A different death spiral

This Forbes article is a helpful explanation of the complicated choices facing insurance companies as their customers embark on a completely different scheme of self-selection from the one that has driven actuarial planning up to now.  It seems that the ACA tried to guard against some kinds of self-selection and their resulting death-spiral dangers by requiring insurance companies to create one risk pool for all of their customers, regardless of whether they purchased their insurance on or off the exchange.  The law's architects did not take fully into account, however, how many insurers might decide to boycott the exchange altogether.  Boycotting insurers are free to price their products on the basis of their own pools.  If I understand the author's argument, this is likely for several reasons to result in a divergence of the risk profiles that will favor the competitive position of the non-exchange insurers even on their ACA-compliant products.

Pricing is only one aspect that may vary sharply between exchange and non-exchange products:  there is already considerable pressure on exchange products to shrink their provider networks and covered drug lists.  I've become interested in Assurant Health, an insurer that decided to boycott the exchanges.  Its prices for a Bronze plan are slightly higher than those of Blue Cross, but its network is the old-fashioned universal sort.  The article cites to a detailed brief on risk pools, including this explanation of why network shrinkage may be a more powerful cost-control issue than I realized:
Prohibiting [denial of coverage for pre-existing conditions] leaves insurers vulnerable to attracting a disproportionate share of patients with poor health risks. This vulnerability might cause them to leave the market or encourage them to use more covert or indirect means of risk avoidance, such as selective marketing or structuring their provider networks to exclude the doctors or hospitals preferred by higher risk patients.
It's not just that excellent hospitals like the Mayo Clinic or cancer centers charge high rates.  It's that they attract exactly the sort of patient that an insurer needs to avoid if it can't tie its prices to the health status of brand-new customers.


Grim said...

Interesting problem. Now, how would you fix it if you were HHS? What I mean is: is there a way to do it and the law is just badly written, or do you think this a structural problem that they can't avoid?

Texan99 said...

Structural problem they can't avoid. You can't mush up the concepts of "insurance against an unknown future risk" and "prepaid medical care as a human right, regardless of medical condition" without making a joke of risk pools.

Theoretically HHS could come clean in its thinking and tease apart these two concepts, but that would leave it with diametrically opposed goals. The whole purpose of mushing them together was to obscure the conflict for political purposes.

Singapore evidently does well with a combination of health-savings accounts and high-deductible stop-loss policies. Switzerland does less well, but better than Obamacare, with a universal mandate--apparently one with teeth, unlike ours--combined with a flexible array of private coverage. A universal mandate does at least have the advantage of converting the entire country into a unified risk pool.

If I were given a free hand, and the option of "treating people like grownups who were free to take their own risks and bear their own consequences" were off the table, I'd fund a nationwide stop-loss coverage for the most extreme medical disasters. Everything under X dollars a year (or per lifetime) would be entirely the business of the citizen (to save up for, or insure against, or to find charitable help to pay), and everything over X dollars would be covered by taxes. That's actually pretty close to the Singapore approach.

Elise said...

Vermont and DC are not allowing individual (and, at least in Vermont, small group) health insurance to be sold outside the exchanges. I don't think they did this to solve the problem T99 is writing about but it would be one possible solution.

Texan99 said...

It's an interesting contrast to states that are considering blocking insurers from selling inside the exchanges. I'd love to see how that competition works out, if only real people could somehow stayed insured in the interim.

bs king said...

Texan99 - interestingly, your solution is very similar to the one I've been mulling over as my ideal.

I'm curious though, if you were running things, what would you keep Medicare the same?

E Hines said...

how would you fix it if you were HHS?

Since you ask me to sully my thinning hair with an HHS hat, I'd do pretty much what HHS already is doing, but more efficiently: Rule 1: You can't do that. Rule 2: Resolve all questions and conflicts in favor of Rule 1.

A universal mandate does at least have the advantage of converting the entire country into a unified risk pool.

How, exactly, is a unified risk pool an advantage?

...fund a nationwide stop-loss coverage for the most extreme medical disasters.

I'm adamantly opposed to this step, at least at the outset. First, put the separate health insurance and health care industries into a free market environment, and watch prices for most of all of both fall. Then see how NGOs, doctor associations, and hospital and clinic associations fill in the gaps. See what truly remains, and what truly constitutes an extreme medical disaster. Only then will we know whether government supports remain necessary.

