By Lambert Strether of Corrente.
ObamaCare is, of course, a neoliberal “market-based” “solution.” ObamaCare’s intellectual foundations were expressed most clearly in layperson’s language by none other than the greatest orator of our time, Obama, himself (2013):
If you don’t have health insurance, then starting on October 1st, private plans will actually compete for your business, and you’ll be able to comparison-shop online.There will be a marketplace online, just like you’d buy a flat-screen TV or plane tickets or anything else you’re doing online, and you’ll be able to buy an insurance package that fits your budget and is right for you.
Let’s leave aside the possibility that private plans are phishing for your business, by exploiting informational asymmetries, rather than “competing” for it. Obama gives an operational definition of a functioning market that assumes two things: (1) That health insurance, as a product, is like flat-screen TVs, and (2) as when buying flat-screen TVs, people will comparison shop for health insurance, and that will drive health insurers to compete to satisfy them. As it turns out, scholars have been studying both assumptions, and both assumptions are false. “The dog won’t eat the dog food,” as marketers say. This will be a short post; we’ve already seen that the first assumption is false — only 20%-ers who have their insurance purchased for them by an institution could be so foolish as to make it — and a new study shows that the second assumption is false, as well.
ObamaCare’s Product Is Not Like a Flat-Screen TV
Here’s the key assumptoin that Obama (and most economists) make about heatlth insurance: That it’s a commodity, like flat screen TVs, or airline tickets, and that therefore, there exists a “a product that suits your budget and is right for you” because markets. Unfortunately, experience backed up by studies has shown that this is not true. From ObamaCare is a Bad Deal (for Many). From Mark Pauly, Adam Leive, Scott Harrington, all of the Wharton School, NBER Working Paper No. 21565 (quoted at NC in October 2015):
This paper estimates the change in net (of subsidy) financial burden (“the price of responsibility”) and in welfare that would be experienced by a large nationally representative sample of the “non-poor” uninsured if they were to purchase Silver or Bronze plans on the ACA exchanges. The sample is the set of full-year uninsured persons represented in the Current Population Survey for the pre-ACA period with incomes above 138 percent of the federal poverty level. The estimated change in financial burden compares out-of-pocket payments by income stratum in the pre-ACA period with the sum of premiums (net of subsidy) and expected cost sharing (net of subsidy) for benchmark Silver and Bronze plans, under various assumptions about the extent of increased spending associated with obtaining coverage. In addition to changes in the financial burden, our welfare estimates incorporate the value of additional care consumed and the change in risk premiums for changes in exposure to out-of-pocket payments associated with coverage, under various assumptions about risk aversion. We find that the average financial burden will increase for all income levels once insured. Subsidy-eligible persons with incomes below 250 percent of the poverty threshold likely experience welfare improvements that offset the higher financial burden, depending on assumptions about risk aversion and the value of additional consumption of medical care. However, ; indicating a positive “price of responsibility” for complying with the individual mandate. The percentage of the sample with estimated welfare increases is close to matching observed take-up rates by the previously uninsured in the exchanges.
So, for approximately half the “formerly uninsured,” ObamaCare is a losing proposition; I don’t know what an analogy for flat-screen TVs is; maybe having to send the manufacturer money every time you turn it on, in addition to the money you paid to buy it? That’s most definitely not a “package that fits your budget and is right for you,” unless you’re a masochist or a phool. Second, the portion of those eligible that does the math probably won’t buy the product if they’re rational actors (and Obamaare needs to double its penetration of the eligible to avoid a death spiral). That again is not like the market for flat-screen TVs; the magic of the ObamaCare marketplace has not operated to produce a product at every price point (or a substitute). Bad marketplace! Bad! Bad!
Health Care “Consumers” Tend not to Comparison Shop
We turn now to a second NBER study that places even more dynamite at ObamaCare’s foundations. From Zarek C. Brot-Goldberg, Amitabh Chandra, Benjamin R. Handel, and Jonathan T. Kolstad, of Berkelely and Harvard, “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics” NBER Working Paper No. 21632 (PDF), the abstract:
Measuring consumer responsiveness to medical care prices is a central issue in health economics and a key ingredient in the optimal design and regulation of health insurance markets. We study consumer responsiveness to medical care prices, leveraging a natural experiment that occurred at a large self-insured firm which required all of its employees to switch from an insurance plan that provided free health care to a non-linear, high deductible plan. The switch caused a spending reduction between 11.79%-13.80% of total firm-wide health spending. We decompose this spending reduction into the components of (i) consumer price shopping (ii) quantity reductions and (iii) quantity substitutions, finding that spending reductions are entirely due to outright reductions in quantity. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services). We then leverage the unique data environment to study how consumers respond to the complex structure of the high-deductible contract. We find that consumers respond heavily to spot prices at the time of care, and reduce their spending by 42% when under the deductible, conditional on their true expected end-of-year shadow price and their prior year end-of-year marginal price. In the first-year post plan change, 90% of all spending reductions occur in months that consumers began under the deductible, with 49% of all reductions coming for the ex ante sickest half of consumers under the deductible, despite the fact that these consumers have quite low shadow prices. There is to respond to the true shadow price in the second year post-switch.
