My WSJ greets me on the front stoop this AM with the banner headline on the “Depth of Health Law Woes,” based on the rise of “thin” markets with too few private insurers to generate cost-saving competition. The piece focuses on Arizona, where in 2017, “Arizonans will find in most counties only one insurer selling exchange plans.”
First, while the Journal article is surely informative, it violates my rule #1 in this space: when writing about private exchanges, declare up front that we’re talking about 7 percent of the population. That’s the share that get coverage through the non-group market, the part of the market served by the exchanges. In Arizona, it’s 4 percent.
Those shares don’t negate the thin market problem at all, but they do give it essential context. Most people still get their coverage through their employer (about 50 percent) and Medicare or Medicaid (34 percent).
But my question today is whether this spate of articles is accurately framing this problem. That is, diminished competition among insurers in various markets is invariably framed as an architectural flaw in Obamacare, and thus, a government failure. But it could just as easily be seen as market failure, or more specifically, a pricing-calibration problem. If so, the problem isn’t too much government intervention; it’s too little.
The theory of the case when the law was being crafted was, for both policy and political reasons—the latter being buy-in from private insurers, whose powerful lobby couldn’t be ignored—that the exchanges would be populated by private insurers competing for customers in the (relatively small!) non-group market.
The insurers would get a bunch more customers, most of whom would come to the table with a tax credit to help pay the cost of their subsidy, a non-trivial deal sweetener for the private insurers (not to mention the mandate, further nudging customers into the exchanges). In return, they’d have to accept a set of rules designed to promote adequate coverage, like accepting applicants with pre-existing conditions and “community rating:” no price discrimination based on health status.
At the time, there was a robust argument about the wisdom of this path. While it was the least disruptive to a major industry, the long history of the uneasy relationship between health care and markets, along with the experience of other advanced economies, led many to worry that private insurers could not be depended on to meet the demands of a newly regulated individual market. They had an incentive, for example, to set their initial prices too low to get customers, which would mean actuarial losses and a big jump in premiums (one solution was to add a program to limit losses to such insurers: the so-called “risk corridors”).
This was partially the motivation for adding a public option, but the politics blocked that option (some will argue that the administration, of which I was then a member, didn’t push hard enough; I’d argue the votes just weren’t there). The private folks didn’t want to compete with anything like Medicare, which consistently posts lower price growth than the privates—it is non-profit, after all—and their message was thus, “we got this.”
Well, it turns out they don’t got this, though again, this is less a failure in the structure of the program than growing pains as insurers learn to price their products based on the health of those coming into the exchanges. If there’s a structural flaw in Obamacare, it’s that it doesn’t include the public option. Those of us who pulled for it had it right in that we saw the need for just such a backstop.
To be fair, a public option is itself a tricky bit of work, and it’s too easy to make it sound like a hand-wave, miracle solution (see Jacob Hacker’s excellent discussion of these issues here). But you know what else is a big, old hand wave?: the miracle of competition, allegedly solving everything that ails the health care market.
Obamacare is a public/private hybrid, and this recent episode with the 2017 premiums should teach us that dialing back the public side is not the way forward. To the contrary, the private sector never has and never will provide the health care Americans want and need on its own.