A Woman May Die Because of ObamaCare

For the past 20 years I have been trying to convince my colleagues in the health policy community that managed competition contains perverse economic incentives. These incentives do more than misallocate resources. They create ominous risks for the health and safety of patients with serious medical conditions.

Consider the editorial in Monday’s Wall Street Journal. If you are inclined to believe Barack Obama’s claim that people losing their insurance are giving up skimpy coverage for much better benefits, read the editorial again, and again, and again.

The patient in question has a rare form of cancer that is almost always fatal. Yet she is alive, thanks to the efforts of doctors in San Diego, at Stanford University and in Texas. Over the past year, UnitedHealthcare has spent $1.2 million on this woman’s medical expenses. But she has just been informed that her insurance is being cancelled. And in the new California exchange, the only plan that will allow her to continue seeing her San Diego doctors will not pay for the doctors at Stanford or in Texas. There is no reimbursement for out-of-network services.

Here is my prediction: the kind of coverage this woman had will never again be seen in the individual market in this country.

You don’t need to be an economist to understand why. Think of a game of musical chairs. The health insurers are the chairs. And not a single one of them wants a patient who will spend $1.2 million of their money.

The circumstance under which insurance companies will find it in their self-interest to offer the kind of coverage UnitedHealthcare offered is a market that is free to price risk. Only if people are free to pay actuarially fair premiums can insurers offer the kind of coverage that will pay enormous sums of money to deal with illnesses that have a very low probability of occurring. In a community rated system, plans that are appealing to the sick will attract the sick, who will inevitably be paying premiums that are far below the cost of their care.

Under managed competition, health plans are free to select any premium they choose. But they must charge every entrant the same (community rated) premium, regardless of health status and they must accept all comers. Under these conditions, the plans will make a profit on the relatively healthy and incur losses on the reactively sick. Accordingly, they have an incentive to attract the healthy and avoid the sick.

As noted in a previous post, most insurers believe that the young and the healthy tend to buy on price, while older and sicker prospects tend to look more closely at which doctors and hospitals are included in the health plan’s network. Accordingly, competitors in the newly created health insurance exchanges are choosing to keep their premiums down by offering very narrow networks. The result is a race to the bottom. The price of a lower premium is less access to care.

After enrollment, these perverse incentives do not go away. The health plans have an incentive to overprovide to the healthy (to keep the ones they have and attract more of them) and underprovide to the sick (to encourage the exodus of the ones they have and discouraged the enrollment of any more of them).

I don’t know why this isn’t obvious to other health economists. Nothing involved here is more complicated than Economics 101. Here is a very clear presentation.

To be fair to others, however, the theoretical predictions we were making were always much more extreme than anything we observed in real world examples of managed competition ― the federal employee health benefits program, similar programs for state employees and state university systems, and systems in such places as the Netherlands, Switzerland and Israel. But remember, most insurance companies have traditionally operated more like Blue Cross look-a-likes rather than dog-eat-dog competitors.

Until now.

In competitive markets competition tends to cause the price to change until it equals average cost. Thus, to the extent that price is a measure of the value consumers place on a good or service, the marginal benefit people receive tends to equal the cost of producing that benefit.

The same tendencies exist under managed competition. Because of community rating, premiums are not allowed to adjust to reflect each enrollee’s expected health care costs, the way they would in a normal insurance market. As a result, community rating is similar to a price control. At the community rated premium, some enrollees will be overcharged and some will be undercharged. And since price cannot vary to match expected costs, competition will cause costs to change until they tend to equal the premium.

Take those patients who have above-average health care costs and who are therefore “unprofitable.” If premiums are free to rise for those people, insurers will compete them up to the level of the cost of their care. But if the premiums are artificially constrained at a lower level, insurers will tend to compete the cost of their care down to the level of the artificial premium. The reverse pressures exist for those people who have below-average health care costs and who are therefore “profitable.” If the artificial premiums cannot be competed down to the level of average cost, the tendency will be to compete cost up to the level of the artificial premium.

