Is the Obamacare problem a public or a private problem?

November 1st, 2016 at 10:12 am

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.

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19 comments in reply to "Is the Obamacare problem a public or a private problem?"

  1. Annika says:

    I am one of that 7% and my premium is going up 60% in 2017. This is going to be hard, if not impossible, for me to afford. The irony: I actually worked on the software to build the federal system a few years back. I saw the waste and mismanagement, and was stunned at the vast amounts of money being thrown at a poorly conceived and poorly executed system. So I wonder this: why so much effort and money put into this concept when there are only 7% of us? Something does add up, including my monthly budget.

    • Annika says:

      Sorry, something does NOT add up.

    • Dan says:

      I think the problem goes beyond admin costs. Because you can’t be declined for having preexisting conditions, I think a lot of people only obtain insurance when they see a big medical expense coming down the road and don’t carry any insurance when they don’t. The rest of us have to pay for these folks gaming the system.

  2. Bob Palmer says:

    I made a living in the markets where I learned the flaws as well as the virtues of the “free market”. One particular flaw looms large in the healthcare debate.

    When most of us think about markets, we visualize a simple two-dimensional graph with a supply line neatly intercepting a demand line at the optimum price. Accurate as far as it goes but inadequate to represent something like heath insurance pricing. The biggest dimension missing from the graph is POWER. You have weak disorganized ordinary individuals who make up demand in the 7% of the market that the health insurance exchange comprises. Arrayed against individuals are large highly organized corporations that do health insurance for a living, and that have an “in” with the refs. It is power that sets the price in this relationship, not supply and demand. Visualize college wrestling with no weight classes. The heavyweights will trounce the lightweights every time, which would be a fair outcome according to “free market” principles.

    • Jared Bernstein says:


    • Smith says:

      Great, but, but, it’s not just healthcare where consumers get stuck. Healthcare is only the most egregious example of a market where pricing doesn’t follow classic models of competition. What about my cable bill? Is there really any competition for financial services? Though a few startups have added new ways of financing, the consolidation of credit, financing, mortgages, insurance, brokerage, is more pronounced than ever. Likewise the auto industry though subject to foreign competition and the rare new electric entrant like Tesla is hardly a model of competition. Pricing is concentrated in the hands of business. Galbraith wrote about this in the 1970’s when inflation was a larger concern, but not absent in his previous books going back to the 1950s too. Presidential candidates debated it, and government recognized the issue once upon a time.

      What’s true of healthcare, is true of our entire economy, the epipenation of what you pay for everything. When will economists begin to attack prices in a concerted fashion with the many traditional tools at their disposal, instead of relying on raising unemployment, killing growth, productivity, and stagnating wages while increasing profit margins, to control prices. The economy can not heal itself. Instead we control inflation without any regard to the source of the trouble, higher prices, prices raised beyond any increase in costs, or merely to keep labor’s share of profits at the current meager level. 50% of the people get to share 12% of the national income while the 1% gets 20%. Go figure.

  3. Sagrimore says:

    When looking at health care price increases, it’s also important to look at the artificial shortage of doctors created by collusion between the medical schools and the medical associations. And then there’s the way newly-minted doctors are steered away from general practice and forced into more lucrative medical specialties because they’re saddled with hundreds of thousands of dollars of student loan debt.

    I argued when the ACA was being drafted that the law wasn’t comprehensive ENOUGH. It should have included requirements that medical schools expand their enrollment by 25% within ten years. Medical schools turn away five qualified candidates for every one that they accept.

    And the Act should have included a debt forgiveness program for doctors, perhaps something like a medical National Guard where they reduce their student loan debt by working “one weekend a month and two weeks a year” in a low-cost medical clinic in an underserved area in the U.S.

  4. Smith says:

    While we’re on the subject of healthcare, there should and must be a law passed that shows the value being received cumulatively and annually by the erroneously named “employer contribution” to health care. At the end of every year every employer must be required to mail a letter (yes in paper) to employees, giving the total cost of health care paid for the employee (and any dependents on the same plan). This amount is actually what the employee is paying for health care. The idea of the “employer contribution” is a sham, no economist would consider it not really part of the employees compensation, and thus an expense of the employee. This is very important for workers to know how much they currently pay for health insurance. Employees pay less when on their employers group plan because the volume of the employer brings a discount. But although workers can easily total the cost by digging out their HR paperwork or spending time to query HR, few bother. Employees know their annual salary. But they don’t because they don’t include their total healthcare costs and also never add employer social security contribution.
    This is vital information when we consider the eventual move to single payer.

