The Race to the Bottom under Obamacare

9/25/13
 
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from NCPA,
9/25/13:

Imagine an idealized model of the health insurance marketplace in which there are only three sets of variables: Premiums, Covered benefits and Access to providers.

Now, you could conceivably have market competition for all three sets of variables. You could also have government regulate all three.

Now here is the strange thing about how left-of-center health policy wonks think and it is reflected in the ObamaCare exchanges. Since they want competition in the exchanges, they can only regulate one of the three sets of variables. Which one do you think they choose?

They choose to regulate the benefits package.

what the consequences of that are. We are getting a race to the bottom on access ― with private plans in the exchanges looking increasingly like Medicaid. By the way, this is precisely what has happened in Massachusetts.

During the 2008 election … no candidate even hinted that access to providers might not be any better than it is under Medicaid.

Yet what we got legislatively is very strict regulation of benefits ― right down to free contraceptives, questionable mammograms and other non-cost-effective preventive procedures. At the same time health plans have been given enormous freedom to set their own premiums and choose their own networks. In fact the administration has been touting the fact that the premiums have been lower than expected, even though the reason is that the networks are narrower and skimpier than expected.

Why would anyone want to regulate the benefit package in the first place? … apparently … without regulation, there would be a race to the bottom on benefits. Here is what they say, for example, about competing state regulations: “Allowing insurers to sell policies across state lines would invite a “race to the bottom.” In time, all insurance would originate from states with the least regulation. The policies will be cheaper. But they’ll also be skimpier. They’ll be great if you’re young, healthy, or wealthy enough to afford to fill in the coverage gaps. They’ll be terrible if you are older, have a chronic condition, or, again, if you’re low income.”

We can imagine a market equilibrium in which every single consumer has a different benefit package and everyone is charged a different total premium. Health plans could be as diverse as the portfolios of employee 401(k) plans. What is it in the real world that prevents this diversity from happening? Answer: insurers are not allowed to accurately price risk.

*By “robust competition” I mean that competitors must have the ability to vary the amount they spend on benefits and/or vary the average provider fee they are willing to pay.

More From NCPA:

How the Left and the Right View the Race to the Bottom