As the first open enrollment period for Obamacare closes, President Obama is declaring victory for hitting 6million sign-ups in the new health care exchanges. But what’s missing amid the cheering is the hard fact that not all enrollments are created equal. This isn’t just a matter of whether healthier people sign up for any plan at all. For the exchanges to offer real choice to consumers, the healthy—including the “young invincibles” we’ve heard so much about—have to enroll in the more generous plans available. If they don’t do that in large numbers, as appears to be likely, the dire predictions about the system as a whole could come true when it comes to the premium plans. Recent economic research suggests that the Affordable Care Act may well fall prey to this trap. The premium options could disappear, forcing every participant in the exchanges into a bare-bones plan.
The good news is that research we have just completed suggests a solution to this problem that upends the conventional wisdom on both left and right that more competition is better for insurance markets. Our proposal is simple if surprising: Regulators should limit competition by only allowing only the biggest health insurance companies to participate in the exchanges. In short, we need an Obamacare oligopoly.
The problem is that free competition can easily ruin insurance markets. To see why, imagine there were just two plans: bronze and platinum, the lowest- and highest-quality plans available under the ACA. If almost all healthy people opt for bronze, as preliminary numbers suggest is likely, leaving the older and sicker in platinum, the cost of platinum plans will become prohibitive because the health care costs of the sick are so high. This would drive the platinum plans out of the market, leaving only .bronze. That’s better than nothing, but it is a far cry from the aims of the law’s drafters, to give every America access to good health insurance and fair prices.
This problem is a special feature of insurance markets. Take buying a car as a comparison. If one group of people (younger and healthier, say) opts for economy models, and another one (older and sicker) goes for luxury, it doesn’t matter. The price of one kind of car or another does not depend on who the buyers are. But the cost of insurance does depend on who buys it because it costs more to insure older and sicker people. If they’re the only ones who buy the higher-priced plans, then the prices on those plans will rise, to the detriment of those who need them most.
That’s at odds with the purpose of the ACA. The law aims to provide equal access to health care for people who get insurance from their employers and for those who don’t. If you’re in the employer-sponsored market, you probably have a platinum-like plan. If everyone else ends up with bronze, we’ll be stuck with much of the unfairness and inefficiency of the old system.
How do employers manage to avoid the race to the bottom, given that most of them offer multiple options to employees? Why don’t their young invincibles just opt for catastrophic care while the old and sick choose comprehensive plans? Employers don’t simply price each plan at the cost of providing it. They care about the stability of the firm’s insurance system as a whole, so they steer the young and healthy toward more comprehensive plans. The price of the bronze-like plans go up, cross-subsidizing the platinum ones. This extends the basic idea of insurance (that those who are less at risk help out others who are more so) across the plan of a particular employer.
The government could do the same sort of cross-subsidizing, but that would require bureaucrats to make judgment calls about pricing the same way employers do. That sounds to us like a nonstarter, politically. Americans tend to prefer solutions led by the private sector, and our research suggests one that could do the trick.
Our proposal is to limit participation in the health exchanges to a small number of the largest and most experienced companies—a kind of oligopoly. In this sort of marketplace, each firm is concerned with the stability of the market overall. Just like employers, large insurers will raise the prices of bronze plans to steer the healthy toward platinum. This won’t happen though if a horde of smaller insurers can destabilize the market by offering cheap bronze plans that steal the healthiest people from the large players. Of course, one major insurer could go rogue and try to live off only bronze. But given how cheap such a plan would be, it wouldn’t make much sense—a large insurer would want a slice of the broader, more profitable market. Only if many small insurers hold profits down does the bronze-only strategy pose a real threat.
Our idea would not require new legislation. Obamacare’s regulators (at the Center for Consumer Information and Insurance Oversight and state agencies) could just tweak the standards for certifying health insurers, as they have plenty of discretion to do. And since the big and most influential insurers would benefit, the politics look pretty good.
To be clear, less competition would certainly increase bronze premiums—to as much as 80 percent above cost. We’d hear more complaints from people who already think the lowest prices they can get are too high. And more healthy people would opt out of Obamacare coverage and pay the penalty. Still, our results indicate that overall the gains of better-quality coverage would outstrip the losses.
It’s hard to blame the framers of the ACA for missing this. After all, free competition is as American as apple pie. It was natural for them to appease Republicans who have been arguing that competition—and deregulation—would fix the marketplace. But deregulation and more competition is exactly the wrong answer. It could lead to health insurance that’s even lower in quality, for the individual market, than existed before the ACA. That would be a tragedy. To avoid it, the country has to learn that when it comes to health insurance, competition (like apple pie) is healthiest in moderation.
The research in this article was featured in Weyl’s award of a Sloan Fellowship this year.
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