In my latest book, Priceless: Curing the Healthcare Crisis, I devote much attention to how federal regulations shape the incentives of health insurance companies. To get an idea of how the Affordable Care Act affects incentives, look at the Federal Employees Health Benefit Program (FEHBP), the managed competition model for how insurance will be bought and sold in exchanges created by Obamacare.
In the federal system, insurers must charge every enrollee the same premium—regardless of health status. This gives them strong incentives to attract the healthy and avoid the sick. Furthermore, the perverse incentives do not end after enrollment. Health plans have strong incentives to overprovide to the healthy (to keep the ones they have and attract more) and underprovide to the sick (to discourage the arrival of new ones and the departure of the ones they already have).
The easiest way to overprovide to the healthy is to offer services that healthy people consume: preventive care, wellness programs, free checkups, and so on. The way to underprovide to the sick is to strictly follow evidenced-based protocols and to be slow to approve expensive new drugs and other therapies. Beyond that, a health plan can underprovide to the sick and discourage their enrollment by not including the best cardiologists and the best heart treatment centers in the plan’s network, by not having the best oncologists and the best cancer treatment centers in the network, and so on.
What has been the experience of the federal employees program? Some evidence indicates a backing away from expensive procedures, with the government’s approval. But perverse incentives are held in check somewhat by the Office of Personnel Management (OPM), which operates like a large human relations department. Similarly, where managed competition has been implemented for state employees, for university employees, and for employees of large corporations, the employer usually acts to try to prevent the worst abuses.
What would happen, though, if the OPM went away and the FEHBP were opened up to everyone in Washington, DC, in addition to the federal employees? What I would expect is a big mess—with insurers having perverse incentives to undertreat the sick and no one there to stop them from acting on those incentives. Of course, there are countervailing forces: professional ethics, malpractice law, and regulatory agencies among them. But ask yourself this question: Would you want to eat at a restaurant that you know in advance does not want your business? You should think the same way about health plans.
With the advent of the Affordable Care Act, these perverse incentives will be set in place nationwide. Tens of thousands of employees will leave their employer plans and enter a no man’s land where the healthy will be desirable and the sick will be vulnerable. Those with serious health problems will find they no longer have an employer who acts as a protector and defender. Their problems will be made worse by the inexorable federal pressure on the health plans to keep premiums from rising, so as to contain the expense of the taxpayer-funded premium subsidies.
But, you may ask, won’t federal regulators step in to protect the seriously ill from undertreatment and other abuse? Unfortunately, the government’s incentives to do that will be very weak.
1. For a discussion of rationing under managed care, see Emily Friedman, “Managed Care Rationing and Quality: A Tangled Relationship,” Health Affairs 16 (3) (1997):174–182.