Wednesday, November 25, 2015

Spot insurance markets

Obamacare/ ACA was in the news last week. Some relevant summaries, and comment below.

United Health pulling out of the Obamacare exchange market
UnitedHealth reported one problem after another: An expensive risk pool that lacks the younger and healthier consumers who are supposed to buy overpriced plans to cross-subsidize everyone else....People join the exchanges before they incur large medical expenses—insurers are required under ObamaCare to cover anyone who applies—and then drop out after they receive care. The collapse of the ObamaCare co-ops is recoiling through the market.
... Commercial insurers are being displaced by Medicaid managed-care HMOs, with their ultra-narrow physician networks and closed drug formularies.
From the WSJ blog,
...Health plans say they have had more sick people, and fewer healthy people, sign up under the new rules than they need to keep prices stable. ...It’s also cited as a factor in some insurers’ decisions to withdraw products from the market or offer more limited choices of providers this year. Health Care Service Corp., which owns Blue Cross and Blue Shield plans in five states, already has pulled out in selling through in New Mexico, and yanked its preferred-provider organization offerings in Texas.
From Rising rates pose challenge to health law
Federal officials are pushing people to evaluate their options and consider switching plans to try to keep costs in check, in a message regularly summarized as “shop and save.”

In about half of the states using, people in popular plans can pay lower premiums in 2016 than they did in 2015—as long as they are willing to switch to a plan with a different insurer, usually with a narrower network of doctors and a higher deductible. 
A story:
Kimono England...said... Their health plan’s decision to withdraw its “preferred provider organization” product this year tipped her over the edge.

She said she now has only a narrow provider-network option that doesn’t include her local doctors,...she decided to enroll in a Christian health-care sharing ministry, in which members agree to pay each other’s health bills... since the ministry won’t pay for an expensive specialty shot her husband needs four times a year they are thinking of buying a health plan just to cover him.

The move by the England family would mean that five people with relatively low medical costs exit the insurance risk pool, and one person with large expenses remains—bad news for the insurance industry.
Also,  Mary Kissel interview of Holman Jenkins (video)


Let's beyond the standard headlines -- "Millions more covered!" "But they're all medicaid or high subsidy!" (For example here.) "Premiums going up!" "Not if you shop!" and so forth.

Health "insurance" seems to be moving to a spot market, in which large numbers of people change plans, sign up, or leave every year, and in which large numbers of companies change their plans and coverage every year.

The churn on the individual side and its spiraling costs was a predictable (and widely predicted) response to the ACA, which addressed preexisting conditions by mandating insurers to cover anyone at the same price. The joke around the passage of the ACA was that health insurance would consist of a cell phone, which you use to buy coverage on the way to the hospital.

Yes, open enrollment is only once a year, but it's not really a constraint. Most conditions involve years of care, and you can wait six months to ramp up big expenses. A binding non-insurance penalty close to the cost of insurance was never going to pass.

Moreover, the problem is not so much insurance vs. no insurance, it's the right to move around between plans. Buy a bronze high deductible policy one year. If you get sick, move to a gold low deductible big network policy the next year.

The tragedy here is what was lost. Yes, individual insurance had big problems. But before the ACA, there were millions of people who bought insurance when they were healthy; that paid guaranteed-renewable premiums in a large stable health insurance companies, so that when they got sick, they would still have good affordable health insurance. Sure, it didn't work for people who moved across state lines, who got jobs with employer-provided group plans, and many suffered various snafus. But for many self-employed people and small business owners outside the big company - big government nexus, it actually worked ok.

Those relationships are all gone now. If ever we do move back to long-lasting, individual insurance, that you buy when healthy so that it covers you when sick, the millions of people who did the right thing and bought in to the system are now gone.

It's more surprising, at least to me, that annual chaos is breaking out on both sides.  Plans are discontinued, companies leave the market, coops come and go bankrupt, networks change, and many of us have the pleasure of annually sorting through health insurance policies, trying to figure out which ones cover the doctors, hospitals, and medications we are using or might need next year, all likely to do it again in the next year.

Our "federal officials" are not only not bemoaning this chaos -- they're encouraging it! "Shop and save." Shop because your plan got canceled, they changed your network, they vastly raised your premiums, and so forth. Save because they won't pay your claims.

