Obamacare Schadenfreude A Go-Go

What’s Happening to Obamacare’s PPOs? Health plans that will pay for out-of-network care are disappearing from the insurance exchanges. Here’s why.

The PPO problem is rooted, in part, in individual consumer behavior. Many customers on the exchanges are going for the low monthly premiums, and they’re willing to take a narrowly restricted medical network that doesn’t compensate for out-of-network charges except in an emergency as the price they pay for the lower monthly bill. For those who are healthy and unlikely to go to the doctor that often, that’s a rational, financially prudent decision.

But not everyone has perfect health. No surprise, they’re the ones most likely to seek plans that are likely to cost more money but offer greater benefits in return. “People who have high medical expenses value continuity of care the most, they see the doctor the most, they have complex medical situations,” Chandler says. That drives the prices up, potentially pushing even more purchasers away. As for the insurers, many claim to be losing money on these plans. Blue Cross Blue Shield of Texas, for instance, says that in 2014 it paid out $400 million more than it received in premiums for a PPO plan, one that it’s no longer offering.

In some ways, what’s going on in the individual health insurance market is not dissimilar to the situation faced by airlines. Everyone likes to decry rock-bottom airplane service, but there’s a reason it continues: Again and again, consumers opt for it via bargain airlines and low fares. But health insurance is different in one key way: When it comes to flying, first-class tickets are easy to find. On many state exchanges, individuals seeing to buy coverage face a situation akin to every airline that offers first-class service dramatically cutting back, leaving almost everyone to the mercy of discount airliners. 

Obamacare Premiums to Rise 7.5 Percent

Even the generally Obamacare-boosting Vox delivered its readers some bad news about the Affordable Care Act today:

No matter how you slice the numbers, Obamacare premiums will rise significantly next year. The Obama administration estimates rates will rise 7.5 percent in 2016, compared with 2 percent in 2015.
Insurance markets are complicated. But the story of Obamacare’s 2016 premium increase is actually pretty simple: Many health plans — even those with decades of experience selling insurance — underestimated how sick health law enrollees would be. […]
As prices get higher and as some health insurers scale back their benefit plans, there is the possibility that some consumers might decide coverage isn’t worth it. Premera Blue Cross in Alaska already found that new members who joined the plan in 2015 had health care costs 40 percent higher than those who did not renew.

Vox notes that the big question going forward is whether hikes will be the “new normal.” One fear is that the premium increases currently being phased in will push some healthy people out of the marketplaces (a circumstance that could in turn lead insurers to raise premiums again next year). The Vox piece doesn’t come down especially hard one way or the other on the question of how the hikes will effect enrollment, noting arguments and evidence on both sides. How consequential these hikes will be remains an open question.

But in the meantime, it’s important to look at the bigger picture. President Obama and ACA supporters seized on early premium numbers as evidence that the ACA was working. The Vox piece now admits that those initial numbers were not sustainable. Will other ACA proponents now admit that the law isn’t bringing down costs for Americans they way they thought it was?

Will we ever get tired of saying "I told you so"?

A parable from the ever usually sensible Megan McArdle: There's No Miracle Cure for Health-Care Costs

A long time ago, back when people still filled out expense reports by hand instead of spending three hours trying to get the online expense system to work, a man took a client out for a week on the town. He had a very good week, and at the end of it, he escorted the man out of the restaurant where they’d had lunch to put him in a cab to the airport. Noticing that it was raining, he whipped out an umbrella to protect his customer from the rain. Unfortunately, just as the happy man climbed into the cab, a gust of wind shredded the salesman's umbrella.

Fret not, the delighted customer gave his firm a huge order. And the salesman duly submitted his expense report for $122.46. At the bottom, he listed “1 Umbrella: $3.99”. (Yes, as I said, it was a very long time ago.)

The next day, his expense report came back via interoffice mail with the umbrella x’d out in red and a note from accounting. “You cannot expense an umbrella” it read. “Please fill out a new report and resubmit.”

