You Can’t Put a Price on an Offer That Doesn’t Exist

Recent reports from The Heritage Foundation and the American Action Forum claim that Americans (particularly young Americans) will pay more for health insurance in the new exchanges set up as part of the Affordable Care Act (ACA, or, Obamacare if you like) than they do currently. The question of how much prices differ between the current non-group market and the new health insurance exchanges is awfully interesting, but very difficult, if not impossible, to answer. And to be very clear—neither the Heritage nor the AAF studies do much to shed light on it.

Transparent prices are now widely available in the new health insurance exchanges.1 There are advertised prices for a variety of policies, for consumers in different age groups, and, similarly, subsidies can be calculated for a continuum of income levels. And these are the prices that people will actually end up paying.

Now, let’s contrast that with the non-group market before the ACA. First, the insurance policies often compared to the exchanges do not line up in terms of benefits. Policies in the individual market often have higher deductibles and exclude various conditions from what’s covered by the policy. The policies offered in the exchanges generally offer more comprehensive coverage, and hence should be more expensive on average for this reason. Second, in the pre-reform non-group market, list prices don’t reflect the true prices people will actually end up paying. The individual market, in most states, does individual risk rating. This means the insurance company (often on a website) will give a price, but then they will do an individual risk assessment, for instance, by sending someone to measure an applicant’s blood pressure, weight, etc. At that point, the true price is given. Not surprisingly, it can turn out to be higher than the price listed. This price can be effectively infinity, by the way (more on this below).

There is an exception. List prices in community rated states should more accurately reflect actual prices. Community rating means that different prices cannot be charged to different consumers. Notably, insurance companies in community rated markets can’t change higher prices to people they think will cost more, a.k.a. people with pre-existing conditions. In the most extreme, pure community rated states do not allow rate changes along all of these lines: health status, age, gender, tobacco use, or industry. In 2012, two states met all those restrictions: New York and Vermont. According to the Heritage Report, Vermont has one of the high increases, while New York had a price reduction in the exchanges. Arguably, they should both be around the same before and after the exchanges. The difference calls their methods into question.

Even beyond community rating, the claim that pre-reform non-group market prices provide useful information for comparison is completely invalid. The fact is, unless you live in a state with guaranteed issue, you can be simply denied the policy you desire, at any price. Prior to the ACA, only six states guaranteed issue all insurance products offered. If you apply for a policy in another state and are “undesirable” to insurance companies, you may never see a price for that policy. You simply cannot put a price on a policy that doesn’t exist.

But, the prices in the new health insurance exchanges are transparent. What you pay is what is listed (or less if you get exchange subsidies). The Heritage report explicitly ignores the fact that many people purchasing in the exchange will be subsidized such that the premiums listed are, in some cases, far higher than what will actually be paid. And, the big deal the American Action Forum makes out of young people is completely overblown. Many young people are also lower income (simply because they are in the early years of their careers) and will therefore get subsidized coverage. While it’s true that young, healthy people with high incomes may pay more, the biggest winners are the most vulnerable among us, those who arguably need coverage the most. And, young people, if luck is on their side, may get old someday, or, unluckily, may get sick. Voila… the beauty of social insurance.

Endnotes

1. I’ll admit that it’s not easy to navigate and you need to register to get the full information. But, it does exist.


  • The Kielich Law Firm

    The rate increases on individual policies can more than double the initial quote. By the time those individual policies have been rated up for various pre-existing conditions and exclusions applied for other pre-existing conditions, the cost of what little coverage is provided often exceeds what is available through the exchanges.