Clinging To Orthodoxy

I'm somewhat saddened to see the Century Foundation hopping on the self-insurance mandate (PDF) bandwagon normally associated with the New America Foundation. The basic idea is that the government will specify a mandatory minimum level of coverage that everyone needs to buy from some insurer or other. The government will then offer individuals subsidies, as necessary, to make sure they can afford the premiums. If you want to offer additional services beyond the minimum, you're welcome to do so, and if you, as an individual, want to buy such a plan you're welcome to pony up the additional premium money out of pocket. Companies will need to offer whatever plans they offer on the basis of a single price for whoever wants to buy in. The idea is to get universal coverage, large risk-pools, and other good stuff while still maintaining the benefits of competition.

I think this doesn't work. The basic problem is that in a normal market, if you offer a better product than your rivals, you get more customers, and therefore make more money. It's not at all clear that this would hold under the sort of schemes TCF and NAF are proposing. Some customers will have above-average health care costs, others will have below average costs. Adding customers with above-average costs will lose money for the insurance company.

If I were running a company under this scheme, here's what I would do. First, look at the basic stuff I need to offer. Then, put together a restricted network of physicians to offer the required services. I would put this network together by trying to deliberately weed out doctors who have good reputations. You don't want anyone so inept he's lost his license, but you're looking for bad doctors within the realm of reason. Ideally, you also look for people whose offices are inconveniently located, dirty, etc. You're meeting all the minimum standards, but you're doing it in a super bare-bones way. Next, you add-on some nifty additional benefits. Free gym memberships. Massage therapy with a copayment. Health care schwag, basically. Organize local sports leagues for plan members or something. And invest in a marketing campaign aimed at making your plan look cool.

What you've got, basically, is a plan that will be attractive to young, healthy people and unattracted to older people or folks who have reason to worry about their health. You're within the basic minimum mandates, but people who do things like spend time asking about doctor quality aren't going to join your plan, since you've restricted the network to crappy physicians. People who don't pay much attention to this sort of thing may just get suckered in by your marketing, may carelessly choose your plan, or -- best of all -- will be attracted by the free gym memberships and so forth. Now your plan's well-positioned to make a lot of money. You're getting national-average premiums for each of your customers, but paying out sub-average amounts in health care costs, since the vast majority of your enrollees will have above-average health.

But say a second plan opens up business in town with a similar model. Now you've got competition. Faced with competition, you need to improve your business model. So you need to sign up some less-crappy doctors, right? Wrong. Improving your core health care services will be bad for business, since the additional customers you'll get will be the less-healthy sorts. You want to try and make your core health services worse, driving your less-healthy customers into the arms of your rival, while beefing up spending on tangential goodies and marketing and so forth.

The basic problem is that for a market to produce the sort of good things we associate with market competition -- lower prices, better products, etc. -- you need to have yourself a real market. Real markets have downsides, of course, in terms of distributive consequences and so forth. Try to regulate those consequences away, however, and you don't just get to keep the good aspects of your former market. Once you create an oddly-structured market, with mandates and price controls and so forth, you're going to get a market that functions oddly. An insurer who's allowed to charge what he wants to whomever he wants has an incentive to make his product attractive. Each customer will be priced in a way designed to maximize expected profits, so you want to sign up as many customers as possible. An insurer who's forced to take on certain clients under terms where he's expected to lose money has incentives to do the reverse -- try to make his product unattractive to large swathes of the population in order to avoid getting stuck with the money-losing clients.