How the Left and the Right View the Race to the Bottom

Imagine an idealized model of the health insurance marketplace in which there are only three sets of variables:

  • Premiums
  • Covered benefits
  •  Access to providers

In this simple world, these are the only choices insurers have. They cannot tell providers how to practice medicine. They don’t negotiate special discounts. Once they decide what fee to pay, providers can join or not join their networks. In what follows, I will assume that higher fees attract more doctors and hospitals to a network and that means greater access to care. Lower fees have the opposite effect.

Now, you could conceivably have market competition for all three sets of variables. You could also have government regulate all three. But if you want robust competition,* you can only regulate one of them.

If the government sets the premiums, for example, the only way insurers will be able to compete robustly is by offering various tradeoffs between benefits and access to providers. One insurer might offer a rich package of covered benefits but access to a very narrow range of providers. Another might offer a broader network of providers, but more limited benefits, etc.

Alternatively, the government might choose to regulate access, say, by requiring insurers to include in their network every doctor licensed to practice medicine. In that case the only way insurers can compete is by offering various options with respect to benefits and premiums. For example, there might be a rich benefit package and a high premium, or a limited benefit package and a low premium, or various tradeoffs between premiums and benefits.

Now here is the strange thing about how left-of-center health policy wonks think and it is reflected in the ObamaCare exchanges. Since they want competition in the exchanges, they can only regulate one of the three sets of variables. Which one do you think they choose?

Answer below the fold.


This sky, too, is folding under you
And it’s all over now, Baby Blue.

They choose to regulate the benefits package. And loyal readers of this blog already know what the consequences of that are. We are getting a race to the bottom on access ― with private plans in the exchanges looking increasingly like Medicaid. (See here, here  and here, and Robert Pear in the New York Times this morning. By the way, this is precisely what has happened in Massachusetts).  I do not remember seeing any left-of-center blog commenting on this, however.

Why do I say this is a strange choice?

During the 2008 election, every serious candidate for the Democratic presidential nomination repeated the “universal coverage” mantra repeatedly ― and on the left “universal coverage” means universal access to care. I don’t recall any candidate talking about the benefits package. Also, no candidate even hinted that access to providers might not be any better than it is under Medicaid.

Yet what we got legislatively is very strict regulation of benefits ― right down to free contraceptives, questionable mammograms and other non-cost-effective preventive procedures. At the same time health plans have been given enormous freedom to set their own premiums and choose their own networks. In fact the administration has been touting the fact that the premiums have been lower than expected, even though the reason is that the networks are narrower and skimpier than expected.

Why would anyone want to regulate the benefit package in the first place? Austin Frakt and Aaron Carroll apparently believe that without regulation, there would be a similar race to the bottom on benefits. Here is what they say, for example, about competing state regulations:

Allowing insurers to sell policies across state lines would invite a “race to the bottom.” In time, all insurance would originate from states with the least regulation. The policies will be cheaper. But they’ll also be skimpier. They’ll be great if you’re young, healthy, or wealthy enough to afford to fill in the coverage gaps. They’ll be terrible if you are older, have a chronic condition, or, again, if you’re low income.

State regulation is mainly in the form of mandated benefits. For example, state governments tell insurers they must cover services ranging from in vitro fertilization to acupuncture and providers ranging from chiropractors to naturopaths. What Austin and Aaron are saying is that given the freedom to choose, insurers would avoid as many of these mandates as possible.

If they are right, that implies that the consuming public views all of these mandated benefits as not worth their cost. The behavior of self-insured companies suggests that isn’t so, however. These companies often include such services as acupuncture and naturopathy even though they are not required by state law to do so. Presumably, employers give their employees the benefits the employees want.

A race to the bottom doesn’t happen in normal markets. But it’s possible that health care is different. Suppose that consumers are persistently myopic. Suppose they systematically underestimate the various services they will want, once they get sick.

In the ObamaCare exchanges, the insurers apparently believe that is what is happening with respect to the choice of networks. Only sick people (who plan to spend a lot of health care dollars) pay close attention to networks, conventional wisdom has it. Healthy people tend to buy on price. Thus, by keeping fees so low that only a minority of physicians will agree to treat the patients, some insurers are able to quote very low premiums. They are banking on attracting the healthy and they may even have the good luck to scare away the sick.

This conventional insurance wisdom ― whether right or wrong ― is a plausible explanation of why there is a race to the bottom with respect to access to care in the ObamaCare exchanges. It could also be used to justify the Frakt/Carroll view of competition in benefits as well.

[As an aside, here is the question for the reader: Which is worse? Fixing the benefits and allowing a race to the bottom on access to care? Or regulating access and allowing a race to the bottom on benefits?]

I think there is a better explanation for these and other races to the bottom. Imagine a free market for health insurance in which insurers are completely free to price risk for every consumer in every benefit dimension. What do you think the market would look like? If consumers differ in the benefits they prefer, insurers would have an incentive to charge them an actuarially fair premium for every benefit change.

We can imagine a market equilibrium in which every single consumer has a different benefit package and everyone is charged a different total premium. Health plans could be as diverse as the portfolios of employee 401(k) plans.

What is it in the real world that prevents this diversity from happening? Answer: insurers are not allowed to accurately price risk. Except for the small percent of the population that is in the individual market (and even there the stay is typically temporary), everybody is being charged community rated premiums. In the ObamaCare exchanges, (modified) community rating for individual plans will be required by law.

This prevents insurers from presenting buyers with real (risk-adjusted) tradeoffs between price and access or price and benefits. It’s this artificial pricing that causes a race to the bottom, not some inherent defect in the market.

