With the recent announcement of UnitedHealth Care’s abandoning Covered California and most other Obamacare exchanges around the country, its beneficiaries will have fewer plans to choose from in 2017. We can expect this shrinking number of health plans to take advantage of market power to increase premiums. Obamacare’s supporters believe the solution is to give state-based exchanges the power to act as “active purchasers” limiting consumers’ choices like Covered California does today.
Under Obamacare, consolidation is widespread. Hospital mergers increased 44 percent from 2010 to 2014. As for physicians, Marcus Welby, MD is an artifact of history. In 2014, 39 percent of physicians worked in practices with at least eleven physicians, versus fewer than one quarter three decades ago. The five largest national health insurers are merging into three, assuming the federal Department of Justice approves the consolidations.
Admitting Obamacare is leading to shrinking choices, its supporters now argue less competition among health plans is just fine, as long as the exchanges are granted even more power over the plans insurers offer.
California is one of only four states where the Obamacare exchange, called Covered California, has the statutory authority to act as an “active purchaser.” Covered California defines just one benefit design in each “metal” tier. It dictates, for example, a primary-care visit has a $45 co-pay for those with Silver plans; or that a family deductible is $4,500. According to Peter Lee, Executive Director of Covered California, consumers do not really value being able to choose plans with different deductibles or copays. “What’s the difference between them? Tweaks on co-insurance and insurance babble that most consumers don’t understand.”
In order to cut out this “babble”, Covered California only accepted 12 of 32 insurers which initially showed interest in participating in 2014. Some rating regions have more insurers competing than others. Obamacare’s supporters were relieved when Professor Richard Scheffler of the University of California, Berkeley, and colleagues published research concluding rating regions with fewer insurers (such as Santa Clara County) had lower premium hikes in 2015 than those (such as San Francisco) with more. The authors credited Covered California’s active purchasing power for this counter-intuitive result.
Examining Silver plans, the researchers concluded the average statewide premium for a 40-year old increased 3.3 percent in 2015; and a 10 percent decrease in insurer competition in a rating region was associated with a reduction in the premium hike to 3.0 percent. In New York, where the exchange is not an active purchaser, the relationship went in the direction one would expect in a normal market.
The average statewide premium increased 2.1 percent; and a 10 percent decrease in competition in a rating region was associated with an increase in the expected growth rate to 3.0 percent.
Explaining California’s counter-intuitive result, Professor Scheffler and colleagues suggest health plans in rating regions where there are fewer competitors can negotiate excessively profitable contracts with hospitals and doctors; and this gives them more room to yield when negotiating rate hikes with Covered California. Another way to put it might be that uncompetitive insurance markets allow insurers to gouge providers, then Covered California gouges back from insurers.
A policy to give that power to other states’ exchanges ignores the bigger picture. Comparing two states’ Obamacare exchanges is like comparing the taste of two rotten lemons. Health plans in exchanges in both California and New York are “highly concentrated” as defined by the Department of Justice and Federal Trade Commission. In other words, they would be closely investigated for antitrust violations if they operated in a normal market.
Nevertheless, the average premium hike in California in 2015 was 3.3 percent and in New York it was only 2.1 percent. By 2015, we already had one full year of Obamacare behind us. Everything turned upside down a year earlier. According to the Manhattan Institute, a 40-year old man’s premium went up by 33 percent in California in 2014, versus declining 45 percent in New York.
And there is the problem of network adequacy. Professor Simon F. Haeder of the University of Wisconsin – Madison, and colleagues, found hospital networks were smaller in insurers’ Covered California plans than in their commercial plans in two-thirds of cases. Networks in their Covered California plans were 17 percent smaller (measured by hospital beds) than in commercial plans. Insurers are not limiting premium hikes by yielding excess profits to Covered California, but by reducing access to hospitals and doctors.
Rather than giving other state exchanges Covered California’s power to limit consumers’ choice of health plans with narrow networks, other states should be demanding more freedom from Obamacare’s federal regulations and passing that freedom on to consumers.