Do subsidies protect Obamacare against the adverse selection death spiral?

by on November 1, 2013 at 7:34 am in Economics, Law, Medicine | Permalink

Jonathan Cohn writes:

What you may not realize (because few people do) is that the subsidies, by design, protect people from rising premiums. The law basically dictates what these folks pay for the typical, “silver-level” Obamacare plan, no matter what the insurer charges. This is critical. It means that rising premiums won’t affect the willingness of those people to enroll—which means, in turn, they’d still have incentive to sign up next year, as long as the technological bugs were gone and Obamacare online was working. (Subsides were a missing element of those ill-fated reform experiments in New Jersey and elsewhere.)

The economics here are tricky.  Insurance companies set prices both for those who receive subsidies and for those who do not.  Furthermore, the subsidy — when there is a subsidy — is determined by a process akin to a second-price auction, rather than matching the highest price in the market.  (How much collusion is there anyway, once all these prices are posted?)

One question is this: pre- “pressures for adverse selection death spiral,” where is the price sitting?  I don’t see an a priori answer to this query, so let’s work through two possibilities.

One option is that, at the margin, the price is already high enough that further price hikes would lower insurer profits and subsidies won’t make up for enough of that difference.  So the scenario goes like this.  A smaller number of “invincibles” sign up early on than initially had been expected, in part because of negative publicity about the exchanges.  Providers respond by lowering service quality rather than by raising posted prices.

Think of this as the “price stickiness scenario.” One big reason for holding back on the price, and instead lowering network quality, is the adverse selection problem itself.  If some of the invincibles are paying part of the price hike, higher prices will put them off.  Yet, if indeed they are invincibles, vague rumors about inferior network access may not put them off much at all.  They don’t expect to be using the network anyway.  But of course for sick people this change in quality and access will be a problem.

On top of that, might there be some stickiness in the posted price?  Many macroeconomists stress price stickiness even under normal circumstances.  And that means very often sticky in the upwards direction too, for fear of alienating customers.  Prices are all the more sticky in heavily regulated industries and in sectors which are under a good deal of policy debate and media scrutiny and where suppliers are not all that politically popular.  Prices are even stickier when there are easy ways of raising “true net price” by lowering quality, raising wait times, restricting access and delivery speed, and so on.  Those dimensions of the problem are harder for customers, regulators, and also media-mongers to monitor.

Access restrictions are also a way of checking ultimate financial risk in a way that price increases cannot be.  We can thank Joseph Stiglitz for this insight, as Joe pointed out that not only are prices sticky, but quantities can be sticky too, and risk-averse firms may wish to limit how much they are on the hook for.

I see a good chance that the price stickiness scenario holds.  And in that case the problem is not so much a price spiral but rather network quality moves to a much lower level and sits there.

I call the second and simpler scenario the “subsidies make up the difference” scenario.

In that scenario, the initial prices are low enough that they can be raised and the subsidies pick up the difference.  The companies don’t try to game the adverse selection problem with quality decreases and most would-be buyers are covered by the subsidies at the relevant margin.  The thought experiment then runs like this.  The initial quality of pool applicants suddenly worsens, but this time the main effect is that posted prices go up.  Because of the subsidies the real net prices to potential purchasers do not change very much and all still seems OK.

We do not know which scenario will occur, or to what extent, or in which states.  But I hardly think the law is in the clear in this regard.

1 Ironman November 1, 2013 at 8:03 am

The early indication is that the answer will be no – and it’s not the subsidies that’s the driver of that determination – it’s the deductibles and coverage levels for the most “affordable” plans. We used data for a 27-year old non-smoker in Chicago to do the relevant math – here’s what we found:

Here, using the same $7,500 in expected health care expenses, the Bronze plan required our hypothetical 27 year-old pay for 84% ($6,300) of those costs out of pocket, the Silver plan required they pay for 72.9% ($5,470), while the Gold plan held the out-of-pocket cost down to 46.7% ($3,500). These figures all assume that the annual out-of-pocket limit specified for each plan would apply and not be overruled by President Obama’s waiver of those limits for health insurance providers.

Adding in the annual costs of each metal plan’s unsubsidized premiums, the Bronze plan imposed the highest cost of $8,585.88, the Silver plan was the next highest at $8,062.36 and the Gold plan was the least costly at $6,484.88. What this result suggests is that people who expect to incur large health care costs in the next year will very likely opt for more generous levels of coverage when they do buy health insurance on the Obamacare exchanges.

Meanwhile, for people who don’t expect to consume much health care, they would benefit by paying much less for a plan that provides less generous coverage, even though they might face a huge cost gap before they would have any real benefit in having health insurance. Assuming they don’t choose to save even more money by not buying any health insurance at all and are willing to take a pass on the very small savings associated with Obamacare’s health insurance subsidy tax credit.

Note that the subsidy would be the same in all cases, reducing each of the total costs we listed above by the same amount, so the pattern for total costs under each plan type would still hold. And if you’re wondering about the $7,500 figure, that’s what Cigna indicates is the average cost for health care services related to a childbirth with a normal delivery. Follow the links for much more analysis….

2 Bill November 1, 2013 at 9:45 am

Interesting way to describe the premium: you start with assuming the person will reach the $6300 deductable and then add the cost of insurance to it each year.

Is that the way people pay for or search for their insurance policy…by assuming they blow through the $6300 deductable, and then add the premium.

Now, Ironoman, what you also did was “add the unsubsidized costs” of the premium to your total, so the price again went up.

I hope the readers saw what happened.

By the way, Ironman, what is the monthly rate for the 27 year old under the bronze plan. If he or she is invincible, what is there cost?

3 Ironman November 1, 2013 at 10:39 am

Bill wrote:

Now, Ironoman, what you also did was “add the unsubsidized costs” of the premium to your total, so the price again went up.

I hope the readers saw what happened.

Since this is Marginal Revolution, where many readers can actually read and understand what we wrote, we don’t think that will be a problem, since we explained exactly what we were doing in plain text – we’re not exactly sure what your issue here is.

As for adding the value for the unsubsidized premiums to the incurred health care expenses in our example, we could have just as easily added the after-subsidy costs of the premiums to the total, but that amount would vary according to the insured’s household income, which is why we opted to use the unsubsized cost for our base reference values. In both cases, the costs go up, but the only difference is that in the case of subsidized premiums, the total cost for each of the different plans would be reduced by an equal amount (the value of the subsidy). It doesn’t change the pattern.

As for your other questions, the text that appears in blue in my comment above are called “links” – they will take you to other posts where the specific answers to your questions have been provided for the benefit of all, not to mention where we’ve also provided you with many of the tools you need to answer your own specific questions for yourself.

Hope this helps!

4 Bill November 1, 2013 at 10:52 am

It must be hard for you to say (based on your limited source)

That the policy costs

$216 a month (without subsidy)

for the invincible who will not blow through the deductable.

5 Yancey Ward November 1, 2013 at 11:05 am

Bill can’t read, Ironman, and even if he could, you aren’t telling him what he wants to believe.

6 Bill November 1, 2013 at 1:41 pm

Bill can read,

but he knows that others reading on this site

(a) probably did not see what Ironman did;

(b) did not go to the source and

(c) did not notice that Ironman never answered the question: what was the monthly rate without subsidy.

Your pejorative statement that “Bill can’t read” makes me think the comment pointing out the tricks must have really hurt your feelings. I’m not sorry.

7 Ironman November 1, 2013 at 2:39 pm

That seems to be the case – it’s pretty amusing to see him complain that “Ironman never answered the question” when a simple click will demonstrate that we’ve already answered it (long before he even asked) and that his unwillingess to become informed is only thing keeping him from having his question answered.

8 Bill November 1, 2013 at 3:43 pm

It is “pretty amusing”, as Ironman would say, to ask why he hid the ball from the readers on what the premium would cost, and why he stated the premium as the deductable plus the premium.

Ask yourself this question: If I offered you a $15k deductable policy plus an $x premium per month, would I sell it to you as:

1. This is a policy that will cost you $15k, plus an $x premium you can find by clicking on my website button, OR

2. This is a policy with an $x premium and a 15k deductable.

Guess which one Ironman used to sell you his argument, and guess which one is used to sell insurance in the market.

9 Skinny November 2, 2013 at 10:58 am

No, Bill is a prick that goes around the internet questioning people intimidate life details because they don’t conform to his bizarre obsession with justifying this law.