Incidentally, the theory proposed here provides a rational justification for consumer myopia. Under managed competition (that is, ObamaCare exchanges), if I am healthy why wouldn’t I buy on price? If I later develop cancer, I’ll move to a plan that has the best cancer care. If I develop heart disease, I’ll enter a plan with the best heart doctors.  And these new plans will be prohibited from charging me more than the premium paid by a healthy enrollee. (See a more comprehensive analysis.)

In proposing this theory, I am doing more than just speculating. I am willing to offer a wager to Austin and Aaron that I can mathematically prove that in a managed competition setting, community rating and community rating alone is sufficient to produce a race to the bottom on benefits, on access to care and on other dimensions of quality as well.

*By “robust competition” I mean that competitors must have the ability to vary the amount they spend on benefits and/or vary the average provider fee they are willing to pay.

Comments (78)

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  1. Alieta Eck, MD says:

    In the health insurance exchanges, the coverage and deductibles are established by the government. Thus, it appears that the only choice people have is the logo on the insurance card.

  2. Ken says:

    John, you out did yourself this morning.

  3. JD says:

    Exactly, actions have consequences. It is amazing how hard it is to get this through people’s heads.

    • Billy says:

      Because people have mistaken liberty’s promise of freedom to face our own consequences as a promise that we are free from those consequences.

  4. Don McCanne says:

    Instead of looking only at regulation of just one of the three variables – premiums, benefits and access – the other combinations of zero, two of the three, or all three should be considered as well.

    Regulating two of the three of course would have a negative impact on the remaining one. Regulating none would destroy the fundamental function of insurance in pooling risk. Ah, but regulating all three would provide access to the benefits that each person would need while distributing costs equitably by replacing premiums with progressive taxes.

    • Greg Scandlen says:

      Hey, Don, where does your faith in the omniscience of regulators come from? I mean this sincerely. I truly do not understand it.

      • Don McCanne says:


        Compare Canada and the United States. We were on the same trajectory until Canada adopted its single payer system (their Medicare). The costs of their system are now much less than ours, and benefits of their program are very generous, especially when you consider their first dollar coverage.

        Access in Canada has been criticized, but the problem has been greatly exaggerated, not to mention that access in the United States is much worse because of our financial barriers. We have far more uninsured than the entire population of Canada.

        Canada does not have access problems for emergency conditions – a fracture is taken care of immediately. The problem is queues for elective services. The Fraser report is often cited to show the alleged severity of this problem, but look at page ten of their report:

        Most waiting times are considered “clinically reasonable” and are comparable to waiting times in the United States (for those who have insurance or can pay for care). The major exception is elective joint replacement, but efforts at queue management and capacity adjustments are improving this. Plastic surgery also has queues, but cosmetic surgery is primarily provided in the private sector and can hardly be blamed on government mismanagement.

        The more disconcerting queue is for internal medicine – 9 weeks for an elective appointment – but that represents a problem that they share with the United States: a serious deficiency in primary care services. Since the private sector has not remedied this deficiency, we will soon see, in both countries, more effort to fill the void through greater public regulation.

        • Greg Scandlen says:

          So, Don, it is not “regulation” that you support. Again, let’s try to be precise in our terminology. “Regulation” applies to government control over private parties. There are no private payers in Canada (other than for peripheral services). There is direct governmental provision of health care financing services, funded exclusively through taxes. That is not regulation, it is expropriation.

        • Greg Scandlen says:

          By the way, I think an argument could be made that Canada has LESS regulation of doctors and hospitals than the United States has.

        • John R. Graham says:

          The statement that Canada does not have “access problems for emergency conditions” is completely unfounded. ER overcrowding in Canada has been a subject of both media reports and scholarly research (mostly by defenders of single-payer) for years. See, e.g.

          • Don McCanne says:

            ED overcrowding is a problem in all nations, certainly including the United States, but care is still provided on an emergency basis.

            • John R. Graham says:

              However, in Canada, ER’s are also crowded with people who do not need emergent care. They do not have access to primary care. The situation is similar to that in the U.S., especially for the uninsured.

        • Jerry Lang says:

          You said: “The more disconcerting queue is for internal medicine – 9 weeks for an elective appointment – but that represents a problem that they share with the United States: a serious deficiency in primary care services. Since the private sector has not remedied this deficiency, we will soon see, in both countries, more effort to fill the void through greater public regulation”.

          Typical “progressive” wishful thinking. No way in Hello “greater public regulation” is going to solve the “deficiency in primary care”, ie. lack of doctors. Unless, that is, one can regulate that street sweepers overnight are medical doctors.

          • Don McCanne says:

            I was referring to regulation in the broader sense of things that government can do to address problems that the private sector is not – in this case, the deficiencies in our primary care infrastructure.

            The government does not have to resort to commanding people to become primary care physicians nor commanding them to practice in underserved regions. What they can do and already are doing to some extent is to expand support of training programs in primary care, expand the National Health Service Corps, including scholarships and practice incentives, expand federally qualified health centers, reject the RUC recommendations by shifting compensation from the procedure-oriented specialities to primary care, expand training and scope of practice for nurse practitioners and other health care professionals that will free up time for physicians to deal with more complex medical problems, etc., etc. There is much positive that the government can do to help correct this deficiency.

            With an adequate infrastructure supported by government policies, primary care professionals have more time and resources to do what they want to do – tend to the health care needs of their patients.

            You can continue fantasizing that markets and competition will take care of this, but when they aren’t, and there is an essential need, our government has a duty to step in. It’s our government and it’s there for us.

