1. At first glance, the exchanges look attractive to both insurers and consumers, as insurers have access to large numbers of new (subsidized) customers and consumers are guaranteed that their health status won’t impact their premiums. But insurers worry that they will attract large numbers of sick or high-risk people as a result, and so their inclination will be to set premiums high enough to protect their profits even if they wind up having to pay for a large amount of expensive care.
2. In theory, competition among insurers is supposed to keep them from raising premiums too much. But because the exchanges make the premiums across plans very transparent, insurers can always see to it than they never charge more than their competitors. All of the insurers can raise their premiums in tandem rather than compete.
3. You’d think that cost-conscious consumers wouldn’t let the insurers get away with this kind of collusion. Some new entrant can come along and undercut the competition, and consumers will flock to this new insurer. But there won’t be very many cost-conscious consumers, due to generous subsidies.
4. Subsidies are supposed to work on a sliding scale, with higher-income households getting a smaller subsidy than lower-income households, and high-income households getting no subsidy at all.
5. But the problem is that any household receiving subsidies at any given level of income has its premiums capped, either at the low end (a family of four earning 138 percent of the poverty level has its premium capped at 3.29 percent of income) or the high end (a family of four earning 400 percent of the poverty has its premium capped at 9.5 percent of income) is indifferent to premium increases above the cap.
A $10,000 plan already costs more than the maximum amount either family would pay. If the insurer raises the premium to $10,001, both families get $1 in additional subsidy. If it raises premiums to $11,000, both families get $1,000 in additional subsidy. In other words, no matter how much an insurer raises rates, a subsidized household pays zero more.
6. Subsidies are tied to the price of the second-cheapest silver plan sold on the exchanges. All insurers have to offer cheaper bronze plans and more expensive gold plans too (which is bad news for firms that want to specialize in, say, the low end of the market), so insurers might simply focus on boosting the price of a silver plan as high as possible to take advantage of the large number of subsidized customers who are effectively indifferent to price above the premium cap.
Goldhill concludes by arguing that the end result will likely be that the exchanges will drive up the cost of care:
In the end, we have incentives for insurers not to compete, for customers not to care about price, and for insurers to drive up the cost of care. Not much of a marketplace, is it?
He acknowledges that he could be wrong — if, for example, the exchanges attract large numbers of unsubsidized customers. But the picture he paints is not a very attractive one. I’d love to read a convincing critique of Goldhill’s basic take on the exchange, but his arguments strike me as pretty convincing.