Will the Affordable Care Act (Obamacare) make health care affordable? Chances are it will do the reverse.
In a recent Bloomberg piece, writer David Goldhill explains the faulty thinking and reverse incentives built in to the new health insurance exchange markets.
Whereas the idea behind creating such markets is to enhance competition, Goldhill says it’s a hindrance.
First of all, every insurer who joins the exchange is required to provide insurance to anyone who comes along, no-questions-asked about health risks. This means insurance companies have to cover their backs by charging higher premiums to everyone.
Secondly, the author shows how insurance subsidies encourage higher rates. Those eligible for subsidies are charged based on a certain percentage of their income and subsidized for the rest. The result is that insurers will get extra subsidy money if they charge higher prices.
Goldhill gives two families as examples. One must spend $1,071 as a percentage of income and the other must spend $8,949. Here’s what happens if they’re both looking at a $10,000 plan:
“A $10,000 plan already costs more than the maximum amount either family would pay. If the insurer raises the premium to $10,001, both families get $1 in additional subsidy. If it raises premiums to $11,000, both families get $1,000 in additional subsidy. In other words, no matter how much an insurer raises rates, a subsidized household pays zero more.”
The third problem Goldhill mentions is the requirement that insurers pay at least 80 percent of premium revenue on healthcare. The intended effect of this is to encourage refunds and money saved, but the incentive will be to spend more:
“In what may be the single greatest source of unintended consequences in the Affordable Care Act, insurers are now required to spend at least 80 percent of revenue from premiums on care. Superficially, this means that if they set premiums too high, they will have to eventually refund much of the money that they don’t end up spending on care. But let’s say you’re running an insurance company. You can find ways to spend more money on beneficiaries’ health care — say, with more generous definitions of free preventive care, more expansive rehabilitation services or higher reimbursement rates on doctors’ services — and keep 20 percent of all the money you bring in. Or alternatively, you can spend less on care and give refunds. Easy choice.”
Will the Affordable Care Act work as intended? That depends on whether it creates the right incentives. Unfortunately, as Goldhill argues, this may not be the case.
>>Read more: Goldhill, David. Exchanges Will Raise U.S. Health-Care Costs. Bloomberg.com. 6 Oct. 2013.