Under the Affordable Care Act, individuals shopping in health care exchanges will be able to select plans from a variety of insurance companies. They will also be able to select a variety of tiers of plans—bronze, silver, gold, and platinum—with the basic idea being that bronze plan coverage is stingy while platinum plan coverage is extremely comprehensive. The more comprehensive plans are, naturally, the more expensive.
Ben Handel, Igal Hendel, and Michael D. Whinston have an interesting newish paper out (PDF) arguing that in practice everyone’s going to get stuck with the bronze plan. The details of their argument are complicated, but the basic logic is simple.
The ACA itself is designed to solve the problem of adverse selection. If only sick people buy insurance plans, then insurance plans have to be expensive, so there’s even more reason that only sick people will buy them, so they get even more expensive. Hence the individual mandate. What Handel, Handel, and Whinston are saying is that the exact same adverse-selection spiral is going to repeat itself inside the exchanges. Instead of unraveling all the way down to a state of noninsurance, it will unravel all the way down to the regulatory minimum of the bronze plan.
Now there’s some irony here. If this analysis is correct, it reflects a screw-up on the part of the ACA’s framers. On the other hand, one of the very most prominent conservative lines of criticism against the ACA is precisely that it sets the regulatory minimum too high. So on the merits, if the ACA really does work the way Handel, Hendel, and Whinston say it does, conservatives should be less unhappy about it. Conversely, I know many liberals feel the bronze plans are too stingy and in an ideal world subsidies would be higher and the regulatory minimum would be lower. My view is that the conservatives have the better of this argument. If we found an extra $100 billion a year lying around somewhere, I’d rather spend it giving people more money than on giving people more health care coverage.