            • Jerry Lang says:

              You can continue to fantasize that more government is the solution. You also need to admit there is a vast distinction between “regulation” and “incentive”. One is involuntary mandate, the other is not. The basic problem with your solution is that it will take time, many years in fact to train enough primary care docs to handle the influx of so many into the system that ObamaCare envisions. Before that happens, I predict the problems will become so massive that there will be hue and outcry for gov to “do something / ANYTHING” to fix them. MORE gov, MORE regulation, MORE COST will the the inevitable outcome. Single-pay, here we come.

              I also predict that the unions and private insurance companies who were so in favor of this will rue the day. Why unions, you may ask? Well, if gov is in total charge of health insurance, unions will have very few issues left that require combat, er, negotiation with management. Even fewer reason to exist at all. Pity!

            • Peter McIlhon says:

              You say that government doesn’t have to “command” people. Tell me, what’s the difference between government “commanding” and “expanding” or “rejecting”. Government expansion is commanding by definition.

    • Daver says:

      Most of us have an inherent fear of single payer because we have seen the results in other countries, and that is what elimination of competition will invariably lead to.

      It’s interesting that the gov’t is currently pursuing restrictions on American Airlines and US Air merging because of the fear of competition loss, yet actively driving insurance companies and health care providers out of the markets with apparently no concern about the impact on consumers?

      • Greg Scandlen says:

        Well, let’s get the terminology right. There is only one industrialized country in the world with a “single payer system.” That is Canada. Every other country including the UK has a mix of private and public payers.

  5. Dewaine says:

    “In proposing this theory, I am doing more than just speculating. I am willing to offer a wager to Austin and Aaron that I can mathematically prove that in a managed competition setting, community rating and community rating alone is sufficient to produce a race to the bottom on benefits, on access to care and on other dimensions of quality as well.”

    I’d like some action as well.

  6. Val Baertlein says:

    Reminds me of the story I heard about the Blue Whale, a replica of which was hanging from the ceiling at a Smithsonian museum, which fell upon a hapless visitor, sending him to a hospital, whereupon he found that kind of incident the only thing covered by his insurance.

  7. Mark says:


    We are never going to win any arguments by using the old divisive “left-right” labeling. We need to talk only about what works, what is good economics and what is bad economics. As Ronald Reagan said way back in his 1964 speech, “there is no left or right, only up or down.”

  8. John Goodman says:

    I agree with you Mark. I should have titled this “Why There is a Race to the Bottom.”

  9. BHS says:

    “Under managed competition (that is, ObamaCare exchanges), if I am healthy why wouldn’t I buy on price? If I later develop cancer, I’ll move to a plan that has the best cancer care. If I develop heart disease, I’ll enter a plan with the best heart doctors. And these new plans will be prohibited from charging me more than the premium paid by a healthy enrollee.”

    It’s hard to see how this consequence escaped so many people.

    • Jerry Lang says:

      Carrying this to the obvious conclusion, why would a healthy person buy any insurance at all? Proposed non-compliance penalties are far less than the premiums. If health problems develop in the future, opt in then. You cannot be denied due to “pre-existing” conditions.

    • BLS says:

      Enrollment is once a year. What if you get cancer right after you’ve enrolled in that plan bought on price only?

  10. Don Levit says:

    Alieta is correct that the Exchanges set the deductibles and the coverage, with 2 caveats:
    1. Excepted benefits do not have to conform to ACA.
    2. As long as the excepted benefit is integrated with other coverage, so that the combined coverage is ACA compliant, all is kosher.
    Community rating actually levels the playing field, by initially charging all the same premium.
    Each month that a person has no claims, he is provided a discount (the lower the claim,the higher the discount).
    While benefits and deductibles are mandatory, filing claims for covered benefits is optional.
    Over 36 months, one’s premium is discounted up to 60% (less, if small claims are filed).
    Over 50 months, the discount is up to 80%.
    This is accomplished via the excepted benefits paid-up benefits rider.
    If one does have large claims, his premium is still the community-rated premium.
    The result is a fair premium for sick and healthy, old and young, particularly over the long run.
    Don Levit

  11. Stewart T. says:

    “Answer: insurers are not allowed to accurately price risk.”

    This is because if they were allowed to do so, some people would be completely written out of the system.

    • Billy says:

      Which is why reducing the necessity of health insurance should also be a goal. If more people can afford it without insurance, more people will have access regardless of circumstances.

    • John Goodman says:

      Not if the system is designed correctly. Medicare pays risk adjusted premiums for special needs enrollees ($60,000 per person, last time I looked) in Medicare Advantage plans.

      You can have real prices without leaving people out.

    • Jerry Lang says:

      Supposedly Obamacare is primarily designed to include those who are currently written out of the system. I submit that if this is the true goal, it would be far easier and cheaper in the long run to simply cut those folk a check and mandate that it be actually used for insurance premiums. Of course, this would be exploited the same way food stamps are now, but hey, that means we get to expand the beaurocracy even more to enforce compliance.

  12. Centrist says:

    Correct me if I am wrong, but the concept of this article is to suggest that exchanges reduce the pool of doctors because the reimbursment levels are lower???

    I just got off the phone with Blue Cross of Idaho and the Exchange ACA metalic plans reimburse providers at the same levels as grandfathered plans. They do have available less expensive plans that have tighter provider pools, but only for those who choose them.

    This seems like the focus of the article is on something that may be isolated and by choice, rather than frequent and mandated.

  13. Mark R says:

    Good to see acknowledgment that HR 3121’s allowing purchases across state lines is a “race to the bottom”.

