I’ve recently started being covered by a new insurance policy. As a result, I just received this over-hundred-page packet about it: the coverage rules, co-pays, benefits, requirements for getting proper approval for procedures, what counts toward the deductible, rules about out of network coverage, etc.
I thought I could use this as a teaching moment to show the wrong-headedness of the market theory used to defend the idea of private health insurance exchanges, like those found in the Democrats’ health care reform law and the Medicare privatization plan passed by the Republican House.
To give you an idea of the thickness of the packet:
Fifteen pages of the packet were a spreadsheet like this showing the limitations on each type of insurance, the deducible, and how much is covered in-network and out of network:
As just a starting point, for any market to “work,” it requires the customers to actually be able to understand what they are buying, so that they can compare similar products.
Everyone must be trained actuaries and insurance experts
President Obama, in order to make this law work, is expecting the majority of people making about $30,000 a year to be able to read and fully understand all the information contained in roughly eight of these packets, so that they can compare the health plans offered.
Beyond just understanding all the complexity of these coverage plans, people will also need to figure out how they will work in the real world to determine the hidden costs. For example, a person could select an HMO they think is the best deal, only to realize they live on the edge of the HMO’s network, so in practice they will face the higher, out-of-network price or need to drive two hours to see the specialist they need.
Everyone must be fortune tellers
Even if we assume that most of these individuals with modest income (in the case of ACA) or most senior citizens (in the case of the Paul Ryan’s Medicare privatization plan) can fully understand all the different plans and how they will affect them specifically, it still won’t guarantee people make the “smart shopper” choice. To make the best choice, in addition to all that, they must also be able to accurately predict the future.
Do you know the chances that you will be rushed to the hospital in the next 12 months? Do you know the likelihood you will need major knee surgery this year? Do you know the probability you will get cancer that requires chemo?
Even if you were a total expert on insurance policies but incorrectly assumed your probability of getting cancer is 1 in 10,000 instead of knowing it is actually 1 in 30, you would choose the wrong plan.
A market with a massive information imbalance won’t work
Making the problem even worse is the fact that insurance companies will have a profit incentive to make this already inherently complex system even harder for a person to understand.
Champions of private insurance exchanges rest their entire case for why this free-market magic will work on the absurd assumption that every middle-class American is secretly a Ph.D in the actuarial sciences.
It would be almost comical anyone believed this if it wasn’t so tragic that our political leaders are using it to justify such terrible policy moves.