Will more choices on the Affordable Care Act exchanges lead to better policies for consumers?

In the states where we have information so far,  the number of insurers offering policies on the new Affordable Care Act exchanges will go up next year according to Advisory.com. A big example is New Hampshire which will go from just one insurer on the exchange this year to possibly five next year.

I’m willing to admit this is one aspect of the law I might have been too pessimistic about. In the past I’ve questioned if states which already had highly consolidated insurance markets would even see the promised private competition on the new exchanges, but it appears they might. There are of course still two important caveats.

First, we don’t know if this will last. It is possible the exchanges with their new customers have only temporarily shook up the market but things will eventually return to high consolation in many states. Just because companies try to enter a market doesn’t mean they will stay — or they could be bought out.

Second, there is a real question as to whether more private insurers on the exchange will actually improve things for the government and/or users. Looking at our history with programs like Federal Employees Health Benefits or Medicare Advantage there is really no indication that competitive private insurance exchanges for individuals bring down costs.

There are ways more insurers could make things worse for some. Too many insurers could potentially cost all individuals and the government more because it can give hospitals more relative leverage to ask for higher prices from all insurers. An insurer that is effectively a monopoly would theoretically be in a better position to demand lower prices from providers.

A paper on insurance consumer plan selection in Switzerland also indicated that the more plans offered, the less likely people were to switch to a cheaper plan. It seems many people suffer from decision overload when given too many very complex options.

Finally, the way tax credits are calculated means that even if competition does bring down government costs it could make things worse off for many individuals. Imagine if one of the new insurer really pushed the limits of how low quality a plan can be and still be legally allowed. They offer the most stripped down, restrictive and poor consumer service silver plan to be the cheapest option. Since tax credits are pegged to the second cheapest silver plan this would technically save the government money but it also means low income people who depend on the tax credits would get less financial help. These people would end up paying more for their old policies or need to switch to this worse plan.

It looks like the ACA will achieve the goal of more private insurers on the exchanges next year. Whether that should even been a goal is a much bigger question.

Graphic by Vic under Creative Commons license