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Economic View

By MARGOT SANGER-KATZ

You may have noticed that Obamacare’s health insurance markets are in trouble.

Insurers have announced that they are sharply raising prices or pulling out entirely. Many consumers will have fewer choices of insurance plans, and many insurance plans will include fewer doctors and hospitals.

The turmoil can’t be explained by one factor alone. But many of the most important problems can be understood if you think of an Obamacare marketplace as a particular kind of restaurant: an all-you-can-eat buffet. It can be a solid business, but it’s hard to get the pricing right.

Consider how difficult it is to accurately estimate. You know how much it costs to make a portion of potato salad or beets or fried chicken. But how many portions will your customers eat? The appeal of your business — and the risk — is that all people pay the same price, whatever their appetite. That is fine if you charge $15 and feeding the average customer costs $10.

But you can be in deep trouble if your buffet suddenly becomes the favorite hangout of the high school football team. Once a bunch of growing teenage athletes start dropping by after practice, they can ruin your business. Those very hungry customers will pay $15, while eating $40 worth of food.

Unless you make major adjustments, you will quickly lose money. That may be what has happened to some of the companies selling health insurance. Economists have a term for describing the problems that afflict all-you-can-eat buffets. They call it adverse selection.

“Who you serve influences how much it costs to serve them,” said David Cutler, an economist at Harvard who has studied adverse selection in health insurance. “That’s the biggest difference between insurance and every other market.” Or every market that isn’t an all-you-can-eat buffet.

Like a restaurant owner, insurance companies set prices based on their best guess of who will buy their product. If a company gets a lot of sick customers who go to the doctor often and require expensive services, its costs will balloon. If the company attracts a lot of healthy customers who rarely require care, costs will shrink. Such a health care plan is like a buffet frequented by dieters. Economists use the word “adverse” because, in general, hungry people tend to be more enthusiastic about buffets.

Insurance companies used to get around these problems by excluding patients with serious illnesses — or by charging those patients much higher prices. Those strategies made health insurance resemble an à la carte restaurant: Customers who wanted a porterhouse steak and a bottle of Bordeaux could buy them while providing the owner with a rich profit.

But Obamacare banned such practices. Insurance companies now must charge all customers of the same age the same price for insurance, regardless of whether they are healthy or sick. And that means that the companies must engage in more guesswork and cope with more risk.

These problems were anticipated, at least to a certain extent, and the Affordable Care Act contains features that were intended to mitigate them. That is why Obamacare offers subsidies meant to make insurance less expensive for people on tight budgets, encouraging healthy people to buy insurance. The law says most people can buy only during a set time period, discouraging people from waiting to buy insurance until they are sick and absolutely need health care. It also contains the notorious “individual mandate,” which imposes a fee on those who can afford to buy insurance but fail to do so.

Those policies probably helped encourage healthy people to buy insurance, but many experts are now saying the incentives weren’t strong enough. Many insurance companies lost money, because they set their prices hoping for a lot of dieters and ended up with the football team. That is why we have been seeing headlines about prices going up. If the average Obamacare customer costs more than the companies anticipated, they won’t make the money they expected without charging more for insurance.

In addition, another kind of adverse selection problem may be plaguing the Obamacare marketplaces, and it is harder to fix. The companies say it is not just that consumers were generally sicker than expected, but also that insurance companies offering access to a wider variety of doctors and hospitals ended up with costlier patients. In other words, insurers with national brand names like Aetna and UnitedHealthcare appeared to be losing more money than lesser-known companies with a history of covering patients on Medicaid.

The restaurant analogy is useful here, too. Imagine two all-you-can-eat buffets. One offers iceberg lettuce, chicken wings and macaroni. Its competitor offers the usual fare, plus lobster, and it charges a bit more. Guess which buffet will attract lobster lovers?

Executives from Aetna and UnitedHealthcare charged more for their insurance products than competitors that excluded high-end specialists and hospitals. They may have attracted customers who preferred expensive institutions and doctors and planned to use them.

That sort of problem can get worse over time. As the companies increase prices to compensate for having sicker patients, fewer healthy people will buy the insurance.

There are policy levers to address this problem, too. Provisions in the law require insurance plans with healthier patients to pay competitors with sicker patients a fee, but getting the formula right is difficult. Currently, insurers on both sides are complaining. Plans with healthier patients say their competitors are just better at making patients look sick. And plans with sicker patients say the payments are too low and unpredictable to make a difference.

In the meantime, insurers are reacting in two ways that diverge from what the law’s authors hoped.

Some are giving up on the new Obamacare markets, deciding that they like the à la carte business better. Those that remain are increasingly clearing their menus of anything that looks like a luxury item. Obamacare was intended to offer a variety of insurance plans with different features, catering to different kinds of people with different needs. The remaining plans may be adequate for basic health care. But their offerings look more and more the same.

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