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Scott Lemieux over at Lawyers, Guns and Money is playing with his food as he mocks Matthew Stoller (OMG, this sounds like a 2008 blog thread now… we just get older and our backs hurt more….) on Stoller’s diagnosis of the pre-ACA insurance market core problem:

The idea that the problem with the pre-ACA status quo was a lack of competition among insurers happens to be the position of Stoller’s good buddy JD Vance. The problem is that it’s ludicrously false — the problem wasn’t a lack of competition per se, it was that “taking your premiums for threadbare insurance and just cancel it on the off chance you get an illness your policy actually covered” was a perfectly legal business model and no amount of competition could require the market to provide affordable insurance that covered anything.

Competition for what? What were the 2008 individual market health insurance company’s incentives?

Why would an insurer want to take on massive new risk?

Let’s make some assumptions that I think are reasonable assumptions for 2008.

1) Insurers like to make money
2) Insurers are in the business of taking on individual level variance and risk and aggregating it to lower levels of group variance and risk.
3) There is a massive information asymmetry between insurers and enrollees
4) Costs for a given diagnosis/cognizable health status have wide variance
5) Contracts are almost always one year
6) Marginal enrollees who have almost no claims probability are the ones who are most likely to move as soon as the premium increases relative to other choices
7) The median American has <$1000 in allowable expenses per year.
8) Other insurers will undercut you

There is a strong incentive to race to the bottom so that the only plans that are offered are plans that provide limited protection against getting hit by a meteor/mid-year cancer diagnosis. Plenty of insurers offer these plans. These plans are probably adequate risk protection at low premiums for healthy men in their 20s to 40s and not bad for healthy women in their late 30s to 40s. Anyone with chronic diseases, a desire to get pregnant or whose knees randomly hurt on Tuesday morning just because becomes really hard to insure. Sure there is an up-rated product with substantial exclusions and carve-outs that will bring in some portion of this market where there are likely predictable and recurring claims. But the market is structured to incentize insurers to run the hell away from plausible risk as the contract takers for a risk adjusted premium are almost always going to be the folks who are on the expensive/more likely to claim side of the sub-distribution.

Now if we were to imagine a universe with very well funded high cost risk pools (like how we make Medicare the backstopping payer for End Stage Renal Disease or ALS and Medicaid for Breast and Cervical Cancer) with multiple year contracts and some type of default system to provide at least universal catastrophic care, then maybe competition in the 2008 individual health insurance market could be the right policy prescription.

But we don’t and never have lived in that world.

Pre-ACA competition and incentivesPost + Comments (8)