Coaxing and wooing ObamaCare’s opt-outs

I wrote recently about how flimsy bronze plans were discouraging some people from purchasing insurance on ObamaCare’s health exchanges at all.  These people are likely, on the whole, healthy and relatively young, upsetting the careful risk pool balance that insurers need to keep the exchanges sustainable.  United Health Group has signaled that it may exit the exchange business next year altogether because of the destabilizing bad customer mix.

There’s essentially two ways fix this problem: (1) make the exchanges’ low-cost insurance options more attractive, and (2) increase the consequences of going uninsured (i.e., raise the individual mandate penalty).

A new study from the Kaiser Family Foundation focuses on the latter, finding that the average penalty faced by the current uninsured eligible to buy on exchanges will increase from $661 to $969 next year.  For about 3.5 million people, a bronze plan will cost less than their prospective tax penalty.  So if they are smart cost-benefit consumers, they should purchase insurance.  For 7.1 million, however, the cost of insurance will still exceed their hit from the mandate’s penalty.

This is, on the whole, good news for getting more people insured and shoring up the health exchanges.  Certainly, tightening the mandate will push more people into the exchanges and make the business more sustainable for insurers.

But some — perhaps many — of those 3.5 million who are expected to opt for insurance this time around will sign on to the health exchanges and be disappointed by what they can afford.  Kaiser tells us that these individuals can get a net-$0 bronze plan (the cost of the bronze plan is less than the penalty).  While buying this makes economic sense, a bronze plan isn’t a very appealing option for many people.  It comes with high deductibles and, aside from routine preventive services, leaves individuals self-funding their insurance until they hit that deductible.

Moreover, bronze plans aren’t eligible for ObamaCare’s cost-sharing subsidies, meaning that individuals won’t receive help with their copays and deductibles.  But for many of the 3.5 million, a silver plan — which is both more comprehensive insurance and has cost-sharing subsidies — will have premiums out of reach for their budgets.

Among the remaining uninsured, those most likely to get fed up by the disappointing options they can afford are the least risk averse.  On the whole, this will be the young, healthy people (the so-called “young invincibles”) that insurers are relying on to financially support their risk pools.

So a tighter individual mandate will help incentivize more of the remaining uninsured to sign up.  It will certainly increase ObamaCare’s take-up rate, which stood at 35 percent of exchange-eligible individuals in June.

But at the end of the day, we’ll need to improve the appeal and quality of the most affordable plans on the exchanges to capture more of the people that we need to keep the exchanges sustainable.  Tightening the individual mandate will only do so much.  And ultimately, we want people to have insurance that truly protects them from the risk of sickness and injury, not just from a tax penalty.

ObamaCare’s Cost Control Dilemma

Health reform might be quietly approaching a crossroads. While the primary goal of ObamaCare was to expand health insurance, a secondary but extremely important goal of the law was to make healthcare spending more cost-effective. These costs are increasingly eating up our public and private budgets, consuming a whopping 17 percent of our national GDP.

But ObamaCare juggles two different theories of cost control: increasing the efficiency of care, and promoting competition among private insurers financing care. These theories aren’t necessarily always in tension, but they are beginning to butt heads.

In short, ObamaCare may have inadvertently set off an arms race in the healthcare industry. The law creates a number of incentives for hospitals and physicians to integrate their care for a patient in order to make treatment more cohesive and more efficient. These incentives were meant to both control costs while getting more bang for the buck in healthcare spending via higher quality care. So the law promotes integrated care networks like accountable care organizations and moves toward global bundled payments to hospitals for the total episode of treatment. This in turn has fueled large mergers among physicians and hospitals in order to better coordinate their care — mergers that antitrust regulators have agreed to tolerate if the efficiency gains are shown to outweigh the costs.

This has divergent effects on our various healthcare payers. We have a highly fragmented healthcare system, providing single-payer insurance for the poor and old, government-run hospitals for veterans, and private market-based insurance for just about everyone else. Other countries have a single system for everyone, be it single-payer, socialized medicine, or commercial insurance, which makes it easier for them to craft a single cohesive cost containment strategy.

In the U.S., however, private insurers are likely to be hit harder by provider mergers than public insurers like Medicare and Medicaid. The quality-based reimbursement programs crafted by the Affordable Care Act were foremost designed to control costs for Medicare. But the side effects of these programs — provider mergers — hurt private insurers by giving provider networks more leverage to negotiate higher fees for medical services. Larger networks become “must-have” networks for insurers, and thus can command higher prices. These prices then get passed on to consumers through higher premiums.

