It’s re-enrollment time for people who get individual medical insurance through the state exchanges established under the Affordable Care Act.
In our state, this is MNsure. As this was the most contentious legislation of the Obama administration and as we are days from a presidential election, problems with the exchanges — particularly sharply higher premiums and shrinking numbers of participating insurers — are getting a lot of attention. This is good, but health care in the U.S. is mind-numbingly complex and much misinformation is disseminated, sometimes inadvertently and sometimes maliciously. So a review of some basics may be helpful. So is an examination of why the state exchanges were a favorite measure to economists for so long and yet have proven so problematic.
THE BASICS
First, MNsure has a very small share of total health coverage, as do all other state-run exchanges and those administered by the federal government in states that refused to establish their own.
Nearly 65 percent of all Minnesotans from birth through age 64 are covered by insurance through employer plans, whether these are private, for-profit businesses, nonprofit private-sector institutions or by some level of government. Some additional 900,000 are on Medicare for those 65 and older. Some Medicare beneficiaries, myself included, also have some supplemental coverage from preretirement employment, whether private sector or public. (For me, it’s “Tricare for Life” coverage as a military reservist retiree.)
About 213,000 more people in Minnesota are on Medical Assistance, which is Minnesota’s program for administering the federal Medicaid program for low-income households. And some 67,000 families still get coverage through MinnesotaCare, a long-established, state-subsidized and -administered program for low-income people who do not qualify for Medical Assistance.
So that leaves the rest to seek insurance in the individual market. About 74,000 policies were purchased on MNsure as of March 1, 2016. This is out of a total of some 250,000 individual policies sold in the state. The rest were procured through traditional insurance marketing channels.
So policies purchased through MNsure indeed represent only a very small component in a complex web of programs.
Second, what constitutes “costs” needs to be defined. The past several years have produced some complex and seemingly contradictory trends in costs for medical services and in the cost of medical insurance. The two are not the same.
In general, the costs of medical services themselves have risen more slowly since the implementation of the ACA than in the decade before it. When advocates of the ACA talk of how it succeeded in “bending the cost curve,” they are correct so far. This reduction in the rate of increase in the cost of medical care itself is a factor in a somewhat improved outlook for the solvency of Medicare.
That slowing of cost increases for services is not evident to most consumers, however. That’s because the overall costs of medical insurance continue to rise, as they have for decades, although at a somewhat slower pace than in the past. This is a highly variable rubric, however. There have been lulls before, as at the end of the 1990s, that were followed by years of marked increases. Current increases are lowest for large-group policies and higher for small groups. That stands to reason as the larger the group, the smaller the individual risk.
In the individually-purchased fraction of private health insurance, however, prices have been rising faster than for all coverage, and, as widely reported in recent months, these increases are particularly sharp for the subset sold on state exchanges.
CHALLENGE FOR ECONOMISTS
For economists, the sharp increases in the prices of coverage sold on state exchanges should force some examination of why we were wrong. Establishment of such exchanges has been a feature of health care financing reform proposals for at least 30 years. The idea found favor both with economists who are politically liberal and those who are conservative. It was included in a proposal originally drafted for the conservative Heritage Foundation in the mid-1980s that was influential in shaping the bill that Senate Republicans proposed as an alternative to the government-run plan set out by then-first lady Hillary Rodham Clinton’s task force early in her husband’s first term. And such an exchange was key to the plan adopted in Massachusetts when Republican Mitt Romney was governor. (Remember this as an issue in the 2012 election?)
Moreover, the basic model of private insurers selling policies directly to households in a government-organized market is at the core of some successful European systems, notably Switzerland’s. So this was a mainstream idea and not something hyper-liberal as enemies of the ACA often assert.
Despite the broad appeal of the general idea of exchanges to many economists, including me, as implemented under the ACA, they certainly have been problematic.
Stepping back, exchanges appealed to many economists — and politicians — because these would use private market forces to implement a public good rather than having government itself administer a program. That is the same appeal of emissions charges to control pollution or tradeable fishing quotas to manage a natural resource.
But students in any introductory econ course learn what conditions must be true for markets to have optimal outcomes: There must be many sellers and many buyers. There must be no barriers to new sellers entering the market. The product itself must be a uniform one. All participants must have good information on the product and on what is bid or offered. There must be equal bargaining power on both sides. There cannot be any externalities, either positive or negative.
There are few goods or services for which all of these conditions hold. Yet private markets remain the best, or perhaps the least-bad, alternative in many cases. The fact that a private market does not work perfectly does not mean that any alternative implemented by government automatically would have better results.
But there are few products for which these conditions fail as completely as they do for medical services and medical insurance. There are few suppliers. There are barriers to entry. Information is very scarce and is asymmetric. The products are not “homogeneous” or uniform. Bargaining power is extremely skewed.
Such problems were the primary reason why insurance exchanges did not arise naturally, the way markets for carrots or used pickups did. And the fact that government acted to establish exchanges did not make these deficiencies disappear.
For example, any given state has a very thin, illiquid market with a handful of insurers choosing to sell. There is competition, but in a situation of “oligopoly,” in which the actions of one supplier has great influence on the price and quantity decisions of all other suppliers.
There is poor information for both sellers and buyers. A primary reason for high premium increases now is that sellers did not really know beforehand what sort of costs they would have. This depended very much on how many sick people would buy policies and also on how many healthy people would chose to go without coverage, albeit accepting to pay a penalty. Sellers underestimated what their costs would be or overestimated the average health of buyers. They lost large amounts when things actually got underway and are either throwing in the towel or raising prices to make up for that now — or both. So is it market failure? That is yet to be determined.
MORE ON COSTS
The complexity of measuring household outlays and price trends for medical services and insurance is evident if one goes to the FRED economics database maintained at the St Louis Federal Reserve Bank. There are 165 distinct medical service data sets within the “National Income and Product Accounts” centering around gross domestic product. There are another 57 sets in a “Health Care Indexes” category within a broad “Prices” category. And then there are 25 more series within a separate “Consumer Prices” rubric of this same “Prices” category. These last are historic series going back decades.
The set of 57 indexes were established to provide data on specific categories like “nursing homes,” “infectious diseases,” “neoplasms” or “pharmaceutical and other medical products,” but unfortunately, go back only to 2000 and are updated with a lag of more than a year. Nevertheless, the FRED database remains an invaluable source of easily downloadable files for medical financing data and all other economic indicators.
Obviously, much more needs to be said about this issue. It is easy to criticize what has happened so far. But those who pledge to “repeal every word” or “repeal and replace” the ACA have produced only highly abstract alternatives. Others who promise that “single payer” (meaning government pays) would make all these problems disappear are similarly misguided.