10 Bill November 2, 2013 at 11:31 am

Well, Skinny,

If I am a prick,

My prick must have hurt you.

Calling people names is not a very good idea because it can come back and prick you.

11 Rich Berger November 1, 2013 at 1:06 pm

Browsing through the rates that Ironman used for his illustration, another thing struck me. If the adverse selection works at the higher ages (relative to average costs), the premiums for that age group will tend to rise. Given the requirement that the lowest premiums must not be less than 1/3 of the highest premiums, if the higher age premiums go up, so will the lower age premiums. Just one more reason for the young to avoid insurance or pay the penalty.

12 Ironman November 1, 2013 at 2:43 pm

That’s a good point, although I think that the more likely response will be for the federal government to widen the spread between lowest and highest premiums. At least, if we go by the example of all the states that that have previously tried to implement the 3:1 highest/lowest premium ratio.

13 Rich Berger November 1, 2013 at 2:58 pm

I see that the Urban Institute has recommended just that –

How will they do that? By passing a law or by executive fiat?

14 mulp November 1, 2013 at 1:09 pm

What if the 27 year old does not have any cash or income beyond the money to pay the insurance premium?

What will she pay to have her baby delivered beyond the insurance premium given she has no money to pay more?

Will her baby be seized and sold to the highest bidder to pay the medical bills?

15 Morgan Warstler November 1, 2013 at 8:12 am

Again, for ANYONE healthy and making say $60K indiv, $80K family NON-COMPLIANCE is the best health care and the best deal on the table.

The folks in this category getting letters, particularly the ones who learn their current PPO doctor isn’t available, are going to FIND HIM in same kind of Catastrophic HSA PPO they already have.

The fact that the IRS can’t even collect the fine unless you are getting a refund, is fun and interesting, but even without it…

Non-compliant plans will no longer have long term sick cases in them. WHY? Because they will only provide coverage of say $500K in event of catastrophe. So if something terrible happens you JOIN OBAMACARE for the folowing year (during open enrollment).

Since the pools have NO ONE SICK, and NO LONG TERM HEALTH PAYOUTS, the cost of the PPO HSA plan drops ALOT.

We’re going to see Individual plans that are basically just Hospital care up to $500K that run $50-75 a month for BMW PPO networks – Cleveland Clinic, out of network etc. Families maybe $200-300.

So you sock away $6350 tax free, you have essentially a $7K deductible – and you cover all your cost paying “cash” (which gets better rates at doctor).

So if you make $100K and go ahead and pay the fine, this year you’ll be saving NEARLY $10K. Ten Thousand Dollars.

What healthy idiot making a decent living, getting a letter telling them to pay 3x more and lose their doctor isn’t going to shop around?

Death spiral.

16 mike November 1, 2013 at 10:30 am

This is smart, but I have to wonder if there’s something preventing it. After all, tons of people are getting their plans “canceled” rather than insurance companies merely saying “we’re still offering this plan, but it won’t satisfy the individual mandate”. Maybe some concern that selling a non-compliant plan constitutes fraud?

17 Morgan Warstler November 1, 2013 at 11:06 am

No, you’ll need to find a insurance company not offering Obamacare.

Remember all those stories about insurance companies deciding to not offer Obamacare in a given state? This is that.

So if you got a letter transition you, its bc your insurer is doing Obamacare in your state.

18 Eric Johnson November 1, 2013 at 10:31 am


Your analysis is probably spot on.

19 dead serious November 1, 2013 at 10:36 am

Your advice is akin to not having a homeowners policy on your McMansion ’cause it’s for TEH SUCKERZ!

People making 6 figures are typically bright enough to realize that paying a relatively small amount is worth avoiding financial catastrophe.

One broken bone by any member of the family is enough to justify paying for the bronze plan. Health has nothing to do with accidents – especially if kids are involved.

“We’re going to see Individual plans that are basically just Hospital care up to $500K that run $50-75 a month for BMW PPO networks – Cleveland Clinic, out of network etc. Families maybe $200-300.”

If that happens, and it’s a big if, then it might be time to recalibrate. But there’s no evidence that this is going to be an option.

20 Morgan Warstler November 1, 2013 at 11:01 am

It already exists… almost.

Look at what is offered, the rates you see are real IF you are healthy.

What’s coming, so I’m told, is rate reductions that reflect to cleaner pools of healthy people.

21 Morgan Warstler November 1, 2013 at 11:08 am

I don’t think you understand that that Bronze plan, for a guy making $150K a year – his current awesome doctor is not in the network.

He has give up his doctor and to drive to other side of tracks to take your advice.

22 dead serious November 1, 2013 at 11:14 am

My current plan is an Aetna high deductible plan, which, from my understanding is on par coverage-wise with the bronze plan.

What you’ve said about doctors being in the network is absolutely false. There is a huge list of medical providers and, to your point, I haven’t had to select different providers than I’ve always had. For me, anyway.

23 Morgan Warstler November 1, 2013 at 12:42 pm

Wait, have you asked your doctor if they have joined are in a ACA network? Let alone a Bronze plan?

As long as you are currently healthy, I think you will be a good example, can you tell me the state and plan? Single or family?

I’ve priced out hundreds of plans like this while doing research. let’s try it.

24 dead serious November 1, 2013 at 1:58 pm

PA, family plan. I have not asked my doctors, no.

I moved from my prior United Healthcare PPO plan to an Aetna high deductible plan. I didn’t lose access to my doctors – meaning they remained in-network.

25 Morgan Warstler November 1, 2013 at 2:38 pm

Please ask them. Your HD plan is a PPO HSA?

26 dead serious November 1, 2013 at 9:19 pm

My plan has an HSA component which I do fund. But the policy is not a PPO in the sense that medical services are prepaid. I pay out of pocket for negotiated rates until the deductible is met, then it’s
coinsurance. Most services are 80//20.

It’s anything but straightforward.

27 Morgan Warstler November 2, 2013 at 6:19 am

Since you are making 6 figures and healthy, you are going to want at a minimum to grandfather on a non-compliant new plan starting Dec 15th of this year

AETNA is definitely canceling your plan when it is up. So, call your doctor (and kids doctor) and find out if he’s inside any of the exchange offerings.

Having looked at Aetna’s offerings outside Pitt, you are definitely going to save thousands of dollars this year just paying the 1% fine, if IRS owes you money and sticking with HD PPO HSA.

28 dead serious November 2, 2013 at 1:07 pm

Last month I went through annual enrollment at my company so my plan isn’t going anywhere.

29 Jimbino November 2, 2013 at 11:41 am

I have just priced cataract surgery in Austin and in Mexico, Thailand, Costa Rica, Brazil, and Prague. The charges in Austin are about $4500 (discounted, for cash) per eye in Austin. In the foreign lands, they charge about $1400 per eye. Who in his right mind would seek treatment in Amerika?

I, like the Amish, am a total non-believer in the religion of insurance. You will never see me buying insurance! The Amish get treatment in Mexico. Nuevo Laredo is only 3.5 hours from Austin.

A risk-averse young male who believes in insurance could just purchase a policy in Mexico, where he won’t have to subsidize the old, female and breeders, and go there for treatment. Hell, Cancun has lots of docs trained in the USSA who speak English. You can combine the treatment with a fine vacation in the Yucutan, in the rainforests of Brazil, Costa Rica or Thailand, or in the cafes and museums of Prague or Budapest.

30 dead serious November 2, 2013 at 1:30 pm

Let us know whether you end up blind in both eyes or just the one.


31 Z November 1, 2013 at 8:38 am

I see an elephant in the room that no one wants to contemplate, let alone discuss. The mythical “invincibles” may not exist, at least in numbers everyone assumes. The numbers have always seemed a bit dodgy to me, based on experience. The results so far suggest the estimates were wildly inflated. The belief that you can force these people to buy a product they don’t need may be based on the mistaken belief that they exist in numbers great enough to make a difference.

One of the defects of democracy is the people confuse slogans for facts. What this grand social engineering project is about to reveal is that there never was a health insurance crisis and there never was a large cohort of young healthy people willing or able to subsidize the scheme. Instead of the hammer of government coming down on the nail, it is landing squarely on their head. The political consequences will make the economics consequences look trivial.

32 Jimmy November 1, 2013 at 10:02 am

I’m one, and I will not be signing up in any circumstance.

