By Lambert Strether of Corrente
This post, with its somewhat alarmist headline — I mean, let’s hope it’s alarmist — was prompted by alert reader Jason, who mailed us flagging some important information on Blue Cross/Blue Shield in his home state of North Carolina (and more like this, please).
But before we get to Jason’s mail, let’s define the term “adverse selection.” Adverse selection is a form of information asymmetry, where sellers and buyers don’t have the same information; for example, a health insurance buyer who knows they need health care, and a health insurance seller who does not know which buyers need health care and which do not. Economics professor Robert Frank explains how an unregulated health insurance market with such asymmetries would play out in the New York Times (2013):
The crux of the matter is what economists call the adverse-selection problem. Uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people. And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates. …. But higher rates make insurance even less attractive for healthy people, causing even more of them to drop out. Before long, coverage would become too expensive for almost everyone.
In other words, a death spiral. ObamaCare’s mandate was supposed to keep enough healthy people in the pool so that the adverse selection problem did not arise. (According to the articles cited in the notes to this Wikipedia article on adverse selection, the evidence for adverse selection in the health insurance market is mixed at best; ironically, therefore, ObamaCare might end up providing that evidence!)
So how’s that working out? Let’s now turn to Jason’s mail (lightly edited):
I’m starting to wonder if there will be a big healthcare system blow up coming soon.
Jason’s interest was piqued by a link that showed Blue Cross/Blue Shield (BCBS) in Illlinois eliminating its most popular individual plan. He goes on:
BCBS in North Carolina is doing the same things in certain counties.
And Blue Cross themselves explain:
In order to address rising health care costs and to continue to provide sustainable insurance for our members, BCBSNC will be revising its individual product offerings for 2016. Effective January 1, 2016, our Blue Advantage and Blue Select plans, which offer our broadest provider networks, will no longer be offered to individual health care consumers in the Charlotte and Triangle areas who purchased their plans since January 1, 2014, as a result of the Affordable Care Act.
(Notice right here how ObamaCare is random with respect to jurisdiction. If you live in the Charlotte and Triangle areas, you go to Pain City; otherwise, you go to Happyville. Yay!) Jason explains how BCBS affects him:
I basically don’t have a good option. The value plans basically cover nothing, none (yes literally none, zero) of my doctors take it. The local plan is tied to the local hospital network and affiliated doctors and is better, but presents problems as specialists I see for a rare genetic condition aren’t local or covered by either. There isn’t another option either, as I live near Charlotte and most of these specialists are at medical schools, so my only options are at UNC or Duke which don’t take the plans I have to choose from. There are no other real options either. Although there are plans from other insurers they aren’t comprehensive either and don’t cover doctors I need.
(NC readers will remember a post from Dromaius in 2013 on how insurance companies design narrow networks to make sure “consumers” needing specialists don’t sign up for their policies.) Jason’s solution:
I am seriously starting to think that moving might be the only way to get a decent healthcare plan and just might be my best option.
(Wait, I thought Obama said “we were able to deliver on universal health care”? To be fair, if you parse the words, he did just that. To take delivery, you need only leave your home and move somewhere else. Such a deal.) North Carolina’s BCBS has a blog, where they explain their thought process for
re-inserting their sucking mandibles “revising” their “individual product offerings:
Why We’re Adjusting Our 2016 ACA Rate Filing
Early on, industry and government officials counted on two assumptions: A healthier mix of customers in the second year (2015), and a leveling-out of medical spending this year following a surge in demand for the initial year. We now have enough data to know that both of these assumptions have not proven true.
Earlier this summer, my colleague Brian Tajlili wrote in a blog post that our ACA customers are reporting even more chronic health conditions than last year, and they’re using a lot of expensive health care services. And he noted that we may need to adjust our filing to reflect a higher increase in order to cover these costs.
Unfortunately, we now know that to be the case. Our claims and expenses are higher than the premiums we are collecting. As we reported last month, the operating losses on our ACA business in 2014 were $123 million — a number that can’t be sustained over time.
And it’s not just BCBS in North Carolina:
Our rate request is consistent with others across the country as reported by The New York Times.
Jason translates how BCBS is “adjusting” its “rate filing”:
They basically say that their customers are needing and getting lots of healthcare and because of this they are losing money so they are jacking up rates. They then say that lots of people are getting low-cost, limited network plans so they decided to take away the option of getting better plans for some people depending on where they live.
(Again, does this sound like Obama’s “universal health care” to you?)
