It is always nice to see more people come around to my stated belief that health insurance exchanges intended to make people be “smart shoppers” for very complex products is a truly failed idea. Paul Krugman made a very straightforward case against the concept this weekend:
That’s the title of a blog post by Nathalie Martin at Credit Slips. It describes just how hard it is for even sophisticated buyers to figure out which company is offering the best deal on such things as home insurance.
She doesn’t point this out, but this observation has a strong bearing on the health reform debate. When people call for “consumer choice” in health care, what this mainly comes down to isn’t comparison shopping on actual care — help, I’m dying, who’s got a good deal on stents? — but rather comparison shopping on insurance policies. And that’s basically impossible even for home insurance, which is a lot simpler than medical insurance.
Very strong regulation that forced insurance companies to offer clear, simple choices might help — but the consumer-driven-medicine people are also opposed to strong regulation.
Health insurance is extremely complex and people just don’t have the knowledge about how an insurance policy works and the statistical likelihood of developing medical problems to know what is the best deal for them. This task is made even more difficult by the fact that insurance companies have a huge profit incentive to make their products difficult to understand (for example, hiding the cost of care to give them the lower sticker price on the exchanges).
Not surprisingly, the largest health insurance exchanges for people under 65 have failed to control costs in the United States, and the Medicare Advantage private insurance exchange ended up costing way more than regular Medicare.
Even having regulations that force insurance companies to offer very simple, standardized products, like Krugman suggests, is unlikely to make the “free market forces” work as promised. In Switzerland, where the basic insurance package is highly standardized, people still fail to switch plans to shop for a better bargain (PDF).
For the year 2005, for example, the difference between the lowest and highest premium for coverage in Zurich with a 300 CHF ($255) deductible is 89 percent (BAG 2007). This situation can only persist over time because, despite periodic open enrollment, relatively few individuals change insurer from year to year.
I wish that, while President Obama was telling everyone what an awesome idea loosely regulated private health insurance exchanges were during the health care debate, more liberal economists would have forcefully pointed out how the entire underlying concept was totally flawed, when it could have made a difference
Instead, we have even supposedly “liberal” writers, like Ezra Klein, not only promoting greater plan design “flexibility” on exchanges (i.e. more complexity, making informed shopping even more impossible), but also the desire to force every American to shop for insurance on the exchanges, including seniors, by ending Medicare.
Given the nearly fact-free state of the “health care debate” in our country, I fear for our health and fiscal future.