33 jacobus November 1, 2013 at 10:09 am

“…there never was a large cohort of young healthy people willing or able to subsidize the scheme.”

Indeed. All those healthy young people without health insurance? They don’t have any money either.

34 Bill November 1, 2013 at 10:12 am

If the mythical invincible a does not exist as you posit, and the carriers assumed they did in setting their premiums, logic says You Should Buy This Underpriced Product, not avoid it.

35 Jay November 1, 2013 at 10:36 am

Not if you expect premiums to rise significantly in the future because of it.

36 Bill November 1, 2013 at 10:59 am

Why? You can buy something else next year. It’s underpriced now, if you believe the rhetoric that invincibles won’t join at the rate carriers expected.

37 Z November 1, 2013 at 12:15 pm

I’m not entirely sure the carriers had much say in the matter. The schemers who wrote this thing started with the belief that there were ~40 million missing rate payers out there. This scheme hinges on pulling them into the system. Either through the tax system (subsidies), higher rates for existing policies (you policy is cancelled, please shop around) or out of the pocket of new subscribers, money would flow into the regulated insurance market to cover all of the new requirements. What if the number is half that and only 25% will actually pay anything out of pocket? The answer is, the whole thing collapses.

38 Pshrnk November 1, 2013 at 11:06 am

Yep. Nowdays all the supposed young invincibles are on Adderall!

39 mw November 1, 2013 at 11:10 am

I don’t know–they seem to make up 100% of the MR comments thread, and there’s not a chance this cohort is medicated.

40 W.E. Heasley November 1, 2013 at 8:41 am

Analysis of HHS Final Rules On Reinsurance, Risk Corridors And Risk Adjustment


1. At a state’s discretion, HHS will administer reinsurance, even if the state is operating the exchange. The proposed rules required states operating an exchange to also administer reinsurance.

2. The assessment to issuers (including Third Party Administrators [TPAs]) on behalf of group health plans) will be on a per capita basis rather than a percentage of premium as stated in the proposed rules.

3. States may not elect to collect contributions for self-insured plans and group health plans. For all states, HHS will collect reinsurance contributions from self-insured plans and TPAs on behalf of group health plans.

4. States may elect to collect reinsurance contributions from fully insured plans or choose to have HHS collect reinsurance contributions from fully insured plans.

5. All covered services will be eligible for reinsurance recoveries, not just Essential Health Benefits (EHB).

(Foot note from page three) 3 All markets contribute to reinsurance, but the payments only apply to the individual market.

The reinsurance provision will follow typical stop loss reinsurance provisions based on actual expenditures. However, unlike typical stop loss reinsurance, the attachment point will be relatively low compared to commercial reinsurance and allowable amounts will be capped at a commercial stop loss reinsurance amount (subject to available funds). Pg.4


The reinsurance program under the ACA is a temporary program that will primarily operate from 2014 through 2016.

States can contract with or establish a non-profit reinsurance administrator.


Is the reinsurance provided privately or is the government acting as the reinsurer? The report doesn’t seem to specify.

In a nutshell and roughly speaking:

If privately obtained, reinsurance in and of itself has a premium and that premium can certainly go up. Moreover, reinsurance markets have ebbs and flows and from time to time become “hard markets” where reinsures are not in a position to offer coverage hence regardless of the willingness to pay, no coverage is afforded or forthcoming.

If the “reinsurer” is the government itself, then there is no legal reserve meaning the ability to tax substitutes for the legal reserve.

If the reinsurer is public-private then the premium collected is likely a sinking fund held by a public entity with reinsurance purchased above some cut-off if the sinking fund is depleted. Same problems above apply.

41 john personna November 1, 2013 at 8:48 am

Can you make this concrete for me, with respect to my Kaiser plan? I have something akin to silver, which has been officially grandfathered. Rates have been rising consistently for the 10 years I’ve had the plan (as I enter the costly late-50’s).

Now, Kaiser Permanente has 8.9 million health plan members.

That seems important. Will new members, via the exchanges, in response to Obamacare, be so numerous that they will truly change the risk pool, and drive my rates higher?

How many million news subscribers is Kaiser supposed to get, here?

42 john personna November 1, 2013 at 8:55 am

Note that if the claim is that just a few thousand _really_ sick people will do it, it becomes a pretty evil parable. It says that we (healthy) are better off keeping the really sick people off our insurance, and leaving them to their fate.

43 8 November 1, 2013 at 10:03 am

It’s a whole host of factors working together. It’s not just the sickest people joining, it’s that the healthy people will leave. That is round 1. Round 2 comes when people start using more healthcare because they’ve got coverage now, or start demanding more services because the “substandard” plans are all gone. Round 3 will kick in when the costs to the federal government start climbing. Either through rising healthcare costs or from a slower GDP growth rate as disposable income falls to pay for for healthcare.

44 john personna November 1, 2013 at 10:08 am

Why would healthy people leave? Is there some other company, besides Kaiser, who already has a stable base of healthy users, and who can undercut? If there is, why haven’t they undercut Kaiser already?

And frankly, the round 2/3, more services thing, seems like consecutive fantasies. Never trust a scenario that relies on multiple invented futures.

45 8 November 1, 2013 at 10:14 am

Healthy people will see the premiums rise and decide they don’t need insurance anymore. They’ll take the fine, cut back on withholding (no refund) and skip the fine too.

History and common sense tells us people will demand more healthcare once they have insurance. Why would someone pay $700 a month and not get acupuncture or some other treatments covered under their new non-substandard insurance? What’s the incentive for the acupuncturists to tell them they don’t need it? It’s already paid for, in their mind. This isn’t insurance, it is prepaid medical services. If you pay and don’t use the services, you’re the sucker.

46 john personna November 1, 2013 at 10:17 am

“Healthy people will see the premiums rise and decide they don’t need insurance anymore.”

When your scenario is dependent on your own scenario, you should really stop and think.

47 dead serious November 1, 2013 at 10:41 am

I said this in another thread, but “covered” doesn’t equal free. I don’t think you escape a co-pay (a flat amount that you must contribute), or maybe even co-insurance (paying a percentage). Some plans may require that you pay out of pocket until you reach a deductible.

48 TMC November 1, 2013 at 12:15 pm

“Never trust a scenario that relies on multiple invented futures.”

Reason 48 to not implement Obamacare

49 john personna November 1, 2013 at 12:22 pm

The idea of extending private insurance with a mandate is very straightforward. I would prefer a greater change, to a national plan with lower total system costs, but the very thing that made Obamacare palatable was that it was an incremental change from the status quo. It was not revolutionary.

50 mike November 1, 2013 at 10:55 am

How is it “a pretty evil parable” even if it “says that we (healthy) are better off keeping the really sick people off our insurance, and leaving them to their fate.” Asking someone to sell you a policy for $5000 per year when they know in advance they will have to pay $30k in benefits isn’t “insurance”, it’s charity. Is it evil to want to separate actual insurance from straight-up charity? Only if you want to hide the fact that charity is happening, so it’s easier to force it on people unwillingly.

51 john personna November 1, 2013 at 12:24 pm

I think the words you want are “safety net,” rather than “charity.”

Charity is a voluntary thing, which one may choose to offer, or not, and which makes no claim of universal coverage.

52 mike November 1, 2013 at 1:32 pm

Well at least you’re honest that your plan requires putting guns to peoples’ heads.

53 dead serious November 1, 2013 at 2:06 pm

Like paying taxes for a military I don’t want?

For paying taxes so churches and other fantasy-laden organizations get a free ride?

So farmers take money can take money out of my pocket?

Sorry, pal. There are plenty of things my hard work subsidizes. I don’t get a direct say on any of them and neither do you,

Don’t like it? Earn more. Or better yet, move.

54 mike November 1, 2013 at 2:52 pm

I agree with you that pretty much all government programs are horrible.

55 Yancey Ward November 1, 2013 at 11:15 am


I implied it in another thread, but you don’t understand what an “insurance pool” is. Here is what a “pool” is not- it is not the entire customer base of the insurer.

56 john personna November 1, 2013 at 11:28 am

Well, that’s a sloppy claim. Certainly the total risk pool facing the company is for the full pool of members. The company, and not you, may strategize and divide that pool into plans, programs, individual and group.