So, empirically, these “consumers” just don’t act the way that good neoliberal Obama says they should; they do not comparison shop. That alone is enough to undermine the intellectual basis of ObamaCare. If there’s no comparison shopping going on, there’s no competitive pressure for health insurers to improve their product (assuming good faith, which I don’t).
(We can leave aside the issue of motivation, but to speculate, I’ve found that when I talk to people about health care and health insurance; they’re very defensive and proprietary about whatever random solution they’ve been able to cobble together; and if you’d been sold an exploding flat-screen TV, and had somehow been able to use duct tape and a well-timed fist to the housing to get it work, most of the time, wouldn’t you be rather unwilling to go back to the same store and buy another? So there is evidence of “learning”; the lesson learned is once you’ve got something that seems to works, don’t on any account change it, and we “bear those ills we have,” rather “than fly to others that we know not of.”)
Moreover, the population studied has more ability to comparison shop than ObamaCare’s. From page 4 of the study:
Employees at the firm [in the study] are relatively high income (), an important fact to keep in mind when interpreting our analysis
The top income for a family of four eligible for ObamaCare is around $95K (and not eligible for subsidy). Do people think this ObamaCare-eligible population has more ability to comparison shop, compared to a population with a $125K median income for individuals, or less ability? To put this more tendentiously, if a population that can afford accountants or at least financial planners doesn’t comparison shop, how likely is it that a population that cannot afford those personal services will do so?
Even worse, the population studied reduces costs, not by comparison shopping, but by self-denial of care. From page 6 of the study:
In our setting consumers were provided a comprehensive price shopping tool that allowed them to search for doctors providing particular services by price as well as other features (e.g. location).
So, just like the ObamaCare “marketplace online” front end (at least after they got it working). And what happened?
We find . The effect is near zero and looks similar for the t-1 — t0 year pair (moving from pre- to post-change) as it does for earlier year pairs from t4 to t1. Second, we find no evidence of an increase in price shopping in the second year post-switch; consumers are not learning to shop based on price. Third, we find that essentially all spending reductions between t1 and t0 are achieved through . From t1 to t0 consumers reduce service quantities by 17.9%. Fourth, there is limited evidence that consumers substitute across types of procedures (substitution leads to a 2.2% spending reduction from t1 — t0). Finally, fifth, we find that these quantity reductions persist in the second-year post switch, as the increase in quantities between t0 and t1 is only 0.7%, much lower than the pre-period trend in quantity growth. These results occur in the context of consistent (and low) provider price changes over the whole sample period.
Now, it could be that the study population is reducing items like cosmetic surgery and not items like dental care (assuming they’ve got dental); the Healthcare Economist summary of this study says no. In fact, says the study, some of the foregone services were “likely of high value in terms of health and potential to avoid future costs.” And it could be that the lower-income ObamaCare-eligible are smarter shoppers (dubious: Shopping is a tax on time a lot of working people can’t pay). That said, it looks like ObamaCare has replaced a system where insurance companies deny people needed care with a system where people deny themselves needed care; which is genius, in a way. However, if any doctors or medical personnel continue to support ObamaCare politically, they should consider closely whether they’re violating the principle of non-maleficence — “First, do no harm” — and halt their support, if so. Bad marketplace! Bad, bad!
Shopping for health insurance under ObamaCare is nothing at all like shopping for a flat-screen TV. First, there’s a sizeable population who, if they are rational actors, just won’t buy health insurance at all; the ObamaCare “marketplace” is not capable of adjusting prices to get such “consumers” to enter the market. Second, people don’t comparison shop; they reduce needed care. (To flog the flat-screen TV metaphor even further, if the screen is so defective it’s painful to watch, people don’t reduce the pain by comparison shopping for a better TV; they reduce the pain by watching less, and keep the TV they have.)
So, with ObamaCare, and thanks to the dogmas of neoliberalism, we have a “marketplace” that repels “consumers” from entering it, and repels people from shopping if they do enter. Perhaps there’s a better solution out there?
 It may be that the ever-increasing mandate penalties will force enough people into the marketplace to make ObamaCare actuarially stable; needless to say, we don’t see Federal agents forcing people into Best Buy to buy TVs, although the social pressure of Black Friday comes close.
 Again, much like ObamaCare plans, which are increasingly high-deductible.