Commonwealth Fund’s Red Herring on Obamacare Risk Selection

One of this blog’s consistent themes is that Obamacare encourages insurers to seek to enroll health people in exchanges, and shun sick people. A new study from the Commonwealth Fund insists that is not the case, concluding that “insurers aren’t seeking lower-risk customers outside the ACA exchanges as some feared,” and “the ACA’s insurance reforms are working in the individual market.”

I will share the study’s conclusion, then explain the red-herring hypothesis it is meant to test:

Because the ACA’s premium subsidies are available only through the federal and state exchanges, it is no surprise that the majority of coverage in the individual market is sold there.

We see little evidence of insurers actively pursuing risk segmentation in their offerings on and off the exchanges. One way risk segmentation might occur is for insurers to offer leaner plans off the exchanges because these appeal more to healthier people.

Notably, the most generous (and most expensive) plans—i.e., the gold- and platinum-level plans—are much more prevalent off-exchange than on, constituting one-third of projected enrollment off compared with less than one-fifth on.

The hypothesis is that risk selection might have occurred through health plans offering “skinny” plans off-exchange and generous plans on-exchange. The authors claim this is how critics anticipated risk selection happening, but cite only Timothy Jost, a pro-Obamacare law professor, in support of the hypothesis.

This is a red herring that misunderstands Obamacare economics. Obamacare exchanges are bureaucracies designed to move tax credits to beneficiaries buying individual health insurance. These tax credits phase out with income (one of Obamacare’s most harmful effects).

People with household incomes too high for tax credits will not waste time shopping on the exchange. This is a significant advantage to the health insurers: All suppliers of goods and services seek to segment their customers by income, to maximize profit from each. Few have the benefit of the government doing this for them.

There is a socio-economic gradient of health: All other things equal, high-income people will be healthier than low-income people. However, health goods and services are superior goods: A person’s demand for them will tend to increase at a faster rate than his income does. Plus, the higher a person’s income the greater his preference for insurance against financial loss.

So. It is not surprising that insurers are competing for off-exchange customers with gold-plated plans. This tells us little about risk selection on-exchange.

Comments (9)

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  1. Devon Herrick says:

    People have different tolerances for risk. They also have different levels of health risk.

    I personally don’t believe that risk segmentation is a problem that should be discouraged. Rather, people should pool their own health risks over their working lives rather than depend on younger people to overpay so they can get a good deal when their health status declines as they approach old age. Our convoluted health care system makes any significant medical treatment costly. If our health care system relied less on third-party payment and people routinely paid out of pocket, patients would have more options and care would be less expensive.

  2. Bob Hertz says:

    Not sure what you mean by “people should pool their own health risks”………

    If you mean that everyone should create a robust HSA, I agree.
    How you make that happen is not so easy. I believe that Singapore has robust universal HSA’s, but they use coercion.
    (I do not rule out coercion, but it is not likely to come out of any American Congress in our forseeable future.)

    Do you mean that people should form their own co-op insurance companies?
    Again, seems unlikely.

    Do you mean that insurance companies should offer health policies with level lifetime premiums?
    I have some actuarial training, and believe me, that is one terribly tall order.

  3. Barry Carol says:

    Bob –

    In Switzerland, premiums for the standard insurance plan with a given deductible in a given canton are actually the same for everyone 26 and older at least for a given insurer. They use community rating. Premiums are moderately lower for young adults between 19 and 25 and much lower for children from 0 to 18. About 45% of the population qualifies for subsidies to help pay the premium and there is no such thing as the equivalent of either Medicare or Medicaid.

    Singapore uses a combination of subsidies which vary with income, at least for hospital based care, something called MediSave which is sort of like an HSA but it’s a mandatory contribution to the sovereign wealth fund and then there is MediShield which is a catastrophic insurance plan often provided by employers. Subsidies for hospital based care run between 50% and 80% of the bill for citizens and 10 percentage points less than that for non-citizen permanent residents. For those too poor to pay their share, there is supposedly a safety net to take care of them.

    While some conservatives extoll the virtues of Singapore’s healthcare system, they gloss over the coercive aspects including government regulation of healthcare prices. I don’t see anything like it likely to be introduced in the Congress as legislation anytime soon let alone actually passed and signed into law.

    • Doesn’t the Swiss system, as you describe it, have a lot of similarities to Obamacare exchange coverage?

      One difference is that insurance policies in Switzerland are longer term, up to five years, after which the patient can get a bonus for healthy behaviors. (I am probably oversimplifying significantly. It is a long time since I have studied it.)

  4. John Fembup says:

    In Switzerland “there is no such thing as the equivalent of either Medicare or Medicaid”

    Barry, thank you for supplying some factual information about medical coverage in other countries. I’ve said for years this kind of information should be a part of the US debate on health policy. But it’s not. Unfortunately about all we’ve ever got is at the level of “it works in [name a country] so it will work here.”

    I suppose the Swiss don’t need a separate “Medicare” system because they had the good sense to design a single, well-coordinated national health policy. And BTW, their national policy embraces public health, personal medical care, public insurance, and private insurance.

