Let's look at two problems built into ACA-based health-care coverage, one of which we have a shot at doing something about

by Ken

This evening I want to think about two major problems with the way Obamacare works -- one having to do with the way it's set up, which could probably be fixed fairly straightforwardly but won't be because it would require Congress to do the fixing, and one that requires only a change in the way health-care consumers shop for coverage which probably won't be solved because, well, it's just too difficult for shoppers.

THE STRUCTURAL PROBELM FOR FAMILIES

This morning on the radio I heard a report that persuasively called attention to what indeed struck me as a serious problem with the structure of health care under the ACA: that it focuses almost entirely on individual insurance coverage, leaving enormous disparities between those rates and subsidies vs. those for family plans. As a result, in a country that pretends to place highest value on the family unit, people who need family coverage often face prohibitive costs and further are ineligible for subsidies that might make the coverage they need affordable.

As the report pointed out, in a normal political environment it would be reasonable to expect Congress to address this problem, but in our actual political environment the possibility of congressional action seems nonexistent. In some cases children may be eligible for coverage from other programs. But the overall result is that the prognosis for families where agonizing decisions must be made as to which members will have coverage will remain: Good luck to you.

THE "CONSUMER INERTIA" PROBLEM

In a new "Financial Page" piece, "Obamacare's Inertia Problem," New Yorker financial columnist James Surowiecki points to "one fundamental challenge" that remains: "If Obamacare is to succeed in holding down premiums over the long run, it needs consumers to shop around."

Surowiecki goes on to explain that in some areas, we consumers understand and are up to the challenge of "comparison-shopping and changing allegiance" -- "when it comes to, say, automobiles or consumer electronics."He notes that "companies in those markets face huge pressure to keep quality high and prices low." And then there are "markets where consumers tend to stick with the same choice forever, even though switching could save them quite a bit of money."

Energy bills are a classic example. We’ve long been told we can save money by leaving incumbent providers for newer upstarts, but the vast majority of us haven’t. Economists call it consumer inertia, and you can see it in many fields, including banking, credit cards, and health insurance. “History tells us that people are very sticky about health insurance,” Larry Levitt, a senior vice-president at the Kaiser Foundation, told me. “If you look at federal employees or at Medicare Part D, people generally don’t switch plans from year to year.”

First-time health-insurance shoppers, Surowiecki notes, are highly price-conscious. "Most Obamacare enrollees," he says, "chose lower-cost, higher-deductible plans." I'm not sure that this was necessarily the best possible choice, but he doesn't go into that. The point is that buyers price-shopped that first time out. After that, though, "inertia quickly takes hold."

When the Netherlands introduced managed competition for insurers, in 2006, almost twenty per cent of the insured switched after a year. But, by 2012, less than four per cent did. Karen Lamiraud, an economics professor at ESSEC Business School, studied the insurance market in Switzerland and found that the average switch rate between 1997 and 2007 was three per cent.

And "such inertia can be expensive."

Ben Handel, an economist at Berkeley, did a study of the insurance choices made by eighty-five hundred employees at a big company, and found that most ended up staying with their default option, even when it cost them serious money. “Consumers leave thousands of dollars a year on the table because of inertia,” he told me.

And I have to say that I sure as shootin' recognize what Surowiecki labels the key problem: "what economists call switching costs."

Sometimes they are tangible: if you want to get out of your cell-phone contract, you’ll have to pay a penalty. More insidious is what Handel calls “hassle costs”—the time and energy required to do enough research to make an informed switch. These are especially high when products and services are complicated and confusing, as with banking and health insurance, and when there are lots of potential options, which amplify people’s anxieties about making a bad choice. “The complexity is daunting, and these things just aren’t intrinsically interesting to most people,” Handel said. Obamacare has an extra layer of complexity, since you have to take subsidies and taxes into account. And since different insurers use different networks, getting a better deal often means finding a new doctor—a big disincentive.

Given the powerful disincentives for customers to switch suppliers, "it’s much easier for companies to raise prices," and Surowiecki offers the example of a storage unit. When that initially "attractive monthly rate" starts jumping, "What are you going to do? Move all your stuff?"

Similarly, even though there are lots of affordable new Obamacare plans this year, many of last year’s are raising premiums substantially. Lamiraud’s study found that in Switzerland the gap between the most expensive health plans and the cheapest didn’t narrow over time, which doesn’t suggest much price sensitivity.

Surowiecki notes that there's a certain amount of price pressure on the insurance company provided by the fair degree of "churn," with people coming in and out of coverage each year for such reasons as getting and losing jobs. And people on really tight budgets are apt to be forced to shop for cheaper coverage.

But the system also has a major feature that encourages inertia: your plan renews automatically each year if you do nothing. That’s crucial for getting people to stay insured, but it will keep a lot of people on plans that weren’t the best value they could have found.

"So how do you combat this?" Surowiecki asks.

More information is a start. One study Handel conducted found that “fully informed” consumers saved a couple of thousand dollars compared with those who were less well informed. But merely making information available isn’t enough: you have to confront people with it. In one experimental study, when Medicare Part D consumers got a letter telling them that they could save money by changing plans the chance of their actually doing so rose by almost fifty per cent. Decision-support companies, which analyze huge tranches of data in order to come up with personalized rankings of insurance plans, could work with the Obamacare exchanges. That probably won’t make insurers very happy, but it should please taxpayers. We’re going to pay most of the bill when Obamacare recipients make poor choices. So we should do all we can to help them make better ones.

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