These conclusions follow from well-known principles of the economics of regulation. In the United States, we have had decades of experience with regulated markets. For example, under regulations imposed by the Civil Aeronautics Board (CAB) for most of the post-World War II period, the government dictated airline fares. Unable to compete on price, the airlines competed by offering more flights, flights at more convenient times, more spacious seating and  other amenities. Price regulation imposed by the CAB was similar to cartel pricing and had the potential to allow the airlines to earn supra-normal profits. However, these profits were competed away as airlines increased their costs by making passenger-pleasing adjustments.

The reverse tendency emerges when prices are kept artificially low. Under rent control laws, landlords are prohibited from raising their rents to the level of average cost. Since rents cannot rise, quality tends to fall. Landlords tend to allow housing quality to deteriorate until housing costs equal the government-controlled rent.

A different way of appreciating this result is to consider it in terms of a basic principle taught in all introductory economics courses: when firms are maximizing profits, marginal revenue must equal marginal cost. Under managed competition, marginal revenue (the amount of premium each enrollee brings to a plan) must be the same for every enrollee. That means that marginal cost (the amount the plan spends on health care) will also tend to be the same for every enrollee.

Comments (33)

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  1. SovereignMary says:

    As Daniel Webster stated – “Miracles do not cluster.” It is absolutely abhorrent all the disasters that the Non- affordable ACA has wrought.

  2. Perry says:

    There is a problem with this whole debate. Supporters of the ACA portray its detractors as uncaring for the travails of the un/underinsured and this becomes an emotional boiling pot. On the other hand, I don’t think Obama is trying to kill people, but I do think the law is too over-reaching for the original intent of helping the folks who need it. Notwithstanding the fact that no effort has been made to control costs.
    Really I think the law is merely trading one set of problems for another and complicating the delivery of medical care in the process.

    • Kent Lyon says:

      No, Obama is trying to kill people. He enjoys it. He even brags about how good he is at it. He’s even better at it than he gives himself credit for. He has a Stalin-lite attitude. To the gulag or execution–execution preferred, just for the fun of it. Note how the White House has attacked the woman with gall bladder cancer, blaming the victim and the insurance company (United Heatlhcare, which has the contract for the data hub under Obamacare, a major enabler of Obamacare that has spent millions on lobbyists to make money off of Obamacare, but has opted out of the exchanges????).

  3. Andrew Thorby says:

    For a start virtually all competition is managed – that’s how we avoid sending 5 year old children into coal mines. Second, you cannot sing the praises of the free market on one hand and then decry the results on the other. The fee-for-service free for all you appear to be longing for managed to saddle this country with the least efficient healthcare delivery system on the face of the planet – and not by a little bit. Narrow networks are the natural result of providers beginning to compete on price and quality and of insurers attempting to reward those providers with increased patient volumes. I happen to believe in the power of free markets and to me that which you decry is a good thing.

    In order to be effective policy analysis should be balanced. The ACA is a deeply flawed piece of legislation however there are a number of things that it got right. It would be great to read a few more constructive suggestions on ways to fix the flaws rather than a relentless drumbeat of criticism.

    • Sean Parnell says:

      I’m not sure what free market you think most health care exists in today, or at least pre-Obamacare. Tax policy over the last 65 years or so has driven the third-party reimbursement system that dominates, government price controls set fees directly for half the market and strongly influence the other half, and government narrowly limits who can enter the market (reasonably enough in some ways like medical licensing, stupidly in other ways like certificate of need).

      There is a free market in health care today, but it’s quite small compared to the leviathan that most people operate in today. Cash-only doctors, medical tourism, real prices (the things you can find here http://theselfpaypatient.com/selfpayhealthcaremarket/) – this is a free market in health care. The fact that in the dominant system insurers and big hospital chains and doctors’ practices are allowed to earn profits is not enough to make it a free market.

    • Paul says:

      I second Sean Parnell’s remarks. As to this: “The ACA is a deeply flawed piece of legislation however there are a number of things that it got right. It would be great to read a few more constructive suggestions on ways to fix the flaws rather than a relentless drumbeat of criticism.” That is the current liberal fallback line and is like saying sure the Titanic’s design was a bit off but didn’t they have lovely linens and can’t we try to focus on that? Taking an outdated industrial-era care financing system that should have died in the 90s and cementing it in place and then forcing everyone to participate in it is not a solution to our currently overpriced and wildly inefficient care delivery system, and will ultimately bankrupt us. If you are on the wrong path, going backwards is progress.