I guess Americans need something to do between Thanksgiving and New Years. Together with shopping for cell phone contracts, cable and internet bundles, and figuring out our frequent flyer programs, this should keep us all plenty busy. Winter in the Republic of Paperwork.

Will the supply churn continue? One view of this is simply that companies need time to adapt. They made optimistic assumptions about their pools, find they're losing money and have to adjust. In time, we will again see stable offerings by stable companies.

Maybe, but I doubt it. If people keep playing games, moving to high cost policies when they get sick, health insurance for those of us not getting subsidies will be astronomically expensive. It ceases being insurance.

A different view is that the supply churn is the industry's way of solving the problem. By changing networks and coverage each year, by canceling policies frequently, by companies forming, dissolving, entering and leaving markets,  they keep us on our toes. A stable wide network plan with reasonable cost will attract too many sick people. So, the answer is, keep it unstable.  The same kind of price discrimination by complexity that pervades airlines, cell phones, and credit card contracts, might pull in healthy people who don't have time to spend three weeks a year finding out what doctors are covered by what plan.

Related, I suspect the industry is finding a way to segment the market. There are really four separate health insurance systems: 1) Expanded Medicaid. 2) Highly subsidized premiums based on income. 3) Non-subsidized individual policies. 4) Employer provided insurance for high income people with full time jobs. The first three were supposed to be parts of the same market, but it's fragmenting, with medicaid and subsidized plans giving out low cost low quality care.

This is not a grand conspiracy theory. Like most outcomes in economics, it's not obvious any of the participants understand what's going on, and an evolutionary process settles on outcomes that "work" in the regulatory environment and don't lose catastrophic amounts of money.

Health insurance really does not work as a spot market, of course.

The answer? For those who haven't been reading this blog very long (collections here and here), it is straightforward: Lifelong, deregulated, guaranteed-renewable, individual insurance, bought when you're healthy, carried along from state to state and job to job, with employers contributing premiums rather than setting up group plans. Deregulation of supply, so that for most procedures you can just pay cash and not be rooked by made up prices.


  1. The likely outcome in my view is that the US will move to a single payer system. Obamacare is obviously not sustainable and now that some citizens have gotten something for free they are not going to easily give it back. I imagine that many of the left leaning economists who supported Obamacare envisaged this as the likely outcome because as Professor Cochrane points out a lot of what has in fact happened was not that hard to predict ex ante.

  2. The GOP seems to love the VA. That is a communist healthcare system. It is for former federal employees, housed in federal facilities, staffef by other federal employees (more than 300000 VA employees!).

    There is not constant commentaries at the VA does not work. Nor do VA beneficiaries pay a $3,000 deductible, as do ACA beneficiaries.

    I say we go to universal conscription, and VA for everybody.

    1. The VA is the most hated federal agency this year.

    2. Wrong. People love the idea of providing health care to veterans. The reality of the VA is a disaster: veterans dying on wait list as corrupt bureaucrats lie about service levels to game their bonuses.

    3. Correct me if I'm wrong, but I seem to recall any number of GOPers and conservative media suggesting that voucher-paid health care for veterans would be a great way to alleviate the outrageous backlog as well as allow a vet to obtain care at a facility of his choosing and a convenient-to-get-to location.
      And, to the contrary, there have been many GOPer complaints that the VA is not meeting the needs of our veterans, while billions of dollars are being wasted on interior redecorating and over-budget new facilities (see: Denver, VA hospital, new).

    4. @ColoComment -

      Yes GOP politicians did indeed propose voucher-paid health care for veterans after the scandal, and it was Sen Bernie Sanders the socialist who led the blockade of any such remedy. Better some Vets die than lower the socialist flag.

  3. We have to pass the bill so you can find out what's in it!

    1. That's not a bill, that's a stool sample...

  4. Author: "Yes, individual insurance had big problems.... it didn't work for people who moved across state lines, who got jobs with employer-provided group plans, and many suffered various snafus" -seems like quite a number of exceptions.

    As a member of the 1%, and using logic (by and large if you have an expensive medical condition it is going to kill you sooner or later; doctors' cannot really save you), I self-insure since I'm overseas and in a cheap medical care country (Philippines; doctor's visits are $12 plus meds).

