NCPA - National Center for Policy Analysis

Insurance Exchanges Will Raise U.S. Health Care Costs

October 16, 2013

Over time, rather than encourage insurance providers to offer ever more attractive and affordable policies, the exchanges are poised to push up the cost not only of insurance but also of health care itself. That means, if the history of U.S. health care policy is any guide, the exchanges' very "success" will have the effect of limiting access to care for the 30 million people who are estimated to remain uninsured, says David Goldhill, author of "Catastrophic Care: How American Health Care Killed My Father -- and How We Can Fix It."

Why are things set to go so badly? Because the architects of the health care exchanges have relied on three crucial assumptions, all of which are probably wrong.

First, they have assumed that if insurers are prevented from competing on benefit design or on underwriting, they will compete on price.

  • Competition among insurers is supposed to drive down prices, but the exchanges can perversely limit competition.
  • Rather than compete aggressively for customers, insurers can use exchanges to informally divide the market among themselves at high premiums.

Second, the designers of the health care exchanges have also assumed that consumers, by shopping for the best deal, will drive down premiums.

  • However, a major flaw in the design of insurance subsidies will insulate almost all of the initial customers -- the estimated 20 million subsidized households -- from concern about how much their policies cost.
  • In practical terms, everyone who is subsidized has an infinite subsidy that will make them insensitive to premium levels.

Third, there's the assumption that the price of health insurance passively mirrors the price of health care. 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 the all money you bring in.

In the end, we have incentives for insurers not to compete, for customers not to care about price, and for insurers to drive up the cost of care. Not much of a marketplace, is it?

Source: David Goldhill, "Exchanges Will Raise U.S. Health Care Costs," Bloomberg, October 6, 2013.


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