  14. Ron says:

    For regulating benefits, how about using state competition that creates a race to a marke-based CONSENSUS MIDDLE and PREVENTS a race to the bottom. Here is how:
    Allow each state regulator (or legislature) to veto allowing up to 25 other state’s insurance products, that do not provide for benefits or administration of benefits acceptable to the receiving state. For example, a state might veto the selling any products from states that do not have guarantee associations. Likewise, states may veto other states that do not provide comprehensive coverage (as determine by the recieving state). Insurers domeciled in the heavily vetoed states would lobby their state for more nationally accepted norms where they could sell products in other states. In states with high cost mandates, the domeciled insurers would have to lobby their legislatures for fewer mandates to be competive in other states. (Rule: any product sold in another state must also be legal in the state of origin) Walla – – a race to a national consensus on benefits and administrative mandates set my the market place of competing interests rather than politicians in any one state or in WDC.

    This was my suggestion to fix cross state selling arguments (a race to the bottom) against the Shaddeg bill.

    • John R. Graham says:

      I have always been baffled by these arguments for “selling insurance across state lines”. (I am, therefore, an odd duck in the free-market community.)

      Are there any examples of an insurer domiciled in any state being prevented from entering another state when it wants to? I haven’t found any.

      Aetna and CIGNA, for example, write policies in other states off their Connecticut balance sheets. There is nothing mysterious about this.

      Wellpoint grew by acquisition. So, although headquartered in Indiana, it writes California policies off a California balance sheet (Anthem Blue Cross). There’s nothing mysterious about this either.

      • Greg Scandlen says:


        Sure any carrier can enter any state and comply with the regulations of that state. That isn’t the issue. The issue is allowing consumers to buy products from other states in accordance with the regulations of those other states. The idea is attempting to dodge the regulations of the consumer’s home state. Don’t think of it as what the carriers are allowed to do, but what the consumers are allowed to do.

        • Underwriterguy says:

          Unless readers are students of benefit design, they may miss the distinction between regulation and mandated benefits. Regulation is not that dissimilar across the states (solvency, for example), but mandated benefits can vary greatly. Mandated benefits are usually a function of the power in any state of various “special interests”; that is, chiropractors, acupuncturists, massage therapists, etc.

        • John R. Graham says:

          I know that my view differs from Dr. Goodman’s and yours. I have never seen one carrier lobby for this reform, so they are not interested in it. They must realize it is ineffective.

          With respect to political philosophy, this is not a power I’m willing to concede to Congress. Not to be goofy, but we are all free to move to Utah if we want to enjoy the fewer mandates in the Utah insurance code. Each state imposes a bundle of costs and benefits on its residents and we must suffer and enjoy them until we change the politicians, or move.

          I did not enjoy paying California income tax when I lived there, but I did not advocate for Congress to allow me to opt out of California income taxes and pay Florida income taxes (i.e. zero).

          On a practical basis, the marginal costs of the benefit mandates are trivial when compared with cost differences caused by differences in the local environment. There is no such thing as a state-wide premium.

          Here is Robert Pear in today’s NY Times:
          “In many cases, the statewide figures are averages. The rates may be available only in parts of a state, and premiums can vary as much within a state as among states.
          Peter V. Lee, executive director of the state-run exchange in California, said that his state had 19 rating regions and that the variation in prices among regions was “quite significant.” For example, he said, a 40-year-old buying the least expensive silver plan would pay $240 a month in Los Angeles, but $330 in Sacramento, about 38 percent more.

          In New York, a premium charged in New York City might be more than 80 percent higher than the charge in Rochester — $611 a month against $337, for the same level of coverage offered by the same insurer. Even within Rochester, prices for the same level of coverage might range from $218 to $366 a month.”

          So, for a resident of New York to say “I want to buy a Utah health insurance policy” is a meaningless statement, because the Utah carrier would have to rent a provider network in Rochester, or wherever the New Yorker resides. And the costs would immediately float up the costs of providing care in Rochester. And if the Utah carrier had wanted to compete in upstate NY, it would have already done so. So, it will be unwilling to restructure its business to satisfy this reform.

          • John Goodman says:

            John, you are missing something. A Utah carrier is not going to come rent a NY network to sell insurance to New Yorkers.
            Instead, New York carriers are going to be able to sell insurance with Utah mandates instead of NY mandates.

            • John R. Graham says:

              That would make more sense but that is not the way most people understand it and not how most people read the Republican reform, as presented in the RSC bill (starting on p. 62 at

              It looks like the strict language of the RSC bill allows a carrier to designate a state other than a state in which it’s domiciled to be its primary state. I think that would add a lot of confusion to insurance regulation.

              Nevertheless, if it did so, the language is clear that it can designate one and only one state as primary state, and other states where it offers policies as secondary states.

              That would mean that Cigna, for example, if it is writing all its policies off its CT balance sheet instead of state-based subsidiaries (as I believe it generally is) would no longer be able to conform to the state mandates in the states in which it competes. It would have to incorporate separate subsidiaries with separate “primary states”. It all seems much too confusing.

              And I’ve never seen one insurer lobby for this. They lobby against state-mandated benefits, like autism treatment, but they don’t lobby to avoid the autism mandate by seeking permission to offer policies “cloned” from states without an autism mandate.

              I may be suffering from “that which is seen versus that which is not seen” and there may be pent-up supply from potential new entrants eager to displace incumbents by competing like this, but I very much doubt it.