      • Wanda J. Jones says:

        Paul: I agree. Free market seems to mean a clear buyer-seller relationship. What we have had since the Federal and State governments have been funding care for the poor and elderly is a market distorted in significant ways by the giant power of government. Medicare’s ability to influence other payers is inarguable.The market response to such power have included concentration of both health plan and provider assets to achieve enough market dominance to push back on third party pricing.

        Now that Obamacare will increase the scope of government influence, real market mechanisms are bound to diminish further to the point that only average needs can be met under average prices.

        Will it take a generation to realize this or can we come to our senses
        before the health field moulders into an embarrassing morass? I fear for loss of the next generation of physicians, especially sons of physicians who knew what it was to practice without being required to justify themselves to some RN at the health plan. I also fear that our infrastructure will fall behind and we’ll find ourselves being cared for in hospitals that have not been renewed for 60 years. (I advised McGill in Montreal about a strategy for renewing 5 of its teaching hospitals at once, one of which dated back to 1890, and where the youngest was built just after WWII. In Paris, I visited a hospital north of Paris that was build in the 16th century.)

        It will not be long before the government finds that it has so depressed the healthcare system that it must resort to fiscal bribery to encourage the industry to expand, renew, upgrade and adopt new science, as it will have squeezed out the natural incentives to do that.

        The main hope we have is to expand the share of our industry that really is a simple cash transaction.

        As for planning cost reduction, the “sweet spot” is the pre-Medicare senior population, experiencing the early phases of their chronic diseases, so that careful management at this stage might reduce higher expenses after entering Medicare, while at the same time reducing the current cost of care IF certain labor-saving methods of adopted, especially team care and group appointments, plus much better patient self-care instructions.

        Wanda J. Jones, President
        New Century Healthcare Institute
        San Francisco

    • Frank Timmins says:

      “…Narrow networks are the natural result of providers beginning to compete on price and quality and of insurers attempting to reward those providers with increased patient volumes..”

      Au contraire, you couldn’t be more wrong. Doctors don’t even know what their competition (other doctors) are being paid for same services in a network, much less the quality of their work.

      True free market competition is “street” level competition, not some vague actuarial assessment made by a disinterested third party with no direct knowledge of the relationship between the buyer and seller of the service.

  4. Don McCanne says:

    “Under managed competition… that means that marginal cost (the amount the plan spends on health care) will also tend to be the same for every enrollee.”

    How complicated the Affordable Care Act is can be demonstrated by the fact that two “identical” plans (e.g., two bronze plans with the same $2000 deductible) can provide very different levels of coverage for the same identical conditions. This is explained at the following link:

    Regardless of what you believe the solutions should be, it is important for all of us to understand the very fundamental flaw in plan competition described in the cited article.

    You can ignore the last paragraph that calls for single payer reform, but it is imperative that you not ignore the thrust of the article. It explains why it is impossible to make an informed decision when shopping for plans on the exchanges.

  5. DE Fuller says:

    Step one in this progression was the often heard mantra that the majority of expenses paid under Medicare were in the last 6 months of life. When you think about it,”Well, Duh!” comes to mind. The patients were sick and they died, because they didn’t get well. That happens. Step two is the move away from active treatment to palliative care, sometimes an appropriate redirection of efforts in the patients behalf. Step three is restriction of access to care the patient needs, or wants, generally expensive, and sometimes effective and sometimes not. It is after step three where there will be a progression of increasingly stringent restrictions on access, and there will be greater efforts to move patients over to a course of palliation rather than active (and expensive) treatment. Watch for it. It will come sooner and soooner in their clinical courses. It is already here for some, and will be the norm for many under the ACA.

  6. Diana Furchtgott-Roth says:

    Just one? You are too kind. A lot of men, women, and children will die sooner due to Obamacare.

    • Dewaine says:

      Exactly. Unfortunately this will all become too real very soon.

      • John Seater says:

        At that point, we will be able to say that “Obama lied, people died.” The difference from the Bush episode is that this time it will be true.