  5. "The answer? For those who haven't been reading this blog very long (collections here and here), it is straightforward: Lifelong, deregulated, guaranteed-renewable, individual insurance, bought when you're healthy, carried along from state to state and job to job, with employers contributing premiums rather than setting up group plans."

    Exactly how are these creatures "deregulated"? For example, I'm sure the lifelong plan will be standardized. If not you'd have the same 'churn' problem....young healthy people would buy a plan with min. coverage and then try to upgrade as they get older and start developing chronic problems. Likewise unless you are doing a single-payer variation, you will have to have some type of mandate.

    It would be interesting if employers stopped having to be the ones to pick out plans and benefits and simply contributed towards the purchase of them (think of a IRA where you choose the mutual funds rather than a 401K where the boss gives you a selection to choose from).

  6. The small (<50 life) group market has always had some of the same problems. In any given market onlay a large market share creates a pool large enough to offset some of the anti-selection. This is the reason that BX/BS plans dominate the individual and small group space. I expect BX/BS to eventually be the dominant carrier under ACA, a sort of non-government single payer.

    1. If BX/BS were to become the single payer, no way could it considered "non-government" except in name. As Thomas Sowell said, "It is amazing that people who think we cannot afford to pay for doctors, hospitals, and medication somehow think that we can afford to pay for doctors, hospitals, medication and a government bureaucracy to administer it." And we can bet that a health care host that size would attract all manner of federal parasite.

      I fear you're right, Unknown, that rather than accepting the wisdom of Prof. Cochrane's plan, such is the current trajectory. But please, let's show Orwell some respect and start trashing the 'non-government' dodge now.

  7. My premiums went up over 40% for '16.

  8. "Yes, open enrollment is only once a year, but it's not really a constraint."

    I disagree. A few quick real life examples:

    1. You lose your job in January and can't make your premium payments. In March you lose your coverage. In April you find a new job but you're locked out of the insurance market for 7 months.

    2. You need certain procedures or services but your insurance company is being uncooperative. You want to change to another company but you can't until open enrollment. In just about any other situation you'd be free to break the contract and give another vendor the chance to provide better service.

    3. You've been taking an expensive medication for 10 years and doing very well on it. One day you receive a letter from your insurer saying that your medication is no longer on their "preferred" list and you have to try at least two of their acceptable alternative drugs before they will cover your current one. You shop around and find an insurer that covers the current drug but . . .

  9. Really nice point about groups. Group 3 might as well be called 'suckers being exploited; get out at all costs'. This group is royally fucked. They not only pay full price on the ‘market-place’ helpfully provided by the government: they also pay direct taxes for Group 1, indirect taxes for Group 2 (through over-priced plans) and even more indirect taxes for Group 4 (supporting the employer healthcare tax deduction by providing money to offset it in the budget). This doesn’t include the overhead for the whole system, which they also pay for through normal taxes.

    Suggests that the size of group 3 should drop pretty consistently as people either deliberately move into groups 1 or 2 (get income down; perhaps one parent could stay home with kids, or just work less and consume more leisure time) or find ways to get into group 4 (take a lower paying job with better benefits, for example).

    Also interested in seeing how much more valuable this makes young healthy employees. Good news for Millennials! Youth and health are now valuable even without useful skills to go with them! Sarcasm, obviously, but I do see a lot of companies going all-in on young labor and optimizing benefits for their older employees. Heavy shift towards a consulting-style labor model (pyramid-structure, up or out, but without the out as long as you stay young and healthy).

  10. What kind of premium would an insurer charge for the lifetime plan? The cost of health care goes up about 6% a year after age 40, from what I have read.
    Life insurance has the same basic issue. Life insurers sell either whole life with level premiums, but this costs a lot and most young people cannot afford it. Or the life insurers sell term, which is cheap at first but then balloons in price in later life. The result is that only about 5% of term policies ever result in a death claim.
    The long term care insurers face a similar problem. They are struggling for a solution, but the current trend is to offer premiums that increase each year. The result is that the only people buying long term care insurance are fairly wealthy to begin with; they can tolerate the rising premiums.
    I do not have the answer here, but I fear that the estimable Mr Cochrane (and I mean that) has underestimated the challenge.


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