  15. Bruce W. Landes, MD says:

    In the DFW market only one insurer that we deal with has truly created a product for the HIX, That is BCBSTX and they are creating a narrow network of both physicians and hospitals. I can’t give more details because I don’t know what is public information and what is proprietary.

    Another national carrier in DFW is also creating a narrow network for the HIX. Physicians will be chosen, not by quality or efficiency, but by where the majority of their attributed patients are hospitalized. (Many of our member physicians have privileges at multiple hospitals but use only one or two regularly.) We still don’t know if this carrier will participate in Texas or not.

    The law prevents excluding patients for pre-existing conditions, it does not prevent a health plan network from excluding physicians who have a high number of patients with pre-existing conditions or that are likely to be treated at high-cost hospitals.

    The narrow networks are not crafted just by accepting those providers willing to accept lower fees, the health plans have more data than that on providers and they are using it to restrict access in a way that they hope will reduce the attractiveness of their products to the high-cost patients.

  16. Tom Newsome says:

    You make an economic case against regulating benefits in the Health Exchanges, but I would suggest that it is the regulation of benefits which makes the Medigap market so much easier to navigate than the Medicare Part D market with its myriad variations of complex options. In the Medigap market, there are a limited number of plan groups, each with clearly defined and structured options for the consumer to compare. The insurance providers compete on price and reputation. The insured knows exactly what he is getting for his premium dollar. On the other hand, the unstructured world of Medicare Part D offers a confusing array of options in which one is always comparing apples to oranges to pears, etc. and, hopefully, not to lemons. Understandably, the consumer bases his choice on the only thing he can understand, price. Price is the driver since quality is so difficult to discern. As a result, the consumer may purchase a policy which does not serve him well and becomes more costly when his prescriptions change. As a consumer, I would argue that, academic economics aside, the general public is better served by offering in the exchanges as in Medigap a limited number of options which are clearly structured and easy to understand. Then, the decision can be based on price and access.

    Tom Newsome

    • Greg Scandlen says:

      Sorry, Tom, I totally disagree. Medigap is nothing more than dollar swapping and it “covers” exactly those Medicare provisions that make people sensitive to the costs they are incurring. The limited options are a bad thing, not a good thing.

      I have a Medicare MSA under Medicare Advantage. It is a great deal — simple to understand and less costly than Medigap would be. And I didn’t find Part D confusing in the least.

    • Underwriterguy says:

      Tom, some may find shopping for fruit confusing with so many options, as you note. I’d still rather do it myself rather than have a wise man tell me what to buy.

  17. DoctorSH says:

    Why don’t states mandate that insurers have riders for all the medical conditions that are now mandated, instead of forcing everyone to pay for them

    Put the riders out to community rating, and when you choose a policy, you first get the basic bare bones policy and then choose from the riders available that you feel you need. You are then stuck with this policy/riders for the year, until you can add/subtract riders at the renewal date.

    Why should a 55yo have to insure for maternity care or pediatric immunizations?

    Regulate what needs to be offered in a rider and give individuals the freedom to choose and the insurer the freedom within reason to charge a premium commensurate with the risk.

    • Greg Scandlen says:

      There is a better way to accomplish what you want. Instead of one group of customers choosing a maternity rider, and another choosing a substance abuse rider, and another choosing a vision/dental rider, let each group have an HSA and spend the money on exactly the services that appeal to them.

      Otherwise you are you are just getting into “dollar swapping”– each person buying coverage for services they know they will use, so the cost of the coverage exactly equals the cost of the services they will consume PLUS an administrative add-on of course.

      The HSA approach is better because it is totally customizable to the consumer’s needs — maybe maternity in their 20s, then invitro if the usual way doesn’t work, then pediatrics when the kids are young, then vision and dental as the parents age. And you can get all this without the 20% administrative add-on.

      • DoctorSH says:


        I am all for HSA’s. but we are not going to all of a sudden get rid of state mandates that drive up costs. So instead of mandating coverage, mandate riders be offered. They can always be rejected by the consumer, especially of they use their HSA correctly and fund it appropriately.

        The consumer will have to do the math about the cost of the riders, which could last for one year or more depending on the rider, vs the cost of paying out of pocket with their HSA. Riders can be Sort of like a life insurance policy with a 5-10 or 20 year term.

        • Underwriterguy says:

          Doc, are you going to let the insurer price the rider according to risk? If so, you will get exactly what Greg envisions, dollar swapping. If you mandate a community rate you are making the folks who don’t buy the rider pay for those who do.

          • DoctorSH says:

            Yes the rider needs to be priced according to risk.
            Then stop community rating.

            Insurance needs to be insurance.
            Govt should be invisible in the transaction of healthcare dollars, but can help low income outside of the transaction so as not to distort the price.

  18. health care attorney says:

    I completely understand when faux journolist (sic) partisan hacks like Ezra Klein, Jon Chait, Jonathan Capeheart, EJ Dionne, Paul Krugman, Kevin Drum et al, defend the indefensible and IGNORE the fact that the ACA fails in its key goal of cost control.

    What I don’t understand and find very upsetting is when serious academicians like Austin Frakt become CHEERLEADERS for the law instead of engaging in critical analysis.

    John, thanks for this piece. I wonder if Austin will take up your challenge?

  19. Rituparna Basu says:

    Re the Frakt/Carroll argument against allowing health insurers from selling across state lines: we need to shed the mentality that people are stupid if they pick the cheapest policy available.

    Some people, for good reason, may want cheaper policies, and other people, for equally good reason, may want a more comprehensive one. It all depends on what you’re looking for.