    • Smith says:

      K, I swear, I really had not seen (nor heard) of this editorial when I wrote the note above …
      Neither had I run across any article or commentary that might have reflected a ripple of discussion from that oped. If I had, I had seen it, you would have gotten a totally different comment. I’m not in agreement with the author’s suggestion to tempt people to shortchange healthcare to gain income. But the article I believe reinforces my suggestion that people need to know who much money their healthcare costs, and face up to the fact that they are paying for it, not their employer, regardless of who nominally pays most of the bill. I’ve mentioned on this blog before the same type of economics that makes the social security payment of employers a tax on workers. When workers know what they are paying, they are more likely to favor an eventual single payer mechanism.

    • Pinkbum says:

      Oh brother! I had a VERY long frustrating argument last New Year with members of my wife’s family about the fact that we are already paying a lot for health care because the employer contributes so much to the insurance premium. We feel that extra cost as reduced wages. I could not seem to convince them that we are already paying too much for health care overall and that a single payer system would be cheaper overall and that would benefit everybody. All they could see was that their taxes would go up to pay for it and therefore their insurance would cost more.

  5. Gridlock says:

    It’s not just the 7% looking for insurance on the private exchanges. Look at the vast majority of people employed by companies. Most small and mid-sized companies only offer ONE insurance option for all of their employees. Even if they offer more than one plan design, it is usually only with ONE insurance carrier. If you’re lucky enough to work in a very large corporation, you may have more than one insurance company offering to choose from. The difference between company employee plans and the plans offered in the private exchange is that the company is providing the subsidy and not the taxpayers. Of course, taxpayers DO provide a subsidy to companies because employee insurance premiums are deducted pre-tax so they are NOT taxed. In addition, any health expenses/insurance premiums the company pays are considered deductible from company income and thus reduce the taxes that the company pays.
    In summary, the market around health care funding/insurance is broken. Mostly because it does not follow typical supply/demand modeling. People forget that there is the buyer/consumer, the seller/provider and the THIRD PARTY middleman of the insurance company. IF the insurance companies were operated as not-for-profit MUTUAL INSURERS for the benefit of its members, then we would have something approaching a traditional ‘competitive’ market. Until we take the profit out of health insurance, we will have this issue. Even the so called Blues no longer operate as not-for-profits. There are two solutions:
    One solution would be to strip the profit motive out of all of the health insurance companies by forcing them to become non-publicly traded not-for-profits. Shareholders could be compensated by paying out a portion of the BILLIONS of dollars these companies hold.
    The other solution is the PUBLIC OPTION for all. So insurance companies would have to choose, continue on as non-profit entities working for their benefit of their customers or be forced out of business.

  6. Deplorable says:

    Jared is right, of course, that more government intervention was necessary rather than less.

    Leaving out the public option in the ACA was really the critical move that allowed it to pass the Senate by the skin of their fangs. Unfortunately, this is also what doomed it to ultimate failure (in my opinion). I do think it will fail, unfortunately. Insurers and pharma new it would fail without the public option, and that’s why it was allowed to pass.

    We have a crop of government weeds growing, that is people who believe the proper answer to problems is a compromise between the rich and the rest (but just enough to shut up the rest). This is not the kind of compromise that forms stable nations or stable legislation. This is the kind of compromise that collapses world financial systems and health care systems and international relations.

    The weeds think that the rest of us are deplorable. Unfortunately, the world seems to be converging on Roundup to eliminate the weeds. Roundup not only eliminates the weeds, it also eliminates most other vegetation.

  7. urban legend says:

    In the interest of clarifying the history of the public option in 2009-10, I believe “the votes weren’t there” is an over-simplification. In the fall of 2009, as the public option seemed to be dying, an alternative proposal, to allow the states to opt in or out of offering a public option on their exchanges, started to gain traction in the Senate. (I actually believe I was the first to propose the state option in comments at Salon and Matt Yglesias). Senators Carper and Rockefeller, as I recall, were the first to pick up the baton as an answer to Lieberman: You want freedom? How about this for freedom? Each state gets to make its own decision whether to offer the public option or not. How could anyone be against that? What could be fairer, and how could Lieberman think he had the right to dictate what California could make available on its exchange?

    It was also was potentially smart politics, because it appeared to be an eminently fair resolution to the public option debate and possibly could have gained enough support in Congress to pass. In any event, the debate would keep the public option alive as a distinguishing point between Democrats (who want you to have the cheapest options possible) and Republicans (who as their first priority protect the profits of the insurance companies and the outrageous bonuses of their top executives). If it actually made it into the law, it would also drive the red-state disputes down to the state capital level and help Democrats locally: “How come people in Illinois get to buy the cheaper public option and we don’t.”)

