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CDC/ Amanda Mills
Before November’s presidential election gives Americans a final vote on whether Obamacare survives, consumers should consider the kind of health insurance that they would get under the President’s plan. So far, President Obama is withholding the final set of regulations that describe just what health benefits the Obamacare plans will deliver. He may be waiting until after the election. But there’s enough detail already in the law to make decent estimates.
The answer turns out to get a lot worse, the closer one looks. There’s good reason to believe that in short order, the health plans sold in Obamacare’s heavily regulated, state-based insurance exchanges will degrade into something akin to today’s Medicaid managed care plans. If a lot of consumers who presently get their health coverage at work are dumped into these state exchanges (as many independent analysts predict), then tens of millions of Americans could find that they’re worse off under the new law and that their health benefits have been substantially devalued.
“There’s good reason to believe that in short order, the health plans sold in Obamacare’s heavily regulated, state-based insurance exchanges will degrade into something akin to today’s Medicaid managed care plans.” -Thomas P. Miller and Scott GottliebA lot of this relates to the relatively low “actuarial value” required for most of the health plans that consumers are likely to buy in those exchanges, how that figure is determined, and the limited subsidies most people will get to buy that coverage.
Participating insurers won’t be able to increase cost sharing, or drop mandatory benefits quickly and deeply enough to escape the growing squeeze between rising health care costs and the mounting federal budget deficits. The president’s mislabeled “Affordable Care” Act is structured in a way to almost guarantee that the quality of the health coverage offered in the exchanges must erode over time.
And these health plans aren’t likely to start out as a rich set of benefits either.
That actuarial value put on the benefits that plans could offer is priced off a measure of what kind of health services a “standard population” would need. Not the cost of the care actually delivered to people enrolled in a plan. This construction will compel competing plans to offer roughly the same standardized set of benefits, with the same level of out-of-pocket costs foisted on consumers. That’s the idea behind Obamacare. It envisions health plans as commodity products, with little variation in cost sharing or the “essential benefits” that federal regulation lets insurers offer.
Because permissible cost-sharing features will become more uniform, better plans that reduce the costs of their covered health spending will be driven to compete by offering lower premiums (instead of using the savings to offer broader benefits, pay more to attract better providers, or lower out-of-pocket costs paid by consumers.)
In contrast, Medicare’s Part D drug benefit and its Medicare Advantage program that allows seniors to access private health plans each give insurers incentives to compete on benefits as well as cost. But by benchmarking the Obamacare plans off a standard set of benefits, the only incentive plans have is to drive down their premiums, mostly by driving down what they pay to providers, just like Medicaid operates. The plans will have little option but to squeeze on those aspects of the health coverage that affects their costs but don’t reduce the actuarial value of the benefits (since those financial terms are set by the federal government). That means clamping down on things such as the quality of networks and providers.
Another factor that will drive down the quality of the health coverage is the benchmark for determining how much a plan will be subsidized by the federal government. Obamacare uses the cost of the second cheapest plan in a given state market. That means that each year, all of the health plans in a particular state exchange will get priced off whatever plan had the second cheapest benefit package.
That cheap plan could be an outlier – for example, one that offers very narrow networks of providers, sold perhaps as an intentional loss leader by a healthcare business looking to penetrate a market. This mechanism was intended to hold down costs. But its effect will be to steadily reduce the value of the coverage over time.
Right now, the regulations also suggest that health plans will be able to get away with only offering one drug from each major medical category. This is a standard less generous than most Medicaid coverage and far worse than Medicare drug plans.
Finally, the law also caps how much the government can spend on subsidizing the health plans. Beginning in 2019, enrollees can pay a higher percentage of income to enroll in a particular plan if Uncle Sam’s total cost of subsidizing all of the exchanges in the prior year exceeded 0.504 percent of GDP. This arbitrary cap was put in place as a surefire formula to meet the promised costs estimates for Obamacare.
That cap is likely to be breached early because the exchange subsidies are projected to grow faster than GDP. Health plans must be cheapened further to stay under it.
The cap can be hit even faster if GDP continues to stagnate, or if the states move more of their Medicaid eligible citizens into the exchanges. The latter seems likely following the recent Supreme Court decision. It gives states the ability to opt out of the Medicaid expansion. By instead moving lower-income residents into the exchanges, then more of a state’s costs could be picked up by the feds.
With the benefits that the health plans must offer mandated by the government, with their profit margins controlled through regulation, their premiums capped by political jawboning, and the costs that they can pass onto consumers tightly fixed, the only way health plans will be able to compete on price is by cheapening the product that they offer. That means cheapening the quality of the coverage.
The President wants Americans to make peace with his law. First, consumers should know the value of their new coverage. Taken together, Obamacare’s adverse incentives will cause the quality of health benefits to be cyclically degraded as plans compete almost entirely on squeezing costs rather than raising quality.
Messrs.’ Gottlieb and Miller are Resident Fellows at the American Enterprise Institute.
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