Code Red: Two Economists Examine the U.S. Healthcare System

October 30, 2013

How the ACA Turns “Minimum” Standards into Maximum Costs

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:45 am

By now you’ve certainly seen the headlines: “Obama administration knew millions could not keep their health insurance,” or “Report: Millions will lose health plans as ObamaCare takes hold.” This is not just the rumblings of right wing media outlets or scare tactics, it is now becoming clear that millions of individuals who used to buy their insurance in the individual market will not be able to keep their old plans. As a result of minimum standard for health insurance “quality,” between 50 and 75 percent of existing individual insurance plans will be canceled.

White House Spokesperson Jay Carney said that these cancellations will only affect “substandard policies that don’t provide minimum services.” But again, the devil here is in the undiscussed details. The “minimum services” bar for the Affordable Care Act is actually very high and as a result the new policies that replace those being canceled can be quite expensive. For people who are in the unsubsidized portion of the exchanges, or even those who qualify for smaller subsidies, these minimum requirements are going to result in large premium increases. While many people might all believe that these individuals be buying better insurance, this is not the argument used to gain public support for the ACA.

We’ve both been vocal in our support of moving people onto the exchanges and away from employer provided coverage. One reason for that support has been that the exchanges allow a far better matching of individual preferences for health insurance and the products that people can purchase. Certainly that was our basis for our strong support of narrow network plans on the exchanges. Beyond the size of the network, some people don’t want to pay for generous first dollar coverage. Instead, these consumers are willing to exchange lower premiums for higher deductibles or other forms of cost sharing. Others might not be interested in having coverage for every possible service, but instead might opt for a less generous set of benefits. They will be thwarted by the ACA.

There might be some method in this madness. Supporters of the ACA took a lot of flak for mandating that everyone buy insurance. By now, we all understand that the idea behind the mandate is to create stable risk pools. Minimum coverage requirements could serve much the same purpose; insurers may offer limited benefit plans in order to cream skim healthier enrollees. Banning limited benefit plans helps assure that the healthy and the sick are in the same risk pool. This argument is based on a time-honored economic theory, and we are somewhat sympathetic to it. (Frankly, we are skeptical about whether this is the rationale behind the plan restrictions; it may simply be the case that the ACA designers think they know best what constitutes a “good plan.”)

But our sympathy is limited. Plans that have extremely low annual and lifetime caps may be little more than exercises in cream skimming and perhaps should be banned. But bans on high deductible plans and broad benefit mandates for features such as free preventative care or contraceptive services fly in the face of other powerful economic theories. High deductible plans, and plans with substantial copayments, greatly limit moral hazard and hold down costs. At the same time, research evidence suggests that high deductible health plans are only weakly preferred by healthier enrollees. With little to fear in terms of cream skimming, why not let enrollees who prefer the low premium/high cost sharing tradeoff choose the plan that best matches their preferences? It seems that the architects of the ACA have let concerns about one economic theory (cream skimming) dominate another (moral hazard). And while plans that do not offer generous coverage of a wide range of medical services may enjoy some favorable selection, some enrollees may not value this coverage because of personal preferences independent of their medical needs.

A great benefit of exchanges is that they enable matching of consumer preferences and plan characteristics. This holds the potential for substantial cost savings. But the current regulations of the ACA force insurers must sell identical products, which is antithetical to matching. Once again we are reminded of President Obama’s promise when he was promoting the ACA: “If you like your health care plan, you will be able to keep your health care plan. Period.” Surely the President knew this would not be the case. Not even close. But it sure made for a better sound bite than: “If you like your health plan, then we have bad news for you. You will only be able to keep your plan if it meets the United States government’s definition of what you need. We don’t believe that you are able to make the decision for yourself, so we took care of that for you.” This would be far less popular, but has the advantage of being more accurate. Were right wing claims about death panels any less accurate?

We have not even mentioned the impact of plan limitations on innovation. Had the ACA been in place 15 years ago, no one today would even know about high deductible health plans. We can only speculate about the plan designs that we will never see in the future thanks to the ACA.

Forgive us if we are not comforted by this paternalistic approach.


  1. Another thoughtful post. For the most part I agree, except in the assertion that passage of the ACA limits innovation for all time. The ACA is probably just the first of many reforms needed to keep the private health care financing system working. Near-term reforms must I think include changes to the ACA to encourage people to purchase individual insurance policies and to remove penalties on employers who stop providing insurance benefits. Likewise, future Congresses can loosen the regulations on minimum benefits to better control costs, better match what people want and need, and allow insurers to install incentives to encourage healthy lifestyle choices. Had the ACA been in place 15 years ago, a lot of uninsured and underinsured people might not have had to spend their life savings on expensive illnesses and accidents, but any Congress could have taken the high-deductible/HSA idea from Heritage and other think tanks and made it law. Thanks for the posts. Really liked the one on narrow networks.

    Comment by Jonathan Nelson — October 30, 2013 @ 10:19 am

  2. Most of the mandated benefits of the ACA have been included in group insurance for some time — i.e. maternity benefits, drug benefits, and high annual and lifetime limits.

    They were not always present in the individual market, for a very simple reason.

    In the individual market, no one is supporting the individual buyer. That buyer has to control costs himself.

    The drafters of the ACA ( and many Democrats) believe that everyone in the USA should have a health plan comparable to good group insurance.

    That is not an evil impulse at all.

    The ACA drafters included subsidies which (they thought) would be kind of like employer support

    But they underestimated I think how many individuals would need to go to the exchanges but would not get subsidies.

    Comment by Bob Hertz — November 24, 2013 @ 4:37 pm

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