All that is opaque to us, but certainly we know Kaiser has a long history offering similar individual plans, and is only adding incrementally to their existing base.

57 Lord November 1, 2013 at 12:18 pm

The exchanges only apply to the 10% without insurance and the 5% with individual insurance. While the poorer may be less healthy, the copays and coinsurance will represent more of an obstacle to them so it shouldn’t be a large effect either way.

58 Tarrou November 1, 2013 at 8:57 am

These “young invincibles” wouldn’t be the generation Y folks who are having really tough economic times, would it? The ones with reduced prospects, moving in with parents, overeducated and underemployed? Yeah, they sound like the perfect group to subsidize everyone else’s health care.

59 8 November 1, 2013 at 10:04 am

Janet Yellen’s got this.

60 T. Shaw November 1, 2013 at 10:53 am

I imagine many young people think it’s “swell” (yeah, I’m old) that Obama is giving everyone free, or subsidized, health.

It’s just that they didn’t think they’d have to pay for it.

Add that to up to $50 trillion in debt you already owe.

So, when they legalize weed, they may as well turn on and tune out. What are the alternatives?

Young lotus-eaters should have contemplated all of that before voting for Obama.

61 dead serious November 1, 2013 at 10:43 am

They can’t do that – they need to save a lot of cash to buy my house!

62 Dan Weber November 1, 2013 at 11:05 am

The extra bills will give them the motivation they need to start a new business.

63 Lord November 1, 2013 at 12:22 pm

The ones without the incomes to pay for it? Not very likely. They will be the subsidized. It is the healthier, less poor, (but not rich since the rich would already have insurance) regardless of age.

64 Rahul November 1, 2013 at 9:05 am

One tangential question I have is are foreign insurers allowed to come and serve this market? How high are the barriers to entry?

Are we seeing firms entering or leaving? Has there been any indication via applications etc. that this is an attractive market for new entrants or a hot potato.

65 Z November 1, 2013 at 9:26 am

One thing to understand is health insurance is regulated at the state level. So “foreign” means “based outside the state.” In many, if not most, states the rates are set by a commissioner or commission. They will typically mandate what the insurer offers in terms of coverage and deductibles. For instance, my state has one big non-profit insurer and a few smaller for profit companies. The rates and services are set by the state. The differences between the plans is the number of doctors in each.

Again, there’s no such thing as a private health insurance market in America.

66 Rahul November 1, 2013 at 9:42 am

Interesting, thanks. The darn US system is so complicated it’s often hard to make any sense of it.

If rates are set by a commissioner how does one interpret the factoid that post ACA people have reported their premiums / deductibles go up & coverage comprehensiveness reduce? These then are commission-level decisions & not private insurer decisions?

67 Peter H November 1, 2013 at 10:21 am

Rates aren’t set by the commissioners, rather they’re regulated by them. The main factor that goes into that regulation is actuarial value, or simply put, how much of each $ of premiums gets paid out in claims. Since the ACA reduces the ability of insurers to avoid paying claims (by excluding pre-existing conditions from coverage, or excluding unwell people, or using recission on policies when someone becomes very ill), the amount of claims paid out will go up, even if comprehensiveness of network or deductibles also go up.

This is actually one of the better things about the ACA, in that it makes health insurance actually be insurance. If you have a policy, that policy absolutely cannot drop you if you become ill and need expensive treatment. Before, a substantial risk was involved in that you might think you had insurance, only to find out that your policy would be recinded when you made big claims on it.

68 Rahul November 1, 2013 at 10:37 am

If premium to claim payout is a fixed ratio, I wonder what economic strategies do the insurers compete over? Only a reduction in admin overheads?

If one must disburse a fixed kitty what’s the optimum strategy for an insurer to disburse it?

69 Jay November 1, 2013 at 11:01 am

Can you cite evidence for your last paragraph? My understanding was it was already against the law to drop someone simply for becoming sick and using the coverage. They are required to keep you as long as you aren’t found to have had the condition before signing up.

70 Pshrnk November 1, 2013 at 11:22 am

Recission was often because the insured lied about a pre-existing condition.

71 sort_of_knowledgable November 1, 2013 at 11:53 am


Insurance companies could cancel the group policy for everybody every few years, then start a new group policy and sign up the healthy population.

72 Peter H November 1, 2013 at 11:59 am

Recission is used where, after you file big claims, your health insurer goes back and searches for any misstatement in any questionnaire you filled out for your application. Since the questionnaires are long, require perfect memory, and often have ambiguous questions, they often find misstatements.

Even if the recission is illegal, the process of suing the health insurer is lengthy, and in many cases the insured will die long before they could get a payout.

73 Clete N November 1, 2013 at 12:47 pm

Actuarial Value is the ratio of in-network allowed claims to paid claims. It has nothing to do with premium.

74 mike November 1, 2013 at 2:56 pm

“Since the questionnaires are long, require perfect memory, and often have ambiguous questions, they often find misstatements.”

They also often find misstatements because people lied about their pre-existing conditions in an attempt to steal from the company. Or are we just expected to accept the aw-shucks “i forgot to mention i had cancer” explanation.

75 Z November 1, 2013 at 4:06 pm

In my state, the rates are set by the insurance commission. Maybe that’s atypical. or, maybe you are splitting hairs by claiming there’s a difference between setting rates and regulating them. The result is the same. There’s no such thing as a private market for health insurance. That means the abuses, real or imagined, are the result of the same folks now promising to end them. In other news, the fox proposes to guard the hen house from those avaricious foxes.

76 john personna November 1, 2013 at 9:42 am

I think that’s what the progressives were saying, when the conservatives were defending the free market perfection of 2008 vintage health care.

77 mike November 1, 2013 at 10:56 am

Actually I’m pretty sure progressives were demagoguing the free market. At least that’s what they were doing in public.

78 charlie November 1, 2013 at 9:25 am

subsidies won’t help if you have to pay the insurance premiums in cash — and only get the subsidy in your refund.

79 Michael November 1, 2013 at 9:58 am

That’s only true if you purchase outside of the exchange. If you purchase through the exchange (one of the lucky ones), the subsidy is pre-paid to your insurer.

80 Jay November 1, 2013 at 11:03 am

Are the deductibles, co-pays, or other out of pocket fees payed for by subsidies at all?

81 Rich Berger November 1, 2013 at 9:26 am

I am sure these are precisely the discussions that the architects of Obamacare had when they were “designing” this legislation. Don’t worry, all this has been taken into account.

Just a little while more, and the noose will be tight.

82 john personna November 1, 2013 at 9:41 am

I was going too say that “the adverse selection death spiral” was sounding more like the opium dream of a theoretical economist … but it certainly plays into the fevered dreams of the politically paranoid, doesn’t it? (In another forum we are remembering the “European-style Socialism” bogeyman, despite the roaring success of the German economy, with all these social services.)

83 mike November 1, 2013 at 10:38 am

Why does it seem like Germany is the only country in Europe I hear about from you people these days?

84 john personna November 1, 2013 at 10:52 am

Usually I’m a “Denmark” guy, probably because I’m half-Danish and perk up my ears to their news. I like all the cross-country comparisons though. Here’s a good one, not directly health-care related. (I guess it might relate, in the sense that if we are less literate and less numerate, we might have problems with national policies requiring math, etc.)

85 mike November 1, 2013 at 10:58 am

We White Americans outperform Denmark, so which “we” are YOU talking about?

86 john personna November 1, 2013 at 11:04 am

We Americans?

87 john personna November 1, 2013 at 11:08 am

(You know, I’m sure Tyler is not a racist. No one who enjoys the ethnic food as much as he and I do could be. We go to the strip malls in bad neighborhoods. We see people there working hard. Pho stock is work. We might even know the sons or daughters of refugees now at top schools.

But there is something worrying in that Tyler’s economic philosophy provides such convenient rationalization for the racists. So much so that MR is a magnet.)

88 mike November 1, 2013 at 11:14 am

That’s about as idiotic as couples where the woman is pregnant saying “We’re pregnant.” But oh wait, you people are now requiring men to have pregnancy coverage so I guess you people literally believe that.

In particular, your suggestion that We Americans “are less literate and less numerate, we might have problems with national policies requiring math, etc.” would seem to suggest that the policy problems are coming from the less literate and less numerate people i.e. Black and Hispanic Democrat Obama voters. If you look at American Whites (overwhelmingly Republican Mitt Romney voters), we (myself included) must have even better quality policies than Denmark since we are more numerate and more literate than Danes. So stop dragging us down with your stupid shitlib faggotry!

