American Elephants

It’s All About Incentives. by The Elephant's Child

Conservatives recognize that people usually act in accordance with their own self-interest. Hardly a startling revelation. Of course they do. Politicians claim to have the best interests of the people at the forefront, but support for large businesses or special interests in their district may trump “the people.” That’s not a startling revelation either. Votes can be bought, influence pedaled, interests horse traded. So how do we get things done in such an atmosphere?

When the Affordable Care Act was devised in the back rooms of Congress, Democrats tried to include favors for their supporter groups. Much was made of free contraceptives, for example. Democrats wanted it for their women voters.

Sandra Fluke gained her 5 minutes of fame by speaking in favor of it before a faux congressional committee. The Catholic church objected strenuously because it included the morning-after pill, an abortifacient, which is abhorrent to their religion, and required anyone offering health care to offer it to their workers. Conservatives, who are more apt to have taken Economics 101, noted that contraceptives were available for under $10 for a months’ supply, and the taxpayers shouldn’t have to pay for them. You see the conflict of self-interest. Cases are still working their way through the courts.

The incentives created were perverse. An unnecessary favor to attract women voters has the effect of making health insurance unnecessarily more expensive. The law is loaded up with nice things for voter groups, benefits for which everyone must have coverage whether they need it or not. Because insurers were told what they must include in every policy, it meant 60 year-old women had to pay for maternity care and well-child visits. The cost of a policy is based on what is included. To keep premiums as low as possible deductibles are higher than what most people are used to, networks of doctors and hospitals skimpier, and lifesaving drugs not on the insurers’ formularies.

Under the Affordable Care Act, insurers are required to charge the same premium rate to anyone who wants to sign up, regardless of health status; and they are required to accept anyone who applies. This means that to make ends meet they must overcharge the healthy and undercharge the sick. It also means insurers have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses) by, in effect, making their plans less appealing to the sick.

Here’s how they seem to be doing it: In structuring the plans they offer on the exchanges, the insurers apparently assumed that the healthy will choose the plan they buy based on its price, while ignoring other features of the plan. It makes sense: If I am healthy why wouldn’t I shop for the lowest price? If I later develop cancer, I can move to a plan that has the best cancer care. By law, these plans will be prohibited from charging me more than the premium paid by a healthy enrollee.

Insurers also assume that people who already are ill or otherwise expect to use a lot of health care pay much closer attention to the cost of deductibles and which doctors and hospitals are in the insurer’s network. To have any hope of balancing their books, insurers must then attract the maximum number of customers who are likely to stay healthy and thus not use so much of the care they paid for, while unhealthy people in effect use more than they paid for. This is why most plans are apparently designed to attract people willing to overlook high deductibles and less access to health care in return for lower premiums.

Cities and towns have unfunded health-care commitments, and they will be dumping their retirees on the state exchanges. High cost older people. Some people are working only to get health insurance because they are uninsurable in the individual market. Their incentive is to quit and rely on the exchanges. A lot of high-cost patients will enroll through the exchanges.This will drive premium costs and deductibles higher.

The incentives are all wrong. We can do better.

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