    We should respect the fact that some people have different preferences when it comes to health insurance, instead of viewing those individuals as cognitively inferior and trying to trap them, via regulation, in a situation other people think is better for them.

  20. Tom Newsome says:

    Greg and Underwriting guy:
    Clearly, you two are smarter than the average guys shopping for health insurance. Greg, most Americans do not understand “dollar swapping,” much less the fine print in health care policies. They only want to understand what they are buying for what price. A retired physician who understands the language of health care, I watched my employees sort through varying policies for patients, and I purchased individual care for my family. When I turned 65, I welcomed the packaged products of Medigap. In contrast, you welcome the flexibility of the HSA in your Advantage Plan. Properly employed, HSA’s lead to more selective medical purchases. Problem inherent in Advantage plans, especially in some areas, is that some major medical centers do not accept them. That restricts your access to care. I would rather have my menu of plans limited than my menu of providers. As for Medicare Part D, it is simple to pick a plan. You access, plug in your drugs, plug in your pharmacy, push “Enter,” and the computer spits out a list of 20 or so plans in ascending order of total cost. Since no two plans are perfectly alike, most consumers pick the cheapest plan with little understanding how it will play out in different scenarios during the year. I would argue that simpler packages would serve them better.
    Underwriter guy, I understand your desire for independence in picking your fruit, but you have to know something about fruit before you turn down assistance. Most Americans know nothing about the fine print in health care policies and benefit from assistance. For them, the acronym KISS applies.
    Academically, you two are entirely correct. I worry about the practical implications for the average consumer.

    Tom Newsome

    • Allan (formerly Al) says:

      Tom, I agree with you that Medicare Part D is more complex than Medigap, but that is because the variability is greater. However, that doesn’t prevent the patient from picking an appropriate plan along with the fact that it wouldn’t make much of a difference if in the plans the patient was looking at he chose his plan at random. Medigap, on the other hand distorts the reason for the copay to exist and most of the times, at least from what I have seen, people make a bad choice. The agents frequently push the higher cost plans or the plans they are connected with.

      • Ron says:

        The only reason Medicap and Part D are needed is that Medicare failed to evolve as commercial insurance did. No working person has a Part A, Part B, Part C, or Part D. The current Medicare plan design is a 1964 BCBS design (the common plan when Medicare legislation passed). There is an old saying, “Legislation tends to crowd out the future.” Part A=Hospital= BC; Part B=Physician=BS. This is what will happen under Obamacare. Approved treatments, coverages, processes, etc. will stay behind discoveries and they will be not allowed, not reimbursed, or made illegal. Medicare is like the government making everyone turning 65 buy a 1964 Chevy without AC, power steering, airbags, CD player, etc. God help us with the negative health and healthcare impacts of ObamaCare.

        • John R. Graham says:

          Yes, it is a crazy quilt. The oral history of Medicare (and it may be properly recorded too) is that the American Medical Assocation and the American Medical Association were negotiating with different legislative sub-committees, so Part A and Part B ended up shaped completely differently.

          It would be interesting to go back to interview the old negotiating teams and ask the hospital lobbyists why they wanted Part A funded by payroll taxes and ask the physician lobbyists why they wanted Part B to be funded by premiums deducted from Social Security checks plus the general fund.

          Does anyone have any insight?

          I think the Republicans have a very good (but not massively disruptive) idea when they propose merging the deductibles and co-pays for the different parts of Medicare. It is a small step in the right direction.

          • Ron says:

            Of course they should be merged. In addition,the easiest way to kill Medigap (the worst insurance buy ever created), is to simply remove the 150 hospital day limit on part A. I am an actuary who watched many field sales of Medigap policies. They are sold on the fear of staying in the hospital more than 150 days. (The elderly’s greatest fear is outliving their assets). I once had CMS estimate the cost of each change: (1) eliminating day limit on Part A- less than .25% of current Medicare A&B costs, (2)combine deductible ($100) and Coinsurance (80%) with a $10,000 annual max out of pocket – less than 3.5% increase in Medicare A&B costs.

            • Allan (formerly Al) says:

              “the worst insurance buy ever created”

              I am glad to hear an actuary make that statement. Some of my poor patients didn’t carry Medigap recognizing it to be a waste of their very few resources. I carry high deductible Medigap and even if the deductible is met I spend very little more than I would have had I had the low deductible. Of course policies differ so it might not be the same with other policies.

          • Greg Scandlen says:


            At the time (1965) there was a clear distinction in the private market between hospitalization coverage (Blue Cross) and physician services coverage (Blue Shield). Many, many people had the former but many fewer had the latter.

            Congress was trying to replicate what was available on the private market. That is why Part A is mandatory and Part B is voluntary. Being mandatory, Part A was to be funded solely with payroll taxes, while Part B would be funded with premiums plus some general revenues. Major Medical (integrated benefits) barely existed at the time.

            Ron is absolutely right that this is a great example of how government programs are fixed in time. It’s been almost 50 years and basic Medicare has barely changed. It is part of the reason I vehemently opposed the HIT mandate — fear os being stuck in 2009 technology. Or look at Thomas — a great breakthrough in 1995 when Gingrich proposed it, but it has barely changed in all this time.

            • John R. Graham says:

              Everyone I speak to in HIT says that the EHRs being installed for the purpose of earning meaningful-use payments as per HITECH ACT will be “ripped and replaced” within five years.

              As you wrote, there is a credible argument that the IT is already obsolete. The code is written in MUMPS, a language from the 1960s. But I’m told the hospital CIOs are going to retire in five years, so they just go with the flow.

              • Bruce W. Landes, MD says:

                I’m going to say that this conversation is growing weeds.