As for things like Medicare and Medicaid, I'd do the following: privatise Medicare (see the impact on what constitutes "extreme medical disaster"), and taking the current year's Medicaid transfers to the states as baseline, decrease those transfers by 10% of the baseline over the next 10 years. Let the states handle their own programs, free of Federal strings.

Eric Hines

Texan99 said...

bsk, I'd treat current recipients of Medicaid and Medicare the same as anyone else in terms of the stop-loss, but I might identify both groups as peculiarly likely to need help with meeting costs below the stop-loss limit. (I'm assuming the stop-loss limit would be quite high, both annual and lifetime.) Help wouldn't necessarily need to be government-administered, but I'd leave that to the states to work out. Help might take the form of cash subsidies for medical bills, or cash subsidies for insurance premiums. (This is assuming we're operating in a world in which everyone already has acknowledged that SS and Medicare are broke and we're starting fresh. That's politically unrealistic, I know. In the real world there would be some kind of transition.)

Elise said...

It's an interesting contrast to states that are considering blocking insurers from selling inside the exchanges. I'd love to see how that competition works out, if only real people could somehow stayed insured in the interim.

I don't know how DC is doing but Vermont's exchange isn't working well and they seem to be backtracking: it looks like the governor is going to allow people to extend their 2013 coverage through March (how on earth do they get insurers to go along with this) and small businesses are going to be able to buy direct from insurers.

Elise said...

Stop-loss (which I assume is basically true catastrophic insurance) has a lot of different versions. At one point I took a look at three different variations and there's always the McArdle plan: government pays after individuals spend 20% of their income (yearly).

There's one question, though, that I didn't consider when I played around with these plans and that I haven't seen addressed by these plans: who decides how much is "allowed" for medical procedures, prescriptions, etc?

Let's say that the government is going to pay after someone spends $15,000. I go to really expensive doctors and hospitals; you go to really inexpensive ones. I hit my $15,000 for the same amount of care you've only spent $5,000 on. Why should the government start paying me before it starts paying you?

Insurance companies handle this by setting allowances for each medical procedure - doesn't matter how much a doctor charges, the insurance company only counts a set amount toward my deductible. If we're having government pay after some amount of expenditure, it seems like the government would have to set the allowances. That doesn't seem like a good situation to me.

Texan99 said...

It's a problem for all third-party payor systems: the one that pays the bills will insist on some control over how the money is spent. The only other approach I know of is the lump-sum payment approach, which doesn't solve the problem.

I don't so much mind that insurance companies insist that they'll only reimburse for a "reasonable charge"; all insurance works that way. You don't get to take your dented car to a sculptor and hit the car insurance company up for $30,000 for the repair. Where the system seems to go the most wrong is when some well-meaning bureaucrat decides that the best way to save money is to wave a wand and deem ordinary charges "unreasonable," as they've done with both Medicaid and, to a lesser extent, Medicare.

The reason Singapore' health insurance system apparently does a good job keeping costs down is that it relies on people to pay their own bills up to the first X dollars. Only people who are spending their own money on their own care will really make sensible tradeoffs. But if we set "X" at a high level and encourage people to buy insurance to cover that first X dollars, we're back to the third-party payor problem.

There's only one way to control prices that I know of, and that's for people to spend their own money on what benefits them personally. Then, of course, you confront the problem that only people who make that expense a very high priority in their lives (and who are at least moderately lucky) will have their own money to spend when it comes time to pay the medical bill. If you rescue them, you undermine the price-control mechanism. It's the usual moral hazard problem: bailing people out in any way inevitably distorts their behavior.

bs king said...

Thanks for the Medicare thoughts...it's just been striking me how hard it is to take politicians seriously when they argue against Obamacare but then leave off as though Medicare's just ducky.

The bailout problem, plus the "who decides about these costs" problem raised above both drive at a root issue: how much are we treating healthcare as a market, and how much are we treating it as a moral stance?

Texan99 said...

A market issue when it's our own money, and a moral stance when it's someone else's.

Elise said...

how much are we treating healthcare as a market, and how much are we treating it as a moral stance?

Interesting question. We treat buying and selling food as a market question but making sure people can have it as a moral question. Hence, food stamps. Even among those who believe health care is a moral obligation just as much as food, we don't seem willing to treat health care the same way by simply providing funding so the poor can buy health care (or health insurance) in a free market.

(Although I submit that we are more and more treating food the way we treat health care, insisting that government decide what food is adequate, sub-standard, Cadillac, etc., both for both those who get food stamps and for those who don't.)