    Medicare is one thing – Medicaid another. So just out of curiosity, I looked up Swiss poverty statistics.

    Quelle surprise!

    “Figures from the Swiss federal statistics office showed that 7.7 percent of the nation of eight million people lived below the poverty line in 2012. Switzerland’s poverty line is 2,200 francs ($2,466) per month for a single person and 4,050 francs for a couple with two children.” (i.e., $29,592 per year for one person, and $54,476 per year for two persons.)”

    Source: h**p://

    Well then, what about the US?

    “The nation’s poverty rate fell to 14.5% in 2013, down from 15% a year earlier, the U.S. Census Bureau reported.

    The corresponding US poverty annual income thresholds are:

    One person (unrelated individual)……11,888
    Two people………………………..15,142

    Source: h**p://

    Some surprising things here. The cost of living is high in Switzerland – but more than double the US? Even with such seemingly high poverty thresholds why is there still 7% – 8% poverty in rich, little Switzerland? If the Swiss lowered their poverty thresholds to be comparable with the US, would they then suddenly have a “poverty crisis”?

    Shouldn’t US policymakers be explaining to the public why their strategy of endlessly tinkering with separate US government programs like Medicare, Medicaid, etc, is superior to designing an integrated health policy like Switzerland has done? Do our politicians avoid this question because they are more interested in disguising the taxes necessary to support the welfare state they’ve created?

    These questions arise after only the briefest look at the way things actually work in another country. I think Americans would benefit from – and deserve – a more probing, more informed, and more honest public debate about such things. Our present political leaders on both sides of the aisle are failing us.

    • Thank you. That is why NCPA wants a universal, refundable tax credit. It would move us in the direction of blurring the boundaries between these different programs. Obamacare has created more boundaries.

      Also: The cost of living is Switzerland is much higher than in the U.S. Go to Geneve or Zurich and buy a can of Coke, you’ll see! So if the incomes you cite are not adjusted for purchasing power parity, it is not surprising that the poverty cut-off for Switzerland is much higher than in the U.S.

  5. Bob Hertz says:

    Barry’s comment on Swiss insurance brings up an interesting phenomenon.

    For persons under age 65, insurers do impose very narrow networks and restricted drug formularies. There is also very little advertising. (one does see ads from sleazy non-insurance companies offering medical discount plans.)

    Now cross the line to over 65.

    The same insurance companies are taking out TV and magazine ads all over the place to advertise Medicare Advantage and in some cases Medigap.

    These plans are community rated. Companies brag about their wide networks. Although the ads do aim subtly at those aging into Medicare, there is nothing to prevent an 85 yesr old from signing up.

    Why is this?

    Well, I am sure that one reason is the massive government subsidies of Medicare Advantage plans. Almost all the premium is collected by taxes, and there has been an extra 10-15% added (I think this survived the ACA).
    Plus there are mature systems of risk adjustment to protect insurers somewhat from getting a preponderance of 85 year olds.

    What does this prove, at least to me? That the health insurance business is so treacherous, the only way for carriers to make money over time is with government support.

    Look incidentally at the long term care business. There has been next to no government support, just some puny tax deductions, and carriers have bailed out left and right.

    In general I am pro-capitalist, but free enterprise in health insurance does not seem to work.

  6. Barry Carol says:

    Bob –

    Many commercially insured people still have access to very broad networks, especially among employer plans including plans serving public and private sector union members. Even on the exchanges, you can buy a gold or platinum plan with a broader network but the cost is higher, of course, and most people buying insurance on the exchanges are extremely price sensitive, even with access to subsidies.

    For Medicare Advantage plans, the premium paid above FFS Medicare was squeezed down significantly as part of the ACA. Medicare Advantage insurers bid against a benchmark in each county where they participate. The benchmark, I believe, is the average amount FFS Medicare spends per person in that county. According to a recent article in Health Affairs, the nationwide average bid from MA insurers is 94% of the benchmark. In some sparsely populated counties, there may still be some additional payments but the double digit premiums above FFS Medicare are a thing of the past.

    As for long term care insurance, it’s an underwritten product. They won’t sell it to just anyone if they think you are an above average risk for filing a claim. Also, according to the broker I bought my long term care plan from, the insurers won’t sell to anyone older than 74 at any price even if they’re healthy. They mispriced their older policies as it turned out mainly because they lacked experience when the industry started up. They borrowed what experience they could from the life insurance industry but it wasn’t the same. More people are going on claim than they expected and they are living longer than expected as well. Thus premiums are rising and it wasn’t an inexpensive product to begin with.

    I bought a policy for myself and my wife through Genworth in 2002. Two years ago, the premium was raised by 60% spread out over three years. Next year is the third year by which time my wife and I will be paying just under $6,000 albeit it for a pretty good plan with lifetime benefits which, by the way, the company doesn’t even offerl anymore. Not many elderly and late middle age folks can afford that.

    Germany finances long term care with a 3% payroll tax though the wage to which it applies is capped at the equivalent of about $65K per year, I believe. When you add in payroll taxes for health insurance, pensions (similar to social security), and unemployment insurance, it adds up to 40% of payroll. Comprehensive safety nets aren’t cheap to put it mildly.