                There are over 400 ambulatory EHRs that have had at least one qualifier for Meaningful Use 1.

                MUMPS is the is the programming language under VISTA, the EHR used by the VA hospital systems. Maybe there are others written in MUMPS. I’ve never heard of them.

                All electronic health record (EHR) users must upgrade their systems before attesting to meaningful use under Medicare for the 2014 payment year. It does not matter whether they attest to Stage 1 or Stage 2 of Meaningful Use.

                Regardless of the stage of meaningful use they are trying to meet, they must use a Stage 2-certified product in 2014.

                “Some EHR vendors already have released Stage 2-certified versions of their product. You can check the certified health product list (CHPL) to see if your vendor has upgraded. Certification ensures the product has all the necessary capabilities, functionalities, and security required so that physicians can successfully attest to meaningful use.”

                “During attestation, the Centers for Medicare & Medicaid Services (CMS) requires you to give CMS an EHR Certification ID for the EHR technology you use to demonstrate meaningful use. EHR products that do not meet all of the CMS-required criteria to demonstrate meaningful use will not have a CMS EHR Certification ID. To get the certification ID for your product, view the instructions about using the CHPL website.”

                I have worked with the North Texas Regional Extension Center (NTREC) to help our members qualify for MU 1. I will be working with them again toward the goal of MU 2 qualification for our members.

                The HITECH act was the worst thing that could happen to health IT. It made so many vendors raise their prices and imagine that they would be the MS-DOS of healthcare.

                The last thing you need when headed in the wrong direction is more speed and more fuel. HITECH provided these, and keeps on giving.

                • John R. Graham says:

                  Both Epic and Cerner use MUMPS (according to news reports) and they are the Big 2 in hospital-based EHRs.

                  Vendors segment the market, and the more exciting firms (like Practice Fusion) sell to small physician practices. They are too small for big vendors to sell to.

                  However, this in itself is problem, because small physician practices are being rolled up by hospitals. So, the older-fashioned EHRs will dominate.

                  • Bruce W. Landes, MD says:

                    OK, EPIC uses MUMPS, I did not know that. Sorry.

                    Cerner uses Cerner CCL which is patterned after SQL (Structured Query Language).

                    My point was that government HITECH incentives have kept alive a varied group of programs that do not communicate with each other. Many of which should have gone to their well-deserved end long ago.

                    Most people who are enthusiastic about the EHR only know MS Word, MS Excel, PowerPoint, and Internet Explorer. All of which work together. Many are too young to remember the fight to merge the Hays and COMS modem protocols.

                    I wrote a payroll program for my practice in Lotus 123, (version C) and used a pirated copy of PFSWrite for word processing on a Compaq 8086 12 mHz with a 20 mg hard drive back in the 1980s. I also recall when lawyers used WordPerfect after everybody else had switched to Word.

                    The marketplace consolidated to a single standard that worked, so Bill Gates made billions because business was more efficient. If the government had been involved by offering incentives, we would all probably still be using multiple word processing programs and spreadsheets; just as today we are using over 400 different ambulatory EHRs that don’t communicate.

                    THAT was my point.

                    • John R. Graham says:

                      Thanks for the clarification. I’m just going with what I read. I have no experience of installing an EHR in any language!

                      My EHR comprises an Excel spreadsheet where I type in my weight, blood labs, and a couple of other things. No big deal!

                      I appreciate the Landes rule. There is also a sociological aspect to this that I believe the MDs will appreciate. We have often argued that there is too much defensive medicine. Some is due to medical malpractice but some is due to physicians’ not trusting each other or the chart.

                      What is the optimal level of “defensive medicine”? It is surely greater than zero. Some duplication is surely a beneficial trade-off, given human error.

                      What concerns me, and many doctors with whom I’ve spoken, is that they will be commanded to rely on charts with data from other physicians whom they might not even know.

                      Payers will increasingly refuse to pay for duplicate tests, because they will appeal to the infallibility of the EHR.

                      That introduces interesting medical-malpractice issues, doesn’t it?

                      Do any physicians have any feedback on that potential future?

                • Greg Scandlen says:

                  Bruce I appreciate your comments. You are much more of a guts and gears guy than I am. I just worry about evidence-based policy. I hope you are in touch with Scott Silverstein at Drexel University. He has been a great source to me about the constrains of HIT. See —

  21. Ron says:

    The whole idea behind cross-state selling is to allow each state’s coverage, administrative, and regulatory mandates to be available in other states. I you believe in competition of markets and ideas that provide choice and convenience then why not allow states to compete for business (revenues, taxes, jobs, etc.) in selling health insurance products. Of course, the competition is not really among states, but competition among insurers domiciled in those states. An insurer could develop one product, one technology platform, one policy form, etc. and sell nationally new fully insured products over night to individuals and small groups. My suggection above (previous reply)to move from the current exclusion of all states to excluding up to 25 states (you pick a number), would respect each states insurance commissioners (many elected to protect insurance purchasers), and allow a nationally competitive model for what coverages are desired by consumers rather than mandated by politicians or bureaucrats. Instead of a rush to the bottom of the barrel (states with few consumer protects and confusing contract), the dynamic would be a rush to a national concensus of what consumers want in their benefit designs. I call this a “Rush to the Middle.”

  22. John R. Graham says:

    I don’t think we’re convincing each other here, so this will be my last response on the subject. With respect to technology platforms, serious health plans are quickly becoming Big Data analytics firms with complex technology platforms.

