Obamacare Insurance Plans Will Be Bare Bones -- And Expensive
There's mounting evidence that come fall, the health plans sold through the Obamacare exchanges will be bare bones affairs - with narrow networks of providers to select from, and heavy co-insurance once patients go "out of network."
In many ways these plans will be a throwback to insurance schemes of the late 1990s, when managed care was dominant and restrictive networks standard fare.
With one difference: The Obamacare plans won't be cheap.
Quality of coverage is just one issue. Price is the other. There's mounting evidence that even though the new health coverage will be austere, it'll still be pricey.
Health plans have ample incentives to price the Obamacare coverage high, which is precisely what they're likely to do.
For one thing, insurers will want to protect against the risk that individuals entering the exchanges are those who most need health insurance because of pre-existing illness. If this sort of "adverse selection" occurs, it will raise costs to insurers. To guard against this, insurers are likely to price the coverage at a premium.
Second, health plans want to reduce uncertainty around how all the risk-sharing provisions in Obamacare will eventually play out. The legislation puts in place mechanisms that forces Washington to share with health plans some of the cost of the covering the sickest beneficiaries. But the regulations outlining these parameters were only released last Friday. Nobody yet trusts how they'll work.
To mitigate uncertainty, plans will price their products high. Insurers know that any excess profits they earn will have to be paid back to the government, anyway (owing to caps that Obamacare places on how much profit health plans can earn). Health plans are better off aiming high, and owing money back, then getting underwater.
After all, Washington takes away "excess" profits, but it doesn't share in losses.
Third, health insurers will want to reduce the incentive for employers to drop coverage and dump employees into the exchanges. This is especially true when it comes to insurers' lucrative small group and large group segments.
If insurers price the exchange products too low, they'll give employers another inducement to do this sort of dropping. By pricing exchange products higher relative to the insurance offered in the private market, they reduce this incentive.
Finally, the providers that Obamacare plans must contract with are unlikely to offer significant price cuts to attract this volume. Since the Obamacare plans are likely to pay providers less than rates offered by standard private coverage (and maybe even less than Medicare rates) many doctors could also refuse to accept Obamacare, just like they refuse Medicaid. Or refuse to offer insurers discounts for these patients.
The architects of Obamacare designed the scheme without much thought to how its overlapping incentives would discourage competition on the price of the new coverage. Health plans will try to drive down costs by offering very narrow networks of providers that they can more easily control. It will be a race to the bottom to see which plan can offer the cheapest benefit, while still meeting minimum standards. But it won't be a race to the bottom on price.
Plans have too many reasons to price their products cautiously, and not automatically pass along any cost savings to consumers.
If the Obamacare plans are priced higher than initial assumptions made by the Congressional Budget Office, it will burst the estimates placed on Obamacare's total costs. It could also make these plans unappealing to consumers.
Economics turns on simple principles. They've evaded Obamacare's architects.