Oops about OOPM: You really can’t keep your health plan

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerThe Tampa Bay Times Politifact has awarded its coveted “lie of the year” rating to President Obama’s oft-repeated “If you like your health plan, you can keep it” promise. I’m happy to chalk this one up to naiveté and the heat of the political moment(s).

As President Obama has noted, the reason that existing health insurance policies have been cancelled willy-nilly is because the plans don’t measure up to ACA’s standard for coverage. Supermarkets can’t sell unpasteurized milk. Health insurers can’t sell these plans.

It is not immoral to sell or buy noncompliant plans. Many consumers chose noncompliant plans on purpose because they were cheaper. Let’s look at one provision of ACA that has received little coverage—the out-of-pocket maximum (OOPM). ACA initially required that a 2014 individual policy must cover all costs above $6,350 for singles or double this, $12,700, for families (of any size) within the year. That’s the OOPM (now delayed to 2015).

That sounds like a lot of money to some of you. But if you have experienced or been close to someone who has experienced a major health event, you know otherwise. My daughter was born prematurely. It doesn’t take too long in the neonatal intensive care unit to blow the doors off a $12,700 OOPM. Perhaps you take a nasty fall and need complex orthopedic surgery, or struggle with cancer—the same is true.

Imagine that you’re the insurer. Now you have to cap a family consumer’s spending at $12,700. How do you pay for the big bills that some of your customers will run up? You can either charge a high monthly premium or you can impose a high deductible. For the plans with the lowest premiums, the deductible begins to approach the OOPM.

Deductibles add their own pocketbook pain to your health problems. Except for a set of always free preventative care like annual checkups, mammograms, colonoscopies (my favorite), and so on, you have to pay out of pocket until you’ve shelled out the deductible. Then you pay part of the cost of future health expenses under co-insurance and/or co-payments until you hit the OOPM.

In previous decades, many people with health insurance had plans that completely flipped this relationship. The plans paid part or all of the cost at the outset with a small deductible or none at all. But there was no OOPM. When my father had heart bypass surgery in 1969 our family had “major medical” coverage that paid 80% of the bills—with no OOPM. Twenty percent of the cost of heart bypass surgery is a lot of money.

In the pre-ACA world, many people chose health care plans that charged lower premiums and paid more of their immediate bills. But these plans left them exposed to serious debt, even bankruptcy. The policy question is whether they should be allowed to buy these plans.

There’s a case to be made for forcing people to make better decisions. Economists and psychologists have shown over and over that we do a lousy job making decisions about risk. Some of us worry about flying in airplanes but think nothing of driving on a busy highway, which is objectively more likely to cause injury or death. Just as we protect consumers from the risks of unpasteurized milk, the ACA doesn’t let consumers buy health insurance that exposes them to the risk of bankruptcy.

We are also protecting providers with the OOPM. Consumers whose medical bills put them in bankruptcy, or at risk of it, typically pay less than they owe. Health care providers like hospitals write off massive amounts of unpaid bills every year. These losses will drop like a rock if everyone is insured with a plan with an ACA OOPM.

But many people won’t feel “covered” with a health care plan that carries a $5,000 deductible. They will be writing a sizeable monthly check to an insurer in exchange for, well, not much. Or so they’ll feel.

That’s why it is possible that the ACA will drive up the share of the population without health insurance, at least in the short run. On purely financial grounds, consumers must weigh the cost of the premiums against the penalty for not having insurance—which will be much less for many consumers, even when ACA is fully implemented. The deciding factor will be how consumers view the risk of incurring bills that exceed the deductible.

The system blows up if the pool of insured consumers is sick enough to make the OOPM—$6,350 for an individual or $12,700 for a family—too low to permit insurers to issue ACA-compliant insurance policies at prices substantial numbers of consumers are willing to pay. With higher prices, even fewer sign up and we enter the ACA “death spiral.” If Congress were capable of rational action, I’d urge that the OOPM be increased, thus allowing consumers to choose lower deductibles and/or premiums in exchange for assuming more “big ticket” risk. There’s a place for regulating what kind of coverage insurers can provide, but if the regulations drive prices up too high then the entire effort will collapse.

The federal subsidies change this dynamic for individuals, of course. Yet when the dust settles, we’ll have turned the insurance market into even more of a pretzel than it is already. Odd though it sounds in the midst of the HealthCare.gov debacle, a single payer system would probably be an improvement on the ungodly “public-private partnership” we have today.

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