  7. charles akins says:

    Very little has been made of an important aspect of ObamaCare. ObamaCare is like the roach motel. You can check in but you cannot check out. Once you are on ObamaCare you are on ObamaCare for life!
    People under duress do not relies they are making an irreversible life time commitment.

    • Dewaine says:

      and just like other entitlement programs, we’ll never be able to rid ourselves of it. Even if ObamaCare fails and the populous realizes it (the second is a big if), it will hang around in some form.

  8. Greg Scandlen says:

    John, a progressive friend of mine recently revealed a lot more than he realized when he told me “the purpose of government is to change human behavior.” I was stunned by the hubris. Government can’t change human behavior. At best it can try to understand human behavior and try to improve conditions within those boundaries.

    On this list we often get discussions about how people will do X (which is in their self-interest) even though Y would be better for society. Progressives are always exasperated by that — “But they SHOULD do Y, it is the right thing to do.” They accuse those of us who recognize the socially negative behavior as endorsing it.

    I now realize that the problem is that they are intent on “changing human behavior,” which is in God’s domain, not man’s. Also puzzling is the conceit that these folks think they are wise enough to know what human behavior should be — as if they are not also humans and subject to all the same the failings of the rest of us. For instance, their ambition to change others’ behavior may be motivated by their own greed and avarice.

    I don’t know if these conflicts of perception can ever be resolved, short of an economic collapse which would instill a big dose of humility.

    • Perry says:

      Yes, if you won’t do what we think is right for you, we will legislate it!!!

    • charles akins says:

      Exactly Greg.

      That is why ObamaCare will not work. The computer problems are mechanical and can be fixed. The problems with the actual operation of the ObamaCare program are human and cannot be fixed by man!

    • Wanda J. Jones says:

      Greg: Great insight. As for a root to this, consider the self-selection of people who run for public office; they already believe that they are selfless saviors of the voters whom they reward with the benefits of more government. It has been clear from the beginning that Obama has this Messiah complex and cannot understand that he is incompetent to execute on his Utopian goals.

      People who want single payer are just asking for more of this manipulation of the citizen in a very key area of their lives.

      Wanda Jones

  9. Ken says:

    Good post. Very insightful.

  10. David Stockman says:

    Any explanation for why United HealthCare kept the California woman’s policy in effect for apparently several years, notwithstanding $1.2 million of expense? Must have been at a super-high premium, which is ok, but explanation to readers would be helpful.

    • Greg Scandlen says:

      David, it is a myth that people are cancelled for higher expenses. I have never known that to happen. Also, insurers do not single people out for premium increases due to their use of services. It never happens. Rates go up according to the experience of the whole pool. This is why you hear complaints like “I never used any services, but my rates went up anyway.”

      Most things in health policy are driven by myths and misunderstandings and these are among the biggest.

      • Jeff says:

        But still, does anybody have an answer to David Stockman’s question? Could it be that California has a guaranteed renewability law that prevented the insurer from canceling coverage–until now, when something about the policy doesn’t comply with the ACA and the insurer is using that noncompliance as a pretext to cancel the policy? It seems to me that the answer to this question is crucial because if the insurer could have canceled the policy anyway, it seems unfair to blame the cancellation on the ACA.

        Further, might there be policies available outside the California Exchange that would provide equivalent coverage to what this patient used to have? Does California have guaranteed issue and community rating in the individual market outside the Exchange?

        • Frank Timmins says:

          Jeff, for purposes of this discussion does it really matter what the insurance laws of California might have been? The facts are that this woman had been responsible enough to secure individual coverage (apparently prior to the onset of sickness), and the insurer had fulfilled its obligation to pay for the treatment as per the contract. The ACA provisions caused the cancellation of the coverage, period.

          Do we need to find excuses for this kind of gross legislative incompetence? Had there been no ACA this woman would still be getting treatment and the carrier would be paying the bills for as long as she paid the premiums. I don’t know about the insurance laws in California but I have never heard of a legitimate insurance carrier cancelling individual coverage because of high claims.

        • Greg Scandlen says:

          It is not a “pretext.” If the old policy doesn’t meet all the requirements of ACA (such as covering pediatric dental) it may no longer be sold — period. The entire plan is dead, not just for this woman but for anybody who bought it. All they can do is offer policyholders plans that do comply, which are twice as expensive.

