be poetic justice.
Regards,
Jim
Ah. Obamacare. My wife and I lost our fine health insurance to Obamacare. Nearing our sixties, and with children in their twenties with insurance of their own, our own insurance did not cover maternity care nor pediatric vision and pediatric dental.
But those ‘deficiencies’ ran afoul of Obamacare and our insurance carrier canceled our plan. ( Note to Valarie Jarret – the insurance company cancelled our plan to comply with Obamacare )
Our new, Obamacare compliant, plan costs way more, covers less of what we actually use and forced my wife to change doctors. But by God if a miracle pregnancy occurs and the child needs glasses and braces we are covered!
Ekosj,
You do realize that you are being counted by the Obamites as one the many uninsured people that the ACA helped. Of course, you already had better Health Insurance. The ACA Law made that insurance illegal so your plan was canceled. Then the ACA (explitive unfit for CoC) signed you up and counted you as “uninsured”.
They should burn in Hell for this.
Regards,
Jim
@jamesgawron. I wish they’d stop helping!
Thank God we don’t need it, but heres the cost for a range of policies here in NC for me and the wife…
Between 27,000 and 40,000 per year.
The basic logic of Obamacare, such as it was, was that the premiums garnered by forcing young healthy people to purchase health insurance would subsidize the cost of insuring those older and less healthy, driving their costs down.
I was just reading an article in my old hometown Pennsylvania paper about the rising Obamacare premiums. They gave the following example. (Might not be exact but it’s close)
The new premium for the second cheapest Silver Plan for a healthy 27 year old making $25,000 per year would be $320 per month. But they would only pay $140 a month out of pocket and would receive an up-front tax credit (subsidy) for the other $180 per month.
So the basic premise of Obamacare is stood on its head. The young and healthy aren’t subsidizing me…because I’m a taxpayer, I’m subsidizing them!
Is this the raw cost, not broken out by what an employer would pick up and the employee would pick up? I have BC here in North Carolina and my premiums are in the $4,000 range, annually – but I’m single, no children.
Obamacare doesn’t have employer and employee shares; it’s for the individual market only. That’s one of the biggest parts of the overall scam.
When an employer “pays” part of a worker’s premiums, it is really just acting as a bookkeeper, paying the worker part in cash and part directly to his insurance company. But there is a huge advantage to this arrangement–in addition to making people “feel” better because they “only” have to pay “part” of the cost of health insurance: the portion of wage that is held back by the employer and sent over directly to the insurance company in the worker’s name is not taxed as income to the worker.
The ACA has made things worse, but at this point I am kind of okay with the system crashing and going to a government run healthcare system. Doctors and hospitals complain now about low reimbursement rates, when they go to single payer they will be even lower. The AMA and the hospital associations were all in on the ACA – they deserve what they are going to get.
But do we?
These are the costs for an individual, ACA plan. NO employer. All me.
Be very careful what you wish for.
Government Healthcare
The efficiency of the DMV
The customer service of the Post Office
The compassion of the IRS
Chris, employers are probably paying less per person because many of their employees won’t cost the insurer anything. The individual market doesn’t have as much cost averaging. The mandate was supposed to make it happen, but it didn’t.
Correct me if I am wrong, but my understanding is that subsidies only cover premiums, not deductibles.
That is correct.
Got it, thanks everyone. Didn’t know those details for the individual market.
As with most political decisions those who knew better and pushed for ACA needed and got the assistance of a lot of useful idiots in and outside Congress and the media. I seem to remember a lot of people in the media asking about the cost to individuals and the government stopping at the answer that forcing younger people to buy into health coverage would pay for everyone else, thus lowering costs for everyone. I don’t remember many asking how increasing the requirements for all the plans wouldn’t lead to higher costs; or how despite the fact that fulltime employment for younger people is more rare, these same underemployed folks would foot the bill for everyone’s health coverage. These are not hard questions to come up with. I think it shows a lack of curiosity and overwillingness to rely on pro-ACA lobbyists and lobbyist-experts on the part of those not already in the bag for the ACA for political reasons. Everyone should have seen this coming a mile away. And yet most of the country doesn’t even see it now. We’ve got a lot of convincing to do.