March 15, 2014

TRAIN WRECK UPDATE: Obamacare Co-Ops Exploit Dodgy Pricing.

You can read this development in two ways. One is as the surprising success of an innovative business model. And the other is as a potential fiscal disaster.

My general understanding of health insurance markets is that they are very, very tightly priced. If a policy is significantly cheaper, it’s either because the policy offers fewer benefits, its provider networks are miserly, or the insurance company has found a way to select for unusually healthy patients. (My favorite example of this in recent years was the Medicare Advantage policies that prominently advertised free gym memberships. You can imagine which seniors this benefit appeals to.)

And maybe that’s what the Obamacare phones are for. An insurer with 80 percent of the state market, however, cannot be lowering its prices through cherry-picking patients. My understanding is that most of the exchange policies offer relatively thin networks compared with the policies that are sold to employers, or individuals off the exchange, so that’s unlikely to be the full explanation, either. And what with all the mandates, an insurance company can’t be offering dramatically reduced benefits, either.

Which suggests a worrying alternative possibility — that the inexperienced co-ops have systematically priced their policies too low. That could hit the taxpayer in two ways: through the risk-corridor payments, which will make up excess losses, and through the $2.1 billion worth of government loans that have been made to these insurers.

Well, that would seem par for the course, wouldn’t it?