          • Jeff says:

            Well, I think it is relevant to understand why the insurer didn’t cancel this policy earlier. I think it’s because the law guarantees renewability, i.e., doesn’t allow insurers to cancel coverage just because of bad claims experience, and this doesn’t change under the ACA. This article ignores some critical facts. What happened in this case is that the insurer, UHC, decided to withdraw entirely from the individual insurance market in California. According to California HealthLine, UHC had 2% market share in the individual market. The article states that a UHC spokesperson said the company’s “individual business in California has always been relatively small,” adding that “OVER THE YEARS, it has become more difficult to administer these plans in a cost-effective way for our members.” Unquestionably, this unfortunate woman has been put in a difficult position, but I find it hard to blame this particular case on the ACA.

  11. Bob Hertz says:

    If we enacted price controls on cancer drugs, like almost all other nations, and paid for chemotherapy at German or French rates, the cost to treat this disease might have been $250,000 instead of $1.2M.

    Or less.

    This does not remove the arguments raised about insurance types, but it makes a resolution less urgent.

    There is a very bad trend even among good students of health care to take medical prices for granted.
    Often the prices are wildly in excess of the real cost of care.

    Bob Hertz,The Health Care Crusade

    • Greg Scandlen says:

      Or there might not be any drugs with which to treat the disease. Do you really think Rx companies charge whatever they want? Price controls in other countries raise the costs for Americans, it’s true. But the Rx companies need a certain amount of total revenue to pay for R&D. Without that revenue there would be no R&D, hence no treatment.

  12. Bob Hertz says:

    When the company that makes Gleenev can charge $8000 a month for a drug that is ten years old, then I say they are charging whatever they want.

    Granted, there a number of programs for cancer patients which give large discounts, and maybe these drug prices are becoming like hospital rack rate charges.

    But it still seems like they are charging whatever they want.

    • Greg Scandlen says:

      Oncologists tell me the availability of cancer drugs is drying up. I haven’t followed it closely, but it is apparently due to additional regulations. Be careful what you wish for, Bob, it might kill you.

  13. Charlie Bond says:

    Hi John,
    Thank you for an example of why one-size-fits-all health policy doesn’t fit. As others have pointed out, there are examples of hardship on the right and on the left, which is why there should not be a right or left in health care policy. At the center, there is always the patient.
    Let’s begin by asking what happened to the San Diego cancer patient? Doesn’t every reader of this blog respond humanely to her plight? For cases such as hers–the extraordinary diagnosis or severe chronic condition–are we not compelled by compassion to assure care? So whether she is a Democrat, Republican, plutocrat or bag lady, isn’t the question, “How do we care for her?” not “whether”? In the world of underwriting she is a statistic. In San Diego, she is an individual with loved ones, friends and colleagues.
    Health policy arguments have historically been punctuated by citing the extremes. Health care is so big and so complex, it is easy to pick outlying examples to prove a point. The real work is to figure out what is common among all those examples and build policy around principle.
    We are running out of time to figure out how we are going to take care of each other. Accordingly, I suggest we strive harder than ever for the common ground, for on that common ground we find all of us–because we and those we love are (or will be) patients.
    In that regard, a notable omission from Obamacare is giving the patient any choice in selecting his or her ACO. Health care delivery is, therefore, being re-organized around cashflows, gainshares, and “efficiencies” without regard to the patient. Yet the patient is the largest driver of cost and the greatest predictor of outcome. Since both sides of the aisle agree on the forced march to ACO’s, wouldn’t it be good policy to allow patients to pick their providers? If the government is going to change providers’ behavior, shouldn’t patient have a say in whether they like how that behavior is being changed?
    Just some thoughts. At the end of the day, health care is about the patient–not the payor.

  14. Bob Hertz says:

    Greg, why would a ‘compliant policy’ be twice as expensive?

    The old policy certainly had a high lifetime max.

    The old policy certainly covered drugs.

    The old policy almost certainly was subject to steady increases.

    Many of the other mandates for compliant coverage do not in general add very much to the premium.

    I am not excusing the regulatory excess that the ACA has spawned – it is deeply stupid.

    I guess I am just picking on you for generalizing.

    By the way, your article in The Federalist was fantastic.