The ObamaCare Carnival of Perverse Incentives

January 24, 2014

With fewer glitches to deter them, millions of Americans are now logging on to the ObamaCare health insurance exchange websites. When they get there, many are discovering some unpleasant surprises, says John C. Goodman, president and CEO of the National Center for Policy Analysis.

  • The deductibles are higher than what most people are used to, the networks of doctors and hospitals are skimpier (in some cases much skimpier), and lifesaving drugs are often not on the insurers' formularies.
  • Even after the government's income-based subsidies are taken into account, the premiums are often higher than what people previously paid.

Why is this happening? Because the new law gives insurance buyers and sellers perverse incentives to behave in ways that create these problems. Things will only get more out of whack as more and more unhealthy people enter a system designed to be paid for by premiums from healthy people.

  • Under the Affordable Care Act, the benefits insurers must offer are strictly regulated. To keep premiums as low as possible, the insurers are offering very narrow networks, often leaving out the best doctors and the best hospitals. In fact, one of the exchange plans in Colorado includes only a single Denver hospital, the one that usually treats Medicaid patients.
  • Under the Affordable Care Act, insurers are required to charge the same premium rate to anyone who wants to sign up, regardless of health status; and they are required to accept anyone who applies. This means that to make ends meet they must overcharge the healthy and undercharge the sick. It also means insurers have strong incentives to attract the healthy (on whom they make a profit) and avoid the sick (on whom they incur losses) by, in effect, making their plans less appealing to the sick.

At some point, politicians of both parties will realize that we can do better than this. That will require a real market for health insurance with premiums that reflect real risks. There is a role for government in helping people with severe health problems. That is why risk pools exist. What we didn't need was to destroy the market for the many in order to give aid to the few.

Source: John C. Goodman, "The ObamaCare Carnival of Perverse Incentives," Wall Street Journal, January 23, 2014.

 

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