    I can’t believe that differences in state-mandated benefits have a big impact on the IT implementation strategy of Cigna, Aetna, United HealthGroup, or WellPoint. What they care about is crunching the data very precisely for competitive advantage.

    And this idea that a carrier can sell “one product” in 25 states is not feasible when they cannot sell “one product” within one state. I looked at the NY map ( and it looks like there are well over thirty regions within the state, as defined by the exchange.

  23. Ron says:

    The state differences are geographic cost differences not product design differneces. I have been a product development actuary and can tell you that you are just wrong. Insurers can sell and market for about 10% less if allowed to market the same product in all states. Can you imagine a furnoture manufacturer’s costs if they had to maker different couches for ewach state and file for approval to sell separately in each state? There are many state laws (written by insurance lawyers) that could also be changed to low premiums 0-50%. Insurance has neverf been a consumer market, it has always been a highly regulated market. In general, insurers aren’t interested in lower costs, since much of their expenses are fixed. Most fought tooth and nail to defeat HSAs and lower premiums (savings to cover healthcare rather thsan premiums).

  24. John R. Graham says:

    OK: Not my last post! You are agreeing with my argument. The “geographic cost difference” does not lead to a “product design difference”, i.e. a benefit design difference. But it does lead to differential access depending on what the provider networks look like.

    Let’s say that repealing every insurance regulation (which will never ever happen) reduced costs overall by 10 percent. That is perhaps a reasonable estimate.

    I noted above that Covered California’s silver plan costs $240 in Los Angeles and $330 in Sacramento: Same plan design, different costs of care due to the structure of supply in the two cities.

    If the state of California reduces the burden of regulation such that the premiums drop 10 percent, the policy costs $216 in Los Angeles and $297 in Sacramento.

    Your own hypothetical demonstrates that the actual cost of delivering care in different local markets is what drives premiums.

  25. Ron says:

    Product designs differences among states DO come from state mandate variations (both coverage mandates & administrative mandates). Product design differences do not come from design differences intra-state. The idea of selling across state lines is to take a product design from one state and market that design in other states so that 50 design differences are eliminated. This is the main reason large employers with employees in multiple states fight to keep ERISA with allows a self-insured employers (basically acting as an insurer)to offer the same benefit package to all employees withour state differences.

  26. John R. Graham says:

    The newly popular so-called “private exchanges” offered to large employers go in the other direction. They drop the self-insured ERISA benefit and take up a private exchange that has a portfolio of state-regulated plans in the different states in which they operate.

    Despite the increased complexity, they find it a better option than staying self-insured.

    Research I cited in a paper no longer available on the Internet showed that almost all ERISA plans cover benefits that are mandated by states anyway. All in all, they don’t like administrative compliance with state laws, but they have to offer the benefits to compete in the labor market.

    • Don Levit says:

      You make excellent points. It seems as if those insurers participating in the private exchanges are throwing in the towel regarding self insuring medical benefits.
      With the plans available today, I can understand some of their rationale.
      Our patented plan through National Prosperity Life and Health will entice some of those employers to return to self funding by offering 60-80% discounts over 3-5 years.
      We are starting with a few select employers to iron out any tweaks that pop up. In 2014, those employers on the private exchanges will be our primary targets.
      Don Levit

    • Underwriterguy says:

      John, I would add that the appeal of the new exchanges is much like the appeal of offering local HMOs (fixed annual premium) along side a self insured PPO. Over time the healthier employees gravitated to the HMOs resulting in adverse selection against the PPO. Total employer costs were then higher than if the HMOs had not been offered.
      The difference is that the new private exchanges replace the defined benefit approach with a defined contribution. The employer knows his cost in advance and it increases only as he chooses. Any adverse selection becomes the problem of the insurers offering plans on the exchange. It will be interesting to see how all this works out over time, just as it will with ACA.

      • John R. Graham says:

        Victory! I found the study I referred to above, in which I examine state mandated benefits. In it, I conclude that each additional mandate increases the proportion of uninsured in a state by about 0.25 percent. However, it is a very tentative conclusion.

        I am pretty confident it is the most thorough literature review on the question you will find (at least as of 2008). This is one reason why I am unconvinced that buying health insurance “across state lines” will have much effect.

        The link is at

  27. Ron says:

    I don’t see plans giving up self-insured plans for fully insured private exchange programs, except for retirees. Defined benefits for large employers (50+ ees) can be done with limited use of HRAs (meeting the ESSENTIAL COVERAGE requirements…NOTE different from the ESSENTIAL HEALTH BENEFITs), but the employer is still subject to $3000 penaltiy for any employee going to an exchange and getting a subsidy. In fact small employers can avoid many of the ACA requirements by going self-insured (NOT subject to the Essential benefits, price compression, single risk pool, medical loss ration, rebates, etc). We will see more self-insured under ACA not less.

  28. John R. Graham says:

    I only know what I hear and I hear people moving in both directions. Maybe the move by large employers to private exchanges is that they fear employees going to Obamacare exchanges instead. But that doesn’t really make sense unless their lower-paid employees are already failing to take up the benefits offered.

    And the trend to private exchanges is biggest amongst jumbo employers (5,000 workers plus). According to the 2013 Kaiser Family Foundation employer survey, 29% percent of firms with 5,000 or more workers are considering private exchanges, versus 13% of those with 1,000-4,999 workers, and 7% of those with 200-999 workers.

    I may be wrong, but I get the sense that the brokers and TPAs who comment on this blog are not vendors to the jumbo employers. The move by smaller groups to self-insured with stop-loss has also been well discussed.

    I’m not going to claim I understand why the differently sized groups are moving in different directions.

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