Commonwealth Fund’s Red Herring on Risk Selection in ObamacareJohn R. Graham • Wednesday September 9, 2015 3:34 PM PST •
One of this blog’s consistent themes is that Obamacare encourages insurers to seek to enroll healthy people in exchanges and to shun sick people. A new study from the Commonwealth Fund insists this is not the case. It concludes that “insurers aren’t seeking lower-risk customers outside the ACA exchanges as some feared” and that “the ACA’s insurance reforms are working in the individual market.”
I will share the study’s conclusion, then explain the red-herring hypothesis it is meant to test:
Because the ACA’s premium subsidies are available only through the federal and state exchanges, it is no surprise that the majority of coverage in the individual market is sold there.
We see little evidence of insurers actively pursuing risk segmentation in their offerings on and off the exchanges. One way risk segmentation might occur is for insurers to offer leaner plans off the exchanges because these appeal more to healthier people.
Notably, the most generous (and most expensive) plans—i.e., the gold- and platinum-level plans—are much more prevalent off-exchange than on, constituting one-third of projected enrollment off compared with less than one-fifth on.
The hypothesis is that risk selection might have occurred through health plans offering “skinny” plans off-exchange and generous plans on-exchange. The authors claim this is how critics anticipated risk selection happening, but they cite only Timothy Jost, a pro-Obamacare law professor, in support of the hypothesis.
This is a red herring that misunderstands Obamacare economics. Obamacare exchanges are bureaucracies designed to move tax credits to beneficiaries buying individual health insurance. These tax credits phase out with income (one of Obamacare’s most harmful effects).
People with household incomes too high for tax credits will not waste time shopping on the exchange. This is a significant advantage to the health insurers: All suppliers of goods and services seek to segment their customers by income, to maximize profit from each. Few have the benefit of the government doing this for them.
There is a socio-economic gradient of health: All other things equal, high-income people will be healthier than low-income people. However, health goods and services are superior goods—meaning that a person’s demand for them will tend to increase at a faster rate than his income does. Plus, the higher a person’s income, the greater his preference for insurance against financial loss.
It is therefore not surprising that insurers are competing for off-exchange customers with gold-plated plans. This tells us little about risk selection on-exchange.
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For the pivotal alternative to Obamacare, please see the Independent Institute’s new book, A Better Choice: Healthcare Solutions for America, by John C. Goodman.