89 dan1111 November 1, 2013 at 11:42 am

@john, I strongly dislike the racist comments that appear on this site. However, underhandedly accusing Tyler of being responsible for those comments is not helping raise the level of discourse. “I am sure Tyler is not a racist, but…”??? And the reason you believe he is not a racist is because he likes pho? How about the fact that he has never made any racist statements or given anyone the slightest reason to believe that he is racist?

If you believe that “Tyler’s economic philosophy provides…convenient rationalization for the racists”, please make an argument to that effect. The fact that a few people anonymously make highly offensive statements only proves that this is the internet.

90 Thomas November 1, 2013 at 11:52 am

You compare the diverse United States to homogenous countries because they outperform. Then you claim racism if someone asks to take a look at the demographics. If it were the case that race demographics are substantial indicators of results, then by your definition, you are using racism to disparage your political opponents, and then claiming racism when they call you out. Shameful.

91 john personna November 1, 2013 at 11:52 am

I’d like to think that Tyler would take my comment constructively. But yes, it probably requires some introspection on the nature of libertarianism and the degree to which market centered (economics centered?) solutions are compassionate. Related: Wharton Professor Studies the Relationship Between Economics and Greed. Not the first such study.

92 john personna November 1, 2013 at 11:53 am

Thomas, if I only talked about health care, and national performance, and then someone came at me “but race!” why wouldn’t I call that racism? Isn’t it, in the very true and native sense?

93 TMC November 1, 2013 at 12:23 pm

If it were not a relevant factor then it would be racist. As it is relevant, then not.

94 john personna November 1, 2013 at 12:28 pm

Ha, TMC goes with the “it’s not racist if it’s true” line. As a non-racist of course I find that totally unconvincing.

95 Thomas November 1, 2013 at 12:50 pm

@john peronna

The most liberal definition of racism is simply the belief that there are inherent differences among human races. Your argument is that health outcomes in country A with your preferred policy outperform health outcomes in country B without your preferred policy. If it were the case that health outcomes varied substantially among racial groups, and that country A and country B differed in demographic makeup, then demographics are pertinent. If it were the case that country A had an inherently healthier demographic, your use of that statistic spreads evidence supporting “the believe that there are inherent differences among human races.” What I’m suggesting is that you may be spreading evidence that racism is valid. Everyone else is just pointing out the racism inherent to your argument.

96 john personna November 1, 2013 at 1:06 pm

Thomas, I don’t use race at all in my arguments, because I don’t think it is a rational perspective. Realistically one could talk about poverty, crime rates and educational attainment. And that works because a poor white car-stealing meth addict drags down national attainment just as much as a poor minority car-stealing meth-addict.

97 mike November 1, 2013 at 3:11 pm

“a poor white car-stealing meth addict drags down national attainment just as much as a poor minority car-stealing meth-addict”

The problem is that the actual ratio is more like one white society-wrecker for every 20 minority society-wreckers. Your statement is like saying that one woman who beats her husband is just as bad as one man who beats his wife. Okay, fine, but that just obfuscates the reality of the situation. And if you smugly pointed out that the WNBA has fewer spousal abusers than the NBA, and claimed that it’s because they have a better collective bargaining agreement, it would be correct to call you an obfuscating degenerate faggot.

98 john personna November 1, 2013 at 3:29 pm

By numbers, there are more whites in prisons than minorities (about 60:40).

99 mike November 1, 2013 at 4:27 pm

Straight up intellectual dishonesty in pretending you didn’t realize I was speaking in per capita terms. Typical.

100 john personna November 2, 2013 at 8:41 pm

mike, I used total numbers because I was discussing total burden on society, GDP. That was the point of the “car-stealing” bit above.

In total cost to society, it IS the total criminal population.

101 john personna November 1, 2013 at 1:11 pm

Seriously, I say “we can do better as a nation,” and the response is “no we can’t because diversity (race).” I say “that’s racist,” and I get, “no you’re the racist” … I guess for thinking we can do better?

102 john personna November 1, 2013 at 1:46 pm

OK, I think I’ve got the connection now, and it’s a little sad. Let’s say you are a libertarian or small government type. This despite not rip-roaring success in the US economy. Someone points to northern European countries which actually have higher government spending per GDP, who have higher taxation, and who in some measures are doing better than us. What do you do? You can’t really support any move in that direction, even slightly. So you look for some reason, any reason, we can’t go there. At this point non-racists will stand down, and remain quiet. A few are willing to go a chilling explanation though. We can’t be line northern Europe, because genetically we aren’t white enough. As I say, it’s sad, because a libertarian should want a good, rational, non-racist explanation for European successes (such as they are, where they are). Absent that, the racists become the libertarian defenders.

103 Thomas November 1, 2013 at 2:17 pm

The argument you are making is inherently racist because the underlying statistics demonstrate differences in outcomes among races. Then, you claim that everyone who points out the nature of the argument your policy proposal stands on, is racist. The irony is incredible, but you go further. Next you threaten to pigeonhole your political opponents as racists should they continue to debate you. Last, you claim that people should “want” certain causes for effects, and not others, as if “wanting” things to be true can make them true.

Fact: If your argument rests on health outcome differences among races, your argument is racist. Your argument is racist.

104 john personna November 1, 2013 at 2:28 pm

Come on thomas, think it though. I claim the independent variable is social structure and spending. You come back at me that the difference must instead be race. What does that make you?

105 john personna November 1, 2013 at 2:29 pm

BTW, thank you for the perfect demonstration of my analysis.

106 mike November 1, 2013 at 2:58 pm

Zimbabwe has high social spending. That’s why it’s been so successful.

107 Rahul November 1, 2013 at 3:04 pm

@john persona:

Moving beyond the immediate debate: How do you define racism?

If I say, Blacks are taller than Asians, is it racist? If I say Latinos are better dancers than Whites, is that racist? On average, of course.

108 mike November 1, 2013 at 3:13 pm

Rahul, racism is believing that black and hispanic failure isn’t caused by racism.

109 Rahul November 1, 2013 at 3:15 pm


It took me 4 attempts to parse out the delicious recursion from that statement. 🙂

110 john personna November 1, 2013 at 3:32 pm

Rahul, racism is short for racial prejudice.

111 Slocum November 1, 2013 at 9:44 am

What’s to prevent the splitting of the insurance market where the only people who buy through the exchanges are those who receive subsidies (low income, older, and/or sick people) and everybody else in the individual market buys policies off the exchanges from companies that don’t participate, have generally younger, healthier customers, and can offer lower prices? Does the ‘death spiral’ end up where the exchanges end up, effectively, as de facto high-risk pools?

112 Clete N November 1, 2013 at 12:49 pm

Single risk pool requirements – at a high leve, must charge the same rates on and off exchange

113 Slocum November 1, 2013 at 1:10 pm

But insurance companies don’t have to participate in the exchanges, and if they don’t participate, they don’t have any exchange buyers in their risk pools.

114 JWatts November 1, 2013 at 11:53 pm

Exactly! Several pretty big insurers have not joined the Exchanges. Why would the join now? And since their pools will likely get healthier as the sicker are soaked up by the Exchanges, won’t their price advantage grow?

Furthermore, the exchange policies pay a much lower reimbursement rate than normal. Won’t Doctors start avoiding the Exchange policies also? Which will leave fewer Doctors treating a greater number of sicker people for low reimbursement rates?

115 Clete N November 2, 2013 at 1:18 pm

Part of the single risk pool requirements are risk adjusters, which imperfectly try to adjust for this affect (by normalizing based on risk status to some degree) so that some insurers with poorer risks should get subsidies

116 8 November 1, 2013 at 9:51 am

So instead of insurance costs going into the death spiral, the federal budget goes into a death spiral.

117 john personna November 1, 2013 at 10:02 am

I guess if we are stubborn enough, it could. The thing is though, other models with lower costs have been staring us in the face:

Health Care Spending in the United States & Selected OECD Countries

We don’t do them because they aren’t American, or something.

118 8 November 1, 2013 at 10:09 am

That ship has sailed. America is far too diverse to pull this off now: healthcare outcomes are too different for different racial and ethnic groups and the federal solution to any disparity is more spending. All of those countries are far more homogeneous.

