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A pessimistic thought on the exchanges

In the House health-care reform plan, the exchanges are expected to serve 21 million people in 2019. Almost all of those people come from the uninsured population or don't make enough money to afford the coverage their employer offers. That is to say, almost all of those people will be eligible for premium subsidies. The numbers in the Senate finance bill are very similar.

I'm a longtime proponent of the exchanges, but key to their functioning is their ability to serve a population that's not entirely low-income. For one thing, you don't want them stigmatized as a place where poor people get health-care insurance. But for another, it's not clear that they'll be particularly competitive if they're primarily serving a subsidized population.

Imagine that my family makes $45,000 a year. That puts us at about 250 percent of the poverty line. In the Senate finance bill, our premium contribution is capped at $4,349. Surveying our options, I see a plan from Aetna that costs $10,000, a plan from Kaiser that costs $9,000 and a plan from Cigna that costs $11,000. All seem pretty similar, but then, I'm not an expert in these things. Which do I choose?

You might say I should choose the Kaiser plan. But why? It's cheaper, but it's not cheaper to me. After all, my contribution is capped at $4,349. Moreover, it's generally true that things that cost more are better. It stands to reason that Cigna is giving me something for the extra $2,000. Indeed, I'm being subsidized to the tune of $7,000, as opposed to $5,000. It's clearly a better deal.

Maybe there are elements in the plan that somehow protect against this, and I've just missed them. But I don't think so. And though this dynamic isn't terribly important in a world where the exchanges are large and lots of unsubsidized customers are creating competitive pressures, they might be very significant in a world where the exchanges are limited to people who need to be subsidized, and so are facing a different cost calculus.

By Ezra Klein  |  November 2, 2009; 2:40 PM ET
Categories:  Health Economics , Health Reform  
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Thank you for the belated questioning but it really would have been nicer if the media focused on questioning the actually policy issues while the legislation was being written and not now when we are in the end game. the questions being raised in this latest series of posts should have been done months ago. now we are left with a bitter choice between either a deeply flawed bill or nothing. better late than never but i really wish it had been sooner.

Posted by: PindarPushkin | November 2, 2009 3:08 PM | Report abuse

The subsidies and caps convert from % of income to % of premium after the first year. So someone did think of this, but it is dealt with in a way that leaves struggling familes continuing to face spiraling health care prices--with perhaps a brief respite courtesy of their fellow taxpayers higher up the income ladder. Affordability due to lack of cost controls is what will bring this bill down.

Posted by: bmull | November 2, 2009 3:30 PM | Report abuse

Ah yes, if only there was a blog somewhere, where some weird guy had been endlessly whining about how the exchanges needed to be opened to more people...

Posted by: Ezra Klein | November 2, 2009 3:42 PM | Report abuse

'PindarPushkin' you are not alone in thinking so. We are all screwed is a simple fact.

Imagine those under poverty are subsidized and health care costs continue to increase (because Senate plan of Excise on insurance does not go through but the House plan of taxing rich to fund these subsidies goes through, as well as the litany of reasons why costs are not controlled); how do we assume that Fed will stop the increasing burden of those subsidies? Will it be politically possible for any party to do that?

So one naive idea was, collect your dollars first and us that to fund subsidies for the next year. In the year funds are collected less, following year subsidies will be low. In the year when funds are more, more people will be insured. Keep these subsidies on 'auto pilot' so at least the damage to the general budget is contained. Of course, Obamas of future can pass their own ‘stimulus’ packages in future as needed to help ‘needy’ whenever recessions hit. This year’s stimulus package where at least $80B goes for Medicade, States, has been a good precedence.

As of now today there does not seem any such containment or at least we are not aware (or we are not ready to believe those in their current forms).

But hey, Ezra is 'cleansing' himself here. At least nobody will be able to blame him for not pointing out these problems!

Posted by: umesh409 | November 2, 2009 3:47 PM | Report abuse

Good work Ezra, this is one point I've not seen already or written on.

It's elementary to someone thinking like an economist or business person that incentives count. There should be someone on staff for the Congressional staffs working on the legislation for whom it is second nature to think on effects like this and set up the numbers correctly.

Just ordinary business or economist sense would be to set up the incentives to aim people into choosing good value.

That's not hard at to devise.

For instance: the subsidized insurance buyer pays 25% of the cost difference between the plan they choose and the lowest cost plan that has the same actuarial value. (The defined levels in the exchange for plans of "bronze," "silver," "gold", etc. are the actuarial value levels.)

What's surprising is the blind spot on the part of the policy makers not to see this already.

They need economists or retired business people on staff!

Posted by: HalHorvath | November 2, 2009 3:52 PM | Report abuse

From CBPP:

"After the first year, the plan would shift to a cap that requires households receiving premium credits to pay a set percentage of the insurance premium amount, rather than a set percentage of their income. Since health insurance costs — and hence premiums — are expected to rise faster than incomes, the percentage of income that people receiving premium credits would pay for premiums would increase over time...

The 8 percent affordability exemption — i.e., the percentage of income above which a household would be exempt from the penalty if it did not have insurance — would be adjusted annually in the same way."

Posted by: bmull | November 2, 2009 4:03 PM | Report abuse

bmull, that's a relevant provision. Is that in the House bill, or the Senate?

Posted by: HalHorvath | November 2, 2009 4:38 PM | Report abuse

It's in both bills--beginning on page 252 of the House bill.

Posted by: bmull | November 2, 2009 4:45 PM | Report abuse

But the exchanges are going to cover everyone in the individual and small business marketplace. You're going to bring in everyone who currently has one of those policies, and everyone shut out based on age and medical history (pre-existing conditions.) So I don't think you're getting a disproportionate number of people shut out because they can't pay, although you'll bring in those as well.

Posted by: losangeles1 | November 2, 2009 4:49 PM | Report abuse

You could fix this by standardizing plan offerings. So, in effect it's an apples to apples comparison.

Posted by: cfuller1 | November 2, 2009 4:51 PM | Report abuse

You don't always get more when you pay more. Not by a long shot. With Kaiser you never worry about coverage or have to pay then seek reimbursement. If the Dr orders it, you get it. Sometimes if one Dr won't order a test, another will, if you really think it is needed. Plus you get e-mail access to Drs and all kinds of info. Take Kaiser, the freedom from aggravation alone is worth whatever else the for-profits dangle in front of you to get your premium dollars.

Posted by: Mimikatz | November 2, 2009 5:34 PM | Report abuse

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