To keep up and regain their standing, insurers have merged in response. If regulators approve the proposed mergers, the number of large national insurance companies would fall from five to just three.

Antitrust experts warn that these mergers could jeopardize a key piece of ObamaCare’s consumer cost control program, and in turn, its strategy to increase the availability of insurance: the health exchanges. These exchanges rely on having a multitude of insurance offerings to foster competition and drive down prices for consumers. With fewer companies, consumers would have fewer available choices to pick from on the health exchanges.

Aside from provider mergers, another part of ObamaCare may also be spurring the wave of insurer mergers. The law sets a minimum medical loss ratio of 85 percent for most large insurers, meaning that insurers must spend 85 percent of the premiums they take in on medical care, devoting the remaining 15 percent on administrative costs and profits. This essentially puts a cap on insurance companies’ profits, so one of the remaining ways to boost profits is by scaling up with another company and economizing administrative costs.

In response to insurance mergers, more providers are expected to consider merging to ratchet up their own bargaining power. So insurance and provider mergers feed off of each other in a chain reaction.

The upshot of these ricocheting mergers exposes a tension in our fragmented healthcare system between (a) controlling health care costs at a systemic level, and (b) controlling health financing costs for individual consumers. Doing the former relies in part on increasing efficiency among providers, which entails some degree of consolidation and integration. Doing the latter relies on preserving competition among private insurers (meaning no consolidation), as well as government subsidization of out-of-pocket costs.

But here, doing (a) may compromise (b) because it creates a power imbalance that favors consolidated providers over private insurance companies. Big provider networks then charge heftier fees to insurers, which get passed on to consumers through higher premiums. And on the individual market, these higher fees ultimately hit government coffers through increased subsidies for purchasing insurance on the exchanges.

Americans and their political leaders tend to be reflexively skeptical of big companies merging, worrying about price gouging from excess market power. But there’s an argument that health insurance might be different — that bigger insurance companies might have some benefits.

For starters, when it comes to negotiating prices with providers, insurers’ incentives are aligned with consumers. They aim to get the best price possible, which keeps premiums low. Larger and stronger insurance companies may be better positioned to do just that.

The extreme result in health insurance consolidation is a single-payer system, where there is only one (typically public) insurance institution. Many liberals favor such a system in part because of its absolute negotiating power to control costs. Consolidating private insurers essentially approximates this feature of a single-payer system by capturing some of this negotiating clout. Insurers thus argue that by joining forces, they can better push back on provider attempts to hike healthcare costs.

Law professor and healthcare antitrust expert Thomas Greaney calls this the “Sumo Wrestler theory” of health economics: the notion that a large insurer will effectively bargain down the prices demanded by large providers, which savings will be passed along to consumers. According to Greaney, “There is no compelling economic evidence that ‘bilateral’ monopoly produces better results for consumers; and even if a dominant payor succeeds in bargaining successfully with providers it has little incentive to pass along the savings to its policyholders.”

But under ObamaCare, this would seem to depend on which side of the minimum medical loss ratio an insurer is on. If it is below 85 percent, then any concessions from providers will be passed along to consumers, either via reduced premiums or through rebates mandated by law.

Moreover, federal and state regulation—particularly under the Affordable Care Act—have virtually transformed parts of the private insurance business into quasi-public utilities. Most states review proposed premium increases, as does the Department of Health and Human Services in some cases. The ACA’s medical loss ratio rules diminish the incentives to unjustifiably increase premiums. Along with the ACA’s regulations over plan pricing, essential benefits, and guaranteed issue, these oversight roles guard against unchecked insurer power.

When providers integrate their care, this is largely a good thing for patients, as it improves the quality and consistency of their treatment. But when providers merge as a consequence, this ratchets up the pressure on insurers to merge too in order to bargain more effectively. This in turn undermines the competition ethic that health reformers want to foster in the market for individual insurance.

This leaves health reformers in a bind. While insurance mergers may even out the leverage discrepancy inadvertently caused by ObamaCare, the most leverage still lies with the Obama administration, whose Department of Justice has the power to halt any merger that falls on the wrong side of antitrust analysis. Ultimately, the administration will need to decide how to reconcile its dueling theories of healthcare cost control: Should we increase efficiency, or increase competition?