Elise said...

t's a problem for all third-party payor systems: the one that pays the bills will insist on some control over how the money is spent.

In a free-market system, the one paying the bills has to stay reasonable or its competitors will take its business. If we go to a government-backed catastrophic insurance plan, there will be no check on those running the plan doing exactly what you describe: waving a wand and deeming ordinary charges "unreasonable".

In fact, the problem will get worse because now doctors can refuse to take Medicare and Medicaid patients; if everyone is basically in a Medicare/Medicaid system, the doctors have to take what the government dictates. (How does Singapore handle deciding how much is allowed for a medical interaction?)

I guess where I'm going with this is that although I long ago wrote myself into supporting a universal catastrophic system if we're going to have a national health plan, I'm now thinking that's not the way I'd go if I had to come up with something.

Texan99 said...

The Wiki entry (http://en.wikipedia.org/wiki/Healthcare_in_Singapore) refers to price controls without explanation.

More detail here:


The price mechanism and keen attention to incentives facing individuals are relied upon to discourage excessive consumption and to keep waste and costs in check by requiring co-payment by users.

The state recovers 20-100 percent of its public healthcare outlay through user fees. A patient in a government hospital who chooses the open ward is subsidized by the government at 80 percent. Better-off patients choose more comfortable wards with lower or no government subsidy, in a self-administered means test.

I've heard a lot of smart people warn that co-payments are penny-wise but pound-foolish, because people cut back on high-benefit preventive care. Unless someone is willing to dispute Singapore's budgetary and health data, it looks like we've got strong counter-evidence to this view: Either Singaporeans don't skimp on preventive care when you raise the price, or preventive care isn't all it's cracked up to be.
More details on how Singapore's system works:

There are mandatory health savings accounts: "Individuals pre-save for medical expenses through mandatory deductions from their paychecks and employer contributions... Only approved categories of medical treatment can be paid for by deducting one's Medisave account, for oneself, grandparents, parents, spouse or children: consultations with private practitioners for minor ailments must be paid from out-of-pocket cash..."

"The private healthcare system competes with the public healthcare, which helps contain prices in both directions. Private medical insurance is also available."

Private healthcare providers are required to publish price lists to encourage comparison shopping.

The government pays for "basic healthcare services... subject to tight expenditure control." Bottom line: The government pays 80% of "basic public healthcare services."

Government plays a big role with contagious disease, and adds some paternalism on top: "Preventing diseases such as HIV/AIDS, malaria, and tobacco-related illnesses by ensuring good health conditions takes a high priority."

The government provides optional low-cost catastrophic health insurance, plus a safety net "subject to stringent means-testing."

Texan99 said...

More info, arguing that Singapore's model really depends on supply-side controls:


Elise said...

Thanks for the links. The last one makes for depressing reading since it argues that it's controlling supply that keeps costs down. Period. (If you'll pardon the expression.)

Texan99 said...

On the other hand, private hospitals are competing with the public ones and have no such restrictions. I don't mind the government putting rigid controls on what a hospital can offer as long as the government owns the hospital: that's just a producer that decides what it's willing and able to offer at a certain price. If there are other hospitals out there offering something arguably better at a higher price, that will keep the public hospitals a little bit honest.

Elise said...

Yes, the mix of public and private does seem like a possible way to go if we want both help for those who cannot or will not help themselves and market forces deciding what prices should be.

I'm back to liking the idea of piggybacking a publicly funded health insurance scheme onto the Federal Employees Health Benefits Plan: the FEHBP is free-market (or at least free-market-ish) and they can set premiums, reimbursements rates, allowed payments for procedures, etc., while the public side mimics them but with financial support for those who need it. No compulsion, existing insurance plans left in place, anyone who wants to can opt in or out of the public plan whether they qualify for assistance or not. Open enrollment once every 3 years or maybe even once every 5 years.

Or we can just give poor people "health insurance stamps" to buy the coverage they prefer and set up high-risk pools for those who got sick when they didn't have health insurance and now can't get it.

Assuming, of course, that we have to have a national plan to address this issue. Ideally I'd like to kick all this back to the States. If Massachusetts wants RomneyCare and Vermont wants single payer and Alaska wants every man for himself, so be it. I suspect the only reason we're doing this at the national level is because the States would have to actually pay for whatever they do and the truth is they (we) can't afford this. Well, that and the whole Europe emulation thing.