### Health Costs under Obamacare

3/29/2013 10:08:00 PM
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Sarah Kliff asks the question we are all wondering: How will Obamacare affect health insurance prices in 2014 when its major provisions kick in?

Now, the healthcare law includes significant regulations on how insurers price discriminate, so this will probably contribute to price decreases (relative to average) for some and increases for others. For example, insurers will only be allowed to charge old people up to three times as much as young people, meaning yung people might pay a little more while old people pay a little less.

More interesting, though, is what the influx of people who currently do not have insurance will do to premiums. According to Kliff
"For those who already have insurance, the Affordable Care Act is expected to increase premiums by 14 percent. That makes sense when you think about some of the people likely to enter the market: Those who previously found coverage too expensive to buy a health plan, perhaps due to a health condition."
Not so fast. What Kliff is arguing here is that there is adverse selection in insurance, and that because of adverse selection only healthy people have insurance. Now, certain clauses such as elimination of the cap on lifetime insurance claims and the elimination of preexisting conditions clauses will definitely cause some higher-risk individuals to re-enter the insurance pool, driving up costs. But on the other hand, it is the healthiest people, such as young adults, who are generally most willing to go without insurance, and the 2014 mandate will reduce insurers' average costs.

Here is a graph of insurance markets under adverse selection
This comes from a paper by Liran Einav and Amy Finkelstein, who are leading experts on selection in health insurance markets. It captures exactly the point I made before--those who bear the most health risk are willing to pay the most for their health insurance. Absent the individual mandate, the healthiest individuals, who lie between $Q_{eqm}$ and $Q_{max}$ on the horizontal axis, drop out of the market because the amount they are willing to pay for insurance (represented by the demand curve) is less than the premium insurers would be willing to charge (which is equal to average health costs, represented by the AC curve). Assuming compliance, the individual mandate forces these individuals to buy insurance anyway, and we move from point C to a new equilibrium at point G. The premium at point G (on the AC curve) is lower as a result of the mandate. As an aside, note that in this case, the mandate is welfare-improving.

Now, the graph above assumes that the amount people are willing to pay for health insurance is positively correlated with their degree of riskiness. That makes intuitive sense, because the incentive to buy insurance increases as your value-at-risk increases. But, that isn't a law of nature--it is also possible that the amount people are willing to pay for insurance decreases with health risk. One potential reason for that would be if highly risk-averse individuals, who are willing to pay the most for insurance, also take measures to stay healthier and minimize their exposure to health risks. Einav and Finkelstein have a graph of that too:

What's interesting about this case is that the number of people who buy insurance $Q_{eqm}$ is actually greater than the socially optimal level $Q_{eff}$. This is known as advantageous selection, and the policy implication is that we want to reduce, not increase, the number of people with insurance. In this case, the individual mandate would increase premiums as we move from the point C to point F.

So, do we have adverse selection or advantageous selection in health insurance markets? That's an empirical question. For general health insurance, the only studies I'm aware of show that there is adverse selection in general health insurance markets, meaning that the mandate should theoretically decrease premiums for existing customers. There are more mixed results in some more specific subsets, such as long-term care insurance and the so-called "medigap" coverage markets, though neither of these is part of the ACA's insurance mandate. It is worth noting though that attempts to quantify the degree of selection in health insurance markets have not generally found very large effects, meaning that the potential shifts in premiums due to the mandate itself are probably quite small.

Thus, there is actually some good evidence that the individual health mandate, considered by itself, would reduce premiums for existing health insurance customers. But, the ACA contains plenty of other provisions, such as the elimination of price discrimination, lifetime caps, and preexisting conditions clauses, that could interact with the mandate and complicate the picture.
hyperbollocks 8/19/2016 08:01:00 PM
well the difficulties Obamacare is now in seem to be due to unanticipated advantageous selection. Companies are getting into trouble due to new enrollments making more claims than were expected. This does not mean that they should not be insured however. These are very likely individuals with no cash to pay premiums or unrealistic optimists.