119 john personna November 1, 2013 at 10:14 am

I honestly think that “diversity” is a just-so story. It is something conservatives can name every time, but not because it makes any sense.

Can you connect the dots? In what way is a “diverse” nation not able to have a cheaper “national health?”

120 Dan Weber November 1, 2013 at 11:12 am

The way most other countries save money is by rationing care, either explicitly or implicitly.

Now, hear me on this: I would love to be in a plan with rationed care. I want to put $10,000 in a pool (of my choosing) and have the people running it decide how to best spend the money to improve the health of all the families in that group, by deciding that some things are worth covering and some things are not worth covering.

The problem is that there is no way that such a system would work in the United States. HMOs tried it, and medical cost growth dropped dramatically when HMOs were dominant. But people hated them and sued them for not paying for the stuff they “needed” to live, like radical chemotherapy. And heavens have mercy on a doctor who decides that what all the other doctors in his city do is dumb and a waste of money.

You can’t put such a plan in place in the US unless you get the culture to accept that there are times when the best option is not to fight. And if we had such a culture, we probably wouldn’t need such a plan to contain costs in the first place.

121 john personna November 1, 2013 at 11:18 am

The perverse thing is that the people who oppose cheaper variations on “national health” have done so by demagoging “death panels” and the like. The progressives have generally taken the “you have rationing already” line, with reminders that “your insurance company does it.” Or Medicare does it.

Really I’m afraid that you haven’t made the perfect the enemy of the good here, you’ve said the good is good, but we just can’t do it.

Am I the only non-defeatist in the room?

122 Dan Weber November 1, 2013 at 11:42 am

Yes, Republicans suck about this. If you thought this was some mood-affiliation comment, let me know so I can stop now.

Democrats also suck about this. You get a few saying “care is already being rationed” but they are the minority. The official Obama line is that Obamacare “helps protect consumers against the health care rationing the insurance companies have been doing for years.” People really really don’t want to hear that they might get turned down for something they “need” to save their life, so politicians pretend that it doesn’t exist.

The Republicans have been screaming it more now because the Democrats have been the ones pushing their new law, but the Democrats were perfectly fine to attack Paul Ryan’s plan for daring to cut care to the elderly. And, no, the rhetoric wasn’t “it’s okay to cut care for the elderly, but our plan does it a better way.” Both sides were perfectly happy to attack the other side’s plan for daring to cut care to the elderly, when, one way or another, sooner or later, cuts are going to happen. (Trends that cannot continue forever must stop.) We get the government we deserve.

The way out of this is to change people’s minds, one at a time. You can’t do that if you are only going to use it as a club to attack the other party, or to show people in your own party how much you are one of them, or to try to convince people that your political party already sees the truth and everyone should just join them.

123 john personna November 1, 2013 at 11:48 am

We have long regulated insurance companies to protect consumers, and Obama is right that Obamacare ups this ante. But we’re talking about the other territory, a single payer system of some kind. Absolutely as Democrats narrowly defend Obamacare they are not reaching for that other territory.

124 Peter H November 1, 2013 at 10:28 am

Canada is not more homogeneous than the United States. If anything, it is less so, considering it has a province with such a distinct identity and ethnicity that it has threatened plausibly to secede from the country. Also the immigration rate into Canada is far higher than that of the United States.

125 mike November 1, 2013 at 10:39 am

And of course no part of the United States has ever even suggested secession.

126 Jay November 1, 2013 at 11:05 am

Can you cite your immigration numbers?

127 Finch November 1, 2013 at 12:16 pm

IIRC, the Canadian immigration rate is something like twice the US rate. But it’s of a completely different character, since it’s largely educated and wealthy people coming through a system designed to attract educated and wealthy people.

Also, how different is Quebec, really?

128 8 November 1, 2013 at 10:19 am

Look at education. How much money is spent to close the gap between different groups? The disparities in health are similar. Look how Congress works. Once healthcare is nationalized, black politicians will look at black disparities in health and demand higher spending. Hispanics will do the same. Whites and Asians will scream if any of their healthcare spending is redirected, so the easy solution will be to spend more. It’s the way everything is dealt with in DC. If it wasn’t racial groups, it would be regional, North vs South vs West vs Midwest. But due to history and law, racial disparities carry more weight. Politicians find it easy to buy votes, and that’s what they’ll do.

129 john personna November 1, 2013 at 10:21 am

Ah, MR comment threads are so reliable. Always we get to the racism.

130 Tarrou November 2, 2013 at 7:58 am

John, there may or may not be racism, but you certainly haven’t shown that there is any in this statement. 8’s comment is merely about tribalism, and is a comment, rather than a prescription. You’re a bit hair-trigger with that racism accusation, ain’t you? 8 comments by analogizing education with health care. There is criticism to be made, but you go for the racism, gg. He then makes the jump to nationalized health care, again, there is an obvious criticism, but no, racism, eh? Then he describes a potential course of action he expects all races to take, which may describe racism, depending on your definition, but doesn’t advocate it. Then he qualifies it as tribalism by noting regional groups and explaining why he thinks race-based tribalism is stronger, again, a descriptor, not advocacy. And you call racism. Classy stuff mate. Ever hear about the boy who called “racist!”. This is why some of us have stopped caring. Sure, racism is bad, mmkay? But who can tell the racists when every argument that even tangentially mentions race is denounced as racist? If you had an argument, I think you would have made it. Calling “racism” just concedes the floor and admits failure.

131 john personna November 2, 2013 at 8:38 pm

If I had an argument I could make ut without race? I did. Higher rates of social service and taxation work.

I certainly don’t need to reform someone else’s just-so stories, offered as just-so disproof, to make them look less racist.

But more than that, face it, race popped up as the reason we cannot safely expand social services three separate times in these comments. It was *never* offered as *culture *.

132 john personna November 3, 2013 at 9:51 am

You can’t really defeat a just-so story anyway. It doesn’t have internal logic, only internal narrative. “8” says we can’t have more social services because (named) minorities (races) would take unfair advantage. What’s to disprove? That is only a story.

133 Bill November 1, 2013 at 10:32 am

I get a kick out of how people get influenced by how you frame an issue. And, this discussion is a good example.

Compare the individual rated market to the group market, for a moment and consider the rhetoric or lack thereof. That is compare the market where you go out and fill out a medical form and try to buy insurance (pay the commission, pay for medical underwriting, pay for a medical exam, disclosure your history, etc.) and compare that to the employer group model, where you are basically employed and offered a group rate based on the composition of the large group workforce.

How many of you have said: I am staying with my employer because I couldn’t get insurance if I left; how many have said “my employer group rate is lower than what I could get individually on the market’?

Let’s start with the group insurance market offered to your employer. If your employer has 100 employees, the employer is group rated–guess what, there are young invicibles in the group (which lowers the group rate), you are paying for someone’s pregnancy even if you are not pregnant and won’t become pregnant, you may have assets, etc, etc., etc. Yet, we all know, that if there is a large pool, rates will be lower than in the individual market.

Now, compare that to the health exchange. A large pool, lower rates…and now some folks say: Hey, I won’t get pregnant, why do I need that; I am invincible (just as invincible under your employers group plan, I would add), etc. Somehow the story is different. The rhetoric has changed.

Insurance is about risk spreading in large pools. Its about managing uncertainty and sharing risks.

That’s what they teach in finance. I guess not in economics. Or, at least not in political economics.

134 mike November 1, 2013 at 10:42 am

That explains why all developed nations have nationalized homeowners insurance, car insurance, vision insurance, etc. Sharing is caring, you know.

135 Bill November 1, 2013 at 1:45 pm


Actually, the difference is that not all persons own a car,

and not all persons own a home

but all persons own a life.

136 mike November 1, 2013 at 3:00 pm

Ah, so that’s why we have universal single-payer life insurance.

137 Bill November 1, 2013 at 3:51 pm

You mean social security benefits for my wife if I die, or do you mean social security disability, or social security lifetime annuity paid for with payroll deduction?

138 mike November 1, 2013 at 4:28 pm

I mean none of those, and you’re moving the goalposts for a third time now because your arguments have been exposed as ridiculous.

139 Bill November 1, 2013 at 5:03 pm

Mike, I suggest you take Shillers course on Finance at Yale as you apparently do not understand the concept of social insurance or the law of large numbers, much less risk adjustment for adverse selection. You can go to and look up the course and listen to the lectures on insurance and social insurance.

