‘Choice’ is Trojan Horse of medical insurance
Sometimes, in some weird markets, too much consumer choice can be a bad thing. Unfortunately for Republicans, health insurance happens to be one of those weird markets.
Republicans believe the problem with the health-care system is that Americans are forced to buy too much insurance, in plans that are too prescribed. Their solution is to give consumers more choices for what kinds of plans, including no plan at all, they can buy.
The Consumer Freedom Option, recently proposed by Sen. Ted Cruz, R-Texas, is emblematic of this: It would allow insurers to sell plans that don’t comply with Obamacare regulations — such as protections for pre-existing conditions — so long as they also sell at least one plan that does.
“We’re guaranteeing them exactly what they have now but giving them more options,” Sen. Mike Lee, R-Utah, said last week. “Options that would inevitably unleash free-market forces, that would in turn bring down the price of health care.” And who doesn’t like options? Choice is as American as apple pie, a core perk of living in a capitalist society. We are free to choose whatever car or yogurt we want, from an enormous menu of colors, features, flavors and prices, and economists, generally, believe we’re happier for it.
But the health insurance market has some distinctive properties that mean too many choices can lead the whole market to unravel. This would leave nearly everyone — consumers, insurers and health-care providers — much worse off.
Why? The answer is somewhat counterintuitive. So counterintuitive, in fact, that the economists who figured it out won Nobel Prizes for the insight. Let’s take it step by step.
At its core, offering greater “choice” in health plans means eliminating both standardization and basic quality minimums.
Eliminating standardization — for example, Obamacare’s rules for what benefits are covered, coverage tiers and out-ofpocket maximums — would make it much harder for consumers to comparison-shop.
Shopping for health insurance is already super-complicated and time consuming, and lots of people make objectively bad choices. You have to comb through fine print and in-network doctor lists. You have to sort out which deductibles and premiums match your family’s likely needs and risk tolerance. Imagine how much more complicated this would become if insurers could offer many more plan configurations with more hidden exceptions and fewer quality controls.
Maybe one plan covers breast cancer but not throat cancer. Another covers statins, but only if you’ve never been diagnosed with heart disease, or maybe just one month’s supply. With so many variables, and so much opportunity for obfuscation, apples-to-apples comparisons become impossible.
Consumers might also end up buying “mini-med” insurance that turns out to cover virtually nothing. This happened a lot pre-Obamacare.
There’s a larger problem than consumer confusion, though. It’s that the entire individual market would fall apart under Cruz’s plan because of adverse selection — the idea that people with higher health costs will self-select into more generous coverage.
The cost to a supermarket of selling you a yogurt is basically the same as the cost of selling me a yogurt. That’s not true for health insurance, where I might turn out to be a much more expensive customer than you are.
In a world where patients know more about their health status, — e.g., a bum knee — or future health spending — e.g., pregnancy, long-delayed surgery — than insurers do, insurers try to attract only the cheapest, healthiest enrollees by offering the cheapest, stingiest plans. Cruz would eliminate quality minimums, remember.
When consumers have a choice of many plans, and insurers can tweak those plans to attract the healthiest patients, you get a death spiral.
In Cruz’s health insurance market, sick people would end up in the relatively generous Obamacare-compliant plans, which couldn’t turn away patients — and healthy people would get siphoned off into the mini-med plans, which could. Or these healthy people would drop their insurance altogether, since there would no longer be a mandate.
With only sick people in the Obamacare-compliant plans, the plans would become very expensive, causing slightly less sick people to drop out, causing the pool to get even sicker and costlier, causing even more people to drop out. And so on.
Cruz says the government would kick in money to subsidize coverage in these plans, but we’ve already seen how limited Republicans’ appetite is for adequately funding high-risk pools — which Obamacare-compliant plans would essentially become.
In the end, we’d have what we had on the individual market pre-ACA: healthy people buying razor-thin coverage, and few good answers for everyone else. All because Republicans gave consumers, and insurers, that beloved freedom to choose.