Our perplexed salesman sat down and wrote out a helpful note explaining that the umbrella had been lost while sheltering a client during a sales call. Then he laboriously filled out a new expense report for $122.46, with “1 Umbrella: $3.99” again listed at the bottom.

You can probably guess what came back in the interoffice mail the next day. The notes flew back and forth, with increasing degrees of venom. Eventually he got a note written entirely in red pencil that said “I will not approve any expense report with an umbrella on it. Fill out a new expense report without it, or good luck finding a new job.”

The next day accounting got a new expense report for $122.46 and a note appended, also in red pencil, that said "As requested. Good luck finding the umbrella.”

Looking at health care prices in isolation is a great deal like playing find the umbrella. For example, if Medicare or an insurer refuses to reimburse a hospital for sending a well-paid nurse to someone’s bedside to administer a pill, they may price the pill at $10. That doesn’t mean they’re necessarily gouging on the pill; it just means that the price includes more than the pro-rated cost of a bottle of Tylenol.

Doctors, hospitals, other providers don’t care about the prices for individual services. They care about whether they can cover their costs. If you drive down the price of one thing very low, other prices may rise to compensate. If you look at just some of the prices, you may seem to have won a great victory on health-care costs. But if you look at aggregated spending, you may still find that you are losing the war. Or at least, the umbrella.

Will Democrats Sink the ACA?

Among Democrats, there’s at least one part of the ACA that’s unpopular: the law’s so-called Cadillac tax. This provision, which is supposed to take effect in 2018, taxes plans offered by employers that pass a certain threshold: individual plans that cost over $10,200 annually or family plans that exceed $27,500. The total amount that a company pays over those thresholds for is taxed at 40 percent. Hillary Clinton—as well as some unions—have come out against this tax.

In Bloomberg, Peter Orszag, a former director of the Office of Management and Budget, argues that this Democratic opposition to tax is the “biggest legislative threat the Affordable Care Act has faced in the past five years.” More:

The health legislation was built on three pillars: It was to expand insurance coverage to more Americans, have at least a neutral effect on the U.S. deficit, and contain health-care costs […]
The Cadillac tax, which is to be imposed on high-cost employer-sponsored health insurance plans beginning in 2018, reinforces the ACA’s second and third pillars. In 2025, it is expected to generate more than $20 billion in revenue — or about 15 percent of the net budget cost of expanding coverage that year […]
By encouraging employers to avoid high-cost plans, the tax encourages them to find insurance of better value for their employees, and it helps offset some of the excessive spending that economists attribute to the longstanding tax preference for employer-provided insurance. The Congressional Research Service has estimated that, by 2024, the tax would reduce health spending by $40 billion to $60 billion.

Why are Democrats opposing it, then? Orszag argues that the opposition springs from short-term thinking. In the immediate future, the tax could result in more health care costs being shifted directly on to the worker (there are other concerns, too). But Orszag thinks that will eventually pass, and in the long term, the total cost of health care will come down thanks to the tax.

The Cadillac tax was one of the sneaky feature that economists like Gruber inserted into Obamacare. While it does serve to disincentive high cost plans by employers, isn't that really their business? How does that hurt anyone besides the employer. But the killer app was that the Cadillac tax was not indexed for inflation. Under the Cadillac tax as written, all insurance funded by employers will eventually become subject to the tax.

Incidentally, as part of the new budget deal, the Cadillac tax was delayed, not repealed, until 2020:

We're talking about the much-reviled Obamacare Cadillac tax, which is set to levy a hefty 40% excise tax on employer health plans that are considered generous.

The tax suffered its first body blow this week, with lawmakers on both sides of the aisle agreeing to delay its implementation until 2020, instead of 2018, as part of Wednesday's budget deal. President Obama has even said he'll sign it, which would make it the first significant change to Obamacare that Congress would get past his desk.