And, saying goalposts are moved doesn’t make it so, particularly when there is a string of comments in chronological order for all to see.

I stand by my comments.

140 mike November 1, 2013 at 6:10 pm

Oh I see now you’ve given up on “everyone has a life” and are back to “because it’s insurance”. I would just point you back to my comment at 10:42 where I defeated you on this argument previously.

141 Bill November 1, 2013 at 6:44 pm

Mike, everyone has a life, and everyone has social insurance. Find out why at Shillers course. It’s not a conspiracy. I think you understand my point, but feign not seeing it.

142 mike November 1, 2013 at 8:35 pm

No, I understand all of the buzzwords you accuse me of not understanding, I think you just have shit for brains and you are engaging in motivated reasoning – which is why no matter how many times I defeat your reasoning you come up with some other reasoning that comes to the same conclusion.

143 Bill November 1, 2013 at 9:32 pm

Mike, what language. This says a lot about you .

144 @YoungEcon November 1, 2013 at 11:44 am

This is why I am in favor of the “idea” of exchanges, and even the elimination of the state-centric insurance regulation apparatus. Moving away from tying insurance to employment is a net benefit. Most people don’t realize how much health insurance is subsidized based on employer provision deductions. It is a handout to the relatively wealth off, those who can find a job with a decent health plan. Equalizing who get subsidies is fair.

However, you can be against the specific implementation of exchanges and the incentives that it comes with. The incentives problems with ACA might be an economist’s worst nightmare. Everything to the 50 employee rule to the phase out of subsidies for low income possibly discouraging work, to the possible adverse selection problems (low penalty specifically). All this in addition to the political economy issues of handouts based on what was considered essential coverage which went so far to be decided at the state level. We will have to see how it all turns out, it might be a net improvement compared to what we had and it might not. However, compared to the counter factual of a policy that was even slightly more economically thought out, we are net losers.

145 john goodman November 1, 2013 at 10:55 am

Two points:

1. The premium the individual pays is not fixed as a percent of income. The subsidy is fixed, based on the second lowest silver plan premium and that amount is based on income. But the consumer is free to buy any plan. Remember, the second lowest priced silver plan may be a really lousy plan. It might have a very narrow network, for example. So, all the plans are competing against each other, with one fixed subsidy and an array of premiums. The premium an insurer charges will matter very much.
2. After 2018, the out-of-pocket premium for the second lowest priced silver plan will no longer be fixed as a percent of income. Premium subsidies as a whole will grow no faster than GDP + 0.5%, the same rate of growth that is in the Obama budget for Medicare.

146 Yancey Ward November 1, 2013 at 11:21 am


147 John Schilling November 1, 2013 at 11:07 am

What about adverse selection between bronze, silver, and gold?

The marginal value of a higher-level plan to a healthy individual – even a healthy older individual – is small. Bronze will probably be enough to protect them from severe hardship in an acute medical emergency, and they can always upgrade at the next enrollment period if they develop a serious chronic illness. Or even a mild chronic illness. This seems to me likely to drive an intra-ACA death spiral. Everybody who isn’t chronically ill gets a bronze plan, everybody who is chronically ill gets silver. With that risk pool, silver is logically priced a few ticks above the average cost of treating a chronic illness, but is subsidized so the poor and lower middle class can afford it. Gold and platinum get only severe chronic illnesses, making them prohibitively expensive even with the subsidy.

Bronze is priced for healthy people, because only healthy people sign up and they leave willingly (in the direction of silver) when they get sick. That makes bronze cheap, probably priced below the subsidy for just about everyone. For the poor and lower middle class, that makes it essentially free. Unless the law was so badly written as to allow them to pocket the difference.

So where does the money come from?

Healthy/Poor: Get bronze plans for free, conrtibute nothing

Sick/Poor: Get subsidized silver plans, own payments are a small fraction of their average treatment costs

Healthy/Rich: Pay full price for bronze plans, which is about what is needed to cover the costs of treating average healthy people

Sick/Rich: Pay full price for silver plans, which is about what is needed to cover the cost of treating average sick people.

The rich (i.e. everyone above 400% of poverty level), pay full price for their own coverage, with fewer options than they used to. They do not pay extra to cover the treatment of poor people. The poor, get most of their costs covered by the government.

This would be fun to watch, from a safe distance.

148 john personna November 1, 2013 at 11:12 am

I would guess that shoppers are not mathematically rigorous in plan selection, I bet it will be “behavioral.” People with different underlying wealth/health may have the same sensitivity to monthly costs, etc. Or people with the same wealth/health may have very different responses to premium rates.

149 John Schilling November 1, 2013 at 1:15 pm

Mathematical rigor is not required. I suspect the simplest and most common behaviors will be, “I’m healthy, but I should have insurance just on general principles/because it’s the law. What’s cheapest?”, and, “I’m sick, and the treatment is expensive. What, that I can afford at all, gives the best coverage of my condition?”

The answers are going to be “bronze” and “silver”, and this is going to drive a substantial price differential between the two. You seem to be suggesting that the dominant behavior will be, “I’m healthy but I should have a high-class insurance plan no matter what it costs!”. I do not believe this behavior will long survive a great price differential between bronze and silver, and every defector increases that differential for those resolved to stay in the high-cost pool.

150 john personna November 1, 2013 at 2:56 pm

I guess I have an idea that most people are not under treatment, and that risk is about future expenditures. My highest medical costs all trace to mountain bike accidents.

151 John Schilling November 1, 2013 at 3:30 pm

“My highest medical costs all trace to mountain bike accidents”

You realize that that isn’t even remotely normal, right? And that it won’t even be true for you a couple decades down the road?

152 john personna November 1, 2013 at 3:35 pm

I was being a bit flippant, and copping to the fact that I don’t actually know what is truly typical. Is there data about the people who have been “pre’d” out of coverage? How many of them need attention every week, and how many had a PSA or cholesterol level that was a shade high?

153 Lord November 1, 2013 at 12:43 pm

I expect convergence on the silver plans since that is what the subsidies are based on. The bronze plans are worse but no less expensive than the silver from what I have seen.

154 Larry November 2, 2013 at 12:55 pm

Ironman’s math (above) indicates that the sick will go for the gold. Gold’s out of pocket is less, assuming that costs are high enough to eat the entire bronze deductible.

155 Lord November 2, 2013 at 8:52 pm

The rich sick may, the poor sick would not be able to afford them.

156 mulp November 1, 2013 at 11:49 am

“The economics here are tricky. Insurance companies set prices both for those who receive subsidies and for those who do not.”

I lose all hope for the field of economics when I read that statement.

No longer do economists consider price connected to cost.

We can apply Tyler’s economics thusly:

“On supermarket pricing, the economics here are tricky. Food manufacturers set prices both for those who receive SNAP subsidies and for those who do not.”

Given the Obamacare marketplace serves fewer people than get SNAP subsidies, and not all buying insurance get subsidies, the SNAP subsidies will have a greater impact on food manufacturer price setting then the Obamacare subsidies will have on insurer’s health insurance pricing. In both cases, the producer is not able to select the customer.

And that seems to be the thing that confuses Tyler who thinks the producer/seller is always picking the customers and thus tailors the price to the customer he picks. But Kellogg and General Foods do not get to pick the customers allowed to buy their products. They will sell under their brand names oat cereal in O-rings that are gold and platinum but they will either supply bronze versions under generic brands, or allow their subcontractors to do so. But ultimately the price is tied to cost of raw materials, labor, capital, and marketing, The platinum brands include some significant marketing costs in the form of customer kickbacks, but the wealthy and poor can get the kickbacks, with the wealthy probably getting bigger kickbacks because the bigger supermarkets double the kickbacks and they serve the wealthy.

When economists fail to remember the basics of a free market where the price is independent of the customer and the seller but determined by the price any seller and any buyer would agree to.

If economists are arguing for marketplaces where the seller sets the price of a commodity based on who he’s selling to, that is not a free market.

157 Thomas November 1, 2013 at 12:13 pm

“If economists are arguing for marketplaces where the seller sets the price of a commodity based on who he’s selling to, that is not a free market.”

Insurance is not a commodity. Nor is insurance a unit. Insofar as I understand it, the relation of market price to cost is only that cost sets a floor for market price. SNAP does not create the same incentives, SNAP benefits aren’t equal to the second least expensive basket of goods mandated by the state.