    It started getting into the public discourse, as evidenced by questions about the proposal on the Sunday talk shows on one Sunday, I think in October, 2009. However, it appeared to me that the administration deliberately shot it down with an orchestrated response that Sunday by Rahm Emanuel (on Meet the Press, I believe), David Axelrod and Valerie Jarrett. Their responses to the questions were not substantive; they merely said something that signaled their lack of interest. (Emanuel said something like, “We don’t see much merit to that idea.”)

    And that was that. I have assumed that the administration’s commitment to those industries opposed to the public option necessitated that response if the basic ACA structure had a chance of passing. As I recall, it was not so much the insurance industry (who are middlemen) and more the pharmaceutical and hospital industries, who feared Medicare-like prices for everything. I have never begrudged that decision to neutralize affected industries, and anyone who lived through the “Harry and Louise” commercials against “Hillarycare” in the early 1990s. However, the state option public option could have been allowed to play out more to the advantage of Democrats politically. All the administration folks had to say was, “It’s an interesting proposal, and we are taking a look at it” to keep the discussion alive.

    You can look it up. I think that’s a 100% accurate description of how it all went down.

    • Deplorable says:

      You’ve filled in some of the gaps for me, as I didn’t realize that a state-level public option was on the table.

      I do remember Obama’s internet streamed discussion about the public option as it was dying, and I still to this day do not know what was driving his approach on this. It would be easy to blame his administration for tanking state-level public options, but I don’t think that is what happened. I think that Obama knew that no public option would be allowed to pass the Senate, and so he was trying to convince his supporters to accept this deal without it. It was a pretty valiant effort, and I don’t blame him for that.

      So I don’t view this in terms of the facade of the party platforms of state rights or freedom or anything ideological. It was simply about profits, and I think the profits of the insurance industry loomed very, very large. Parma already knew how to beat the people as they’ve done with Medicare part D. No, this was primarily the insurance industry knowing they’d be put out of business by a public option.

      The great mystery that people need to begin to look into for themselves rather than listen to people like me is why insurance companies themselves hardly even try to constrain costs. Republicans think that insurance companies should have the incentive to reduce costs if there was enough competition, but that just isn’t anywhere near the truth. Of course the “repeal and replace” mantra exploits the complexities and the public’s ignorance on this, but the public’s ignorance could be remedied. The dynamic is actually kind of complex, I think, but understandable to most.

      The very nature of health care is that it works better under the “Little House on the Prairie” model that the doctor is respected, well paid but realizes the public duty and responsibility of the position. There are so many levels of businesses involved today that it needs well-meaning policies to protect the purpose of the industry — to help people! The purpose is not to make money, rather the purpose is to help humanity!

      • urban legend says:

        Here’s another link filling in some blanks. Say what you will about Glenn Greenwald, he’s usually pretty air-tight on facts. However, I don’t share his outrage in this and other similar pieces he did on the subject. Both the deal to can the public option and the secrecy about it were probably critical to getting ACA passed — as annoying as it was that the President did keep insisting he would not sign a bill without a “robust” public option. Sausage, you know.

        I really fault the administration for not working “the left” hard to accept the bill as the necessary first step setting up the structure for potential introduction of a public option later. With 15% or so “opposing” the ACA because it wasn’t single payer or didn’t contain the public option, but with a significant proportion of those people still persuadable that it was the best possible under the political circumstances, they could be lumped in by Republicans as showing “Americans hate Obamacare. That was part of what led to 2010. A 53% favorable, 12% unsure and 39% opposed, instead of the 47-47-6 or so that we saw, would have changed the dynamic and the press coverage a lot.

    • urban legend says:

      A post on a tiny blog under a screen-name I have used. The “states’ rights” angle was my ironic suggestion, withn the red states most likely to (1) opt out, and (2) still think “states’ rights” is the most important value.

  8. Deplorable says:

    I think it is worth noting that the New York Times has deliberately undermined the submitting of substantive comments in this last week leading up to the election. They’re doing it through the IT department because they know that their editors would print what we think. The IT department is easier to manipulate.

    It is simple to see. If they view you as as dissident, when you attempt to comment they will replace the comment section with other form elements. You are given the illusion that you can comment until you try to do so.

    Krugman’s allowed me in until I countered his last opinion, and now I’m locked out of that also.

    If Roundup is the only solution, then Roundup it will be.

  9. Deplorable says:

    I’d be dead without modern pharmacology. Maybe.

    How much did modern life contribute to my situation? On the job I was working at during the time I had my DVT and PE, my cube neighbors believed it was caused by stress. Was it? Possibly, it was. It was a horrible working situation.

    So if you beat people into oblivion, where their health deteriorates, we become slaves of modern pharmacology. I’m there. I’ve been there for a long time.

    So you all win, I guess. I lose. Good luck to you all.

    If I find somebody willing to believe in something bigger in the mean time, I will thank God or whatever they believe in. But at this time, I’m beaten. I want to give up.