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Don’t Be Fooled by Claims About the ACA Impact on Insurance Premiums

A recent New York Times headline reported that health plan costs for New Yorkers will fall 50%. They were taking the bait from Governor Cuomo’s office, who crowed about “real competition that helps drive down health insurance costs.”

We need to take these reports with a grain of salt. The goal of competition is to lower prices, but when it comes to health insurance — as with all of health care — we need to be careful about what we mean by price. The problem is that price often gets confused with premium, which rises or falls based on three other factors that should not be conflated with competition: the quantity of insurance, the quality of the coverage, and who the consumer is.

First, consider the quantity of insurance. When economists talk about prices, we usually mean the cost a consumer must pay for a standardized unit—e.g., the price for a pound of cheese. For health insurance sold on the exchanges, how do we standardize the quantity? The quantity of insurance is really how much of spending that is covered, and it is a direct result of the benefit design. A plan with a $100 deductible offers more insurance- or covers more consumer spending- than a plan with a $500 deductible. We need to standardize the premium for the generosity of its benefit.

Most exchanges provide a solution, since they offer standardized benefit designs with flashy names like bronze, silver, gold and platinum. Thus, we can refer to the premium for a silver plan. The problem is that the ‘silver plan’ didn’t exist before the Affordable Care Act, so we can’t do a direct comparison on benefits. Of course, one can always hire some actuaries to try and figure this out, as NY State apparently did.

Second, the quality of the product matters. Going back to our consumer example, we know that not all pounds of cheese are priced equally: there is a different price for cheddar than for pule, a rare Serbian cheese made from donkey milk that costs $576 per pound. Similarly, two plans may look the same on paper — with the same deductibles, copayments, and coverage — but they could still offer very different underlying quality. One might have a larger network, cover services at all the best hospitals, and the like. The other might limit services to a narrow network with limited choices, with Kaiser as the most extreme example. Adjusting for the quality differences of these products is hard, just like if we asked you to adjust the price of cheese to reflect differences between pule and cheddar.

Finally, who buys insurance often drives the premium. Here the cheese example fails. The price of a pound of cheddar does not change based on who happens to walk in the door. Health insurance is not like that. Premiums will reflect the underlying risk of the people being covered. In NY State, their individual market was a mess before the ACA, with the highest premiums around. But this wasn’t necessarily because the insurers were making lots of profits; rather, it was because regulation drove the young and healthy out of the market. Offering a “silver plan” to an older, sicker beneficiary will obviously cost more than covering a younger, healthier one.

So, when insurance premiums in NY State “tumble” 50%, we have to ask: are the same populations being covered as before? Did generosity change? Has the quality of the product offering slid? Ultimately, I suspect that insurance exchanges will drive down prices of insurance by reducing the costs of marketing. But without answers to these questions, we can’t yet judge whether competition is working, and by how much.

Post originally published on Linked In



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