What are the likely effects of a huge expansion of Medicaid and the opportunity for employers and individuals to join a system of managed competition? We make four predictions.

A. Demise of the Small Group Market

One likely effect is that the market for small group insurance will vanish. The reason: The FEHBP-type market will enjoy an across-the-board subsidy for catastrophic costs and a subsidy for low-income employees that ranges from 25 percent to 37.5 percent of premiums (depending on the employer’s contribution) with lower, but still substantial, contributions for moderate-income employees. In addition, the FEHBP-type market will promise premium stability - small employers won’t face huge premium increases just because one employee has an expensive illness.

Since participation is voluntary, there may be an opportunity for small groups to stay in the commercial market (paying lower premiums) when all the employees are healthy and enter the FEHBP-type pool when health status takes a turn for the worse. It is this exodus of the healthy that undermines most health marts and other voluntary purchasing arrangements. In this case, however, employers will face a 10 percent penalty if they leave and reenter the FEHBP-type pool in addition to the tax subsidies that favor participation. Small group insurers should not count on a robust market for their products.

B. Demise of the Individual Market

Similar considerations apply to the market for individual and family policies. The self employed, people between jobs, older workers — all would be attracted to Medicaid or to the system of managed competition. For instance, according to eHealthInsurance.com, 46 percent of enrollees in HSA plans have family incomes of less than $50,000. The health insurance company Assurant has found that more than one-third (38 percent) of its HSA purchasers have only high school or technical school training. The same percentage lives in homes with market values less than $125,000. Twenty-seven percent have a net worth of less than $25,000. 61 Under the Kerry plan, most of these families would qualify for free health care through Medicaid. Those whose income is too high would get special tax subsidies if they join the FEHBP-type system not available in the ordinary market.

C. Demise of Fee-For-Service Medicine

It is very difficult for fee-for-service insurers to compete under managed competition. The reason: People tend to prefer HMO coverage when they are healthy because they enjoy the low-out-of-pocket cost, and choice of doctors is not very important. However, once a serious health problem occurs, choice of physicians becomes more important — despite the higher out-of-pocket costs. Fee-for-service plans, therefore, tend to attract a disproportionate number of high cost enrollees. This is one reason so many fee-for-service insurers have left the FEHBP. Among those that remain, pure fee-for-service plans have been replaced by PPOs (Physician Provider Organizations) with some features of managed care.

D. Diminished Role for Employers

As noted above, employers of workers who earn less than 300 percent of a poverty-level income will generally find that both they and their employees will be better off if the employers drop employer-paid coverage and pay higher wages instead. The reason: The subsidies available to individuals who buy insurance through the managed competition system are more generous than the subsidies available through the workplace.