So let’s step back. We’re seeing what could be the effects of adverse selection: The price increases. And we see, from BCBS, the cause of adverse selection: A mix of customers that’s too unhealthy for BCBS to
bloat itself make a profit. But what about ObamaCare and the mandate? Will the pool of insured, eventually, include enough healthy citizens customers for ObamaCare to make sense as a business proposition? It’s not looking good, since the policies are so crapified. Remember this? From the NBER:
However, even under the most optimistic assumptions, close to half of the formerly uninsured (especially those with higher incomes) experience both higher financial burden and lower estimated welfare.
So the pool is bad — by which we mean that those who need health care are getting it, and those who don’t aren’t paying for them — and not likely to get better. Bob Laszewski writes in Forbes:
Yesterday, the Obama administration said that they expect to have 10 million people enrolled on the Obamacare insurance exchanges in 2016. They further said they expect to sign-up only one in four of those still uninsured and eligible during the 2016 open enrollment scheduled to begin on November 1.
These are astonishing admissions.
In 2013 the Congressional Budget Office (CBO) estimated that the Obamacare insurance exchanges would enroll an average of 22 million people during 2016.
If the administration is able achieve an average paid-for enrollment of 10 million people during 2016, they would have only signed up 36% of the potential market of 28.1 million.
Why is this important?
Because in order for a [for-profit] health insurance program to be sustainable and affordable, it must sign up many more healthy people than sick people in order to pay the costs of those who are sick. Since Obamacare is still relatively new we don’t know for certain what percentage of the total eligible we need to make the program work. But, we do know that the longtime health insurance industry underwriting rule is that 75% of an eligible group is necessary to get “an adequate cross section of risk”–the right balance between sick and healthy.
(An “an adequate cross section of risk” is adequate to avoid adverse selection.) Well, if 50% of those who aren’t enrolled have decided ObamaCare is a bad deal, that would seem to put the 75% baseline at risk. Laszewski confirms:
By historical standards, if the administration were to meet its 2016 enrollment estimates it would have only half of the population needed to make the [for-profit] program sustainable. No matter what Obamacare’s actual take-up requirement turns out to be, 36% is not even close.
Why isn’t Obamacare growing?
Because, other than for the lowest income people who enjoy the biggest subsidies and lowest deductibles, the insurance products health plans are required by Obamacare to sell people are just plain unattractive with their still after subsidy premiums and high deductibles and co-pays. The value simply isn’t there for the working and middle class–unless of course you are sick.
Of course, ObamaCare’s tax penalties, which grow increasingly large over time, may change that value equation; a touch of the lash always makes the galley slaves row harder, after all.
Interestingly, ObamaCare’s next open enrollment period will begin and end immediately before the 2016 Presidential campaign begins in earnest with the Iowa caucuses; and the open enrollment period after that will begin around the time that people go to the polls. So if an ObamaCare death spiral moves from mere hints and intimations to harsh realities, progressives in and around the Democratic Party will be confronted with a historic choice: Will they die in the last ditch to defend ObamaCare as is? Will they advocate tweaks? Will they revive the so-called public option? Or — especially given that Clinton has already head-faked left on so many other policies — will they finally push for the simple, rugged, and proven “Everybody in, nobody out” single payer program advocated by Bernie Sanders?
 Because I’m not a “worse is better” kind of guy.
 Obama’s demogoguery on the mandate in 2008 was too much even for Krugman. Clinton supported the mandate; and Obama ran Harry and Louise-style ads (the background) against Clinton, opposing it. Naturally, when in office, Obama supported it.
 “Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey,” The RAND Journal of Economics, 2001. “A robust prediction of adverse-selection models is that riskier types by more coverage and, on average, end up using more care. We test for unobservables linking health insurance status and health care consumption. We find no evidence of informational asymmetries.”
 If you squeeze the profit balloon on the policy side, by insisting that those with pre-existing conditions be covered, as ObamaCare does, then the profit balloon expands on the crapification side, and you get narrow networks without specialists and/or limited by geography, high co-pays and deductibles, narrow formularies, and other forms of obfuscation (or, to put it less politely, fraud). We should be seeking to pop the profit balloon in health care, not squeeze it.
 Or — anything’s possible — the Tea Party, et al., might actually grow some stones and start doing serious tax resistance, now that the screws are beginning to tighten; interestingly, the ObamaCare statute forbids the IRS from garnishing your wages or putting a lien on you if you don’t pay the tax penalty for not fulfilling the mandate, which sure looks like a set-up to me. (Yes, the IRS can take your refund, but surely that can be gamed.) Another reason 2016 might be more interesting even than the usual Presidential year.