Insurance is service in which a provider grants some immunity to future shocks in return for an expected profit. Accuracy in expectation requires knowledge of the customer. Insurance providers need to know about their customers in order to price their goods. Can you name the brand of cereal which is similar?

“When economists fail to remember the basics of a free market where the price is independent of the customer and the seller but determined by the price any seller and any buyer would agree to.”

This, in my opinion, clearly establishes that you are very mistaken. If a market price were the price that any person would buy or sell at, then the good would be worth the same to everyone and we’d be living in a fixed-pie world; trade wouldn’t be mutually beneficial. Fortunately, that does not describe reality. Those lines on a graph of supply and demand consist of dots. Some of those dots choose not to buy or sell at the market price.

158 Clete N November 1, 2013 at 12:56 pm

The more important fact is that they legally can’t discriminate in their pricing between subsidies and non-subsidies so there ends up being no price differential between the two (other than the subsidies themselves). The rates start at the same place and the subsidies are effectively discounts to the premium.

I’m not sure what Tyler originally meant by that sentence.

159 tom November 2, 2013 at 11:49 am

“The more important fact is that they legally can’t discriminate in their pricing between subsidies and non-subsidies so there ends up being no price differential between the two (other than the subsidies themselves). The rates start at the same place and the subsidies are effectively discounts to the premium.”

Your premise doesn’t follow. Those with the subsidies will become price-insensitive at certain levels of coverage/income. Someone who is required to pay at most 5k a year for insurance before subsidies kick in is indifferent between a plan that costs 6k and a plan that costs 60k if its fully covered. Thus insurers will focus on the plans that receive the highest % subsidies and angle to make them the most expensive that they can be. This prices out unsubsidized buyers.

160 mike November 1, 2013 at 1:38 pm

Does a free market require no price discrimination? I have never, ever heard of that. It sounds like you, mulp, have absolutely no idea what you’re talking about.

161 Turkey Vulture November 1, 2013 at 12:54 pm

This all seems like a mess, and I blame the obsession with “health insurance” rather than “health care.” My only hope is that this fails spectacularly, and we can get a compromise market-oriented-but-redistributive system going, such as:

(1) Government-provided catastrophic health insurance for all.
(2) HSAs with high contribution limits. Direct subsidies into these accounts for low income people. At death, any remaining HSA monies are passed on to heirs, still as an HSA. (with no stupid rule that even OTC drugs require a prescription to be covered by an HSA)

We need to combine market forces and pricing signals with our apparent desire to make sure all citizens have some level of protection against medical misfortune. People need to learn what health care costs.

162 Thomas November 1, 2013 at 2:19 pm

This. Why is something like this so difficult to implement?

163 @YoungEcon November 1, 2013 at 2:51 pm

The insurance lobby for one. Not that I disagree with that plan.

164 jonfraz November 3, 2013 at 1:06 pm

I don’t think such a plan would make non-catastrophic insurance illegal, and in fact with catastrophic expenses out of the mix, health coverage would be a lot more affordable since no plan would be at risk for more than 10K (or whatever the high deductible would be) in expenses for any subscriber. It’s the catastrophic element that makes health insurance so expensive, not the routine office visits, simple diagnostics and common Rx.,

165 JWatts November 2, 2013 at 12:10 am

The only change I would add is that I would make all healthcare expenses tax deductible and make minimal contributions to the HSA’s mandatory. This insures that most people have some funds available for regular medical spending, but if they exceed the amount they have available they can still pay with pre-tax dollars. Thus ending the preference towards employer paid plans.

166 Albigensian November 1, 2013 at 2:41 pm

I don’t see why some insurers would not deliberately choose to market to the high-risk but subsidized market, and assume they will be able to set premiums high enough to more than cover costs.

Such a plan would offer top quality insurance to customers who (because of the subsidy) really don’t care how high the actual premiums are.

If their costs still didn’t hit 80% of premiums then perhaps they could offer obscure, but costly and pleasant,”preventive’ psychotherapies to their insureds.

The only risk would be setting the premiums too low. And 20% of a huge premium is a better gross profit than 20% of a small one.

These policies would be unattractive to the unsubsidized; so? Let others serve that market.

Which is to say, is completely insulating the subsidized from the actual cost maybe not such a good idea?

167 ScottA November 1, 2013 at 4:26 pm

As a random comment – I absolutely hate the term ‘young invincibles’. I know it’s common in health policy speak but it’s quite misleading. It masks the actual problem, that young healthy people have to be tricked into signing up for an expense insurance plan they don’t need, with the veneer of a cognitive error. The concept emerges from behavior econ. type thinking – the idea that these people (I’m one of them, FYI, although I have insurance) are somehow irrationally acting against their best interests due to something like excessive discounting of small probabilities. The real concern for the exchanges is that this vital group of people is acting in it’s own self-interest by not signing up – no amount of clever marketing can solve that. I’m not entirely sure why incentives were designed so poorly. Maybe the administration assumed they could talk young people into anything after the re-elect?

168 jonfraz November 3, 2013 at 1:03 pm

Most young people who are employed at jobs that offer health insurance generally do sign up for that healthplan, so I don’t know that they think they are invincible. It’s more likely the issue for those without workplace coverage is affordability, not some false sense of invulnerability.

169 Jonfraz November 1, 2013 at 6:10 pm

The notion that changing doctors is something traumatic for the vast majority of us is absurd. Good grief, I’ve seen eight different doctors (in four different states and excluding urgent care clinic visits) since I graduated college 21 years ago. Most of us are not in some sort of relationship with our doctors, dentists or vets. If it were that big a deal we’d notice it in the labor market because people would be reluctant to change jobs, which also entails changing health coverage, and probably ending up with a different network.

170 mike November 1, 2013 at 7:10 pm

That’s pretty much the dumbest counterargument that always comes up when someone argues against statism. Well I don’t smoke pot, so I don’t see what the big deal is…

171 Jonfraz November 2, 2013 at 7:09 pm

Calling an argument dumb when you obviously did not even read it, is what’s dumb. It was not an argument about “statism” in any way (why would you think it was?). It addressed specifically the claim made by someone in this thread that people having to switch doctors would be a major source of trouble with the ACA.

172 Ethan November 1, 2013 at 9:34 pm

You can never know the specifics, but it’s pretty obvious that we’ve only seen the tip of the iceberg with Obamacare. By the time we see the rest, we’ll all have drowned.

173 ww November 1, 2013 at 9:58 pm

None of the the plans (GOP do nothing), ACA, singlepayer (medicare based) seem to say nothing about the underlying cost driver which is fee-for-service medicine. Manage Care the beast, and you would actually make headway.

174 Larry November 2, 2013 at 1:25 pm

0 It’s amazing that all these smart people are drawn to speculate without a convergence as to what will happen. I’m sure the drafters had similar discussions. Did they converge?

1 If the subsidies are fixed based on income and the 2nd cheapest silver, insurers still compete on price, and buyers still consider price.

2 Can insurers offer non-grandfathered individual plans outside the exchange?

3 Can people buy grandfathered plans that they’re not already on? (If the plan grandfathered, or just the policy?)

4 Since grandfathered plans generally cover less than ACA plans, won’t people migrate to the exchange when they get sick, allowing the grandfathered plans to improve the health/lower the cost of the associated risk pools? Seems like those plans are in a good place to become very profitable (or cheap).

5 Why do gold plans have max lower out-of-pocket than the others (per Ironman)? That drives sick people there and healthy people to the other metals. If insurers price for the pool they expect to get, why would they price that way?

Remember, it’s the very/chronically ill who drive health care costs.

175 Clete N November 2, 2013 at 8:05 pm

2. No
3. No. Grandfathering is based on if the policy existed March 23, 2010 and hasn’t been altered substantially since. You would have to join an employer who has a grandfathered plan.
5. They have to hit the gold level actuarial values which are going to require richer benefits. The two big drivers are the out of pocket max and the deductible.

176 Insight November 2, 2013 at 5:59 pm

I didn’t entirely follow the OP but there is an equilibrium (sort of) where costs just go up essentially without limit and everyone goes on subsidies. I don’t see why that is an implausible outcome over several years unless the law is changed. This isn’t really the death spiral so much as inelastic demand.

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