Health Insurance Cancellations, What’s New?

In many respects it is good to hear politicians, media, civic, and business leaders in an uproar about individuals receiving cancellation notices of their current health care coverage.  Why did it take so long for them to notice?

We hear all about “sub standard” or similar modifiers to describe many individual insurance policies.  This is my own personal generalization, but when I’m healthy plans where I’m paying a premium are less popular to me.  The plan which takes the least amount of money from my pocket is far superior to the other plans.  If I’m in an accident, injured, or sick, those superior plans become “sub standard.”  I want the plan which allows me to receive the best possible care with the lowest co pay, least amount of money out of my pocket, no caps on the amount of insurance I receive, no limitations on any prior or new conditions or complications, and just peace of mind.

In the real world, I try to balance out costs from both upfront and afterwards along with trying not to compromise the level of care.  Comparison shopping, however, is not easy with some items or services.  I’ve never been inside a mattress factory in my life, but it seems like the same brand name with the exact same specifications has 20+ names depending upon where it is sold.  Price matching just to haul the mattress a shorter distance on the road is not an option, and despite an identical spec sheet lying on one model name in store A feels like a totally different mattress than the model name for that brand in store B when supposedly they are constructed of the same materials. Insurance is one of those services where the number 2 on one policy may or may not be equal to the number 2 on another policy.

These types of confusion and the cancellations, however, are not new on the individual market and even with some employers.  One of my classmates lucked up and received his first tenure track position at an institution where he loved the school and community.  Location put him within commutes of less than 4 hours, albeit in opposite directions, to his parents and to his in-laws.  Fortunately he earned tenure before the institution mandated a temporary freeze which still continues on the issuing of tenure.  During his 12 years at the school, however, he has had at least 4 different health insurance plans and 2 provider changes.  All have been PPO plans, but the benefits and networks have changed with each plan.  His employer made the decisions to change providers.  The insurance companies made the decisions to scrap and create the different plans.  None of these changes were a result of ACA.

Changes and at times lack of changes are a result of “Search Frictions.”  A real oversimplification is the mattress analogy above.  The market itself makes it cost and time prohibitive to do a real comparison and thus result in maintaining the existing relationship.  As a result, competition will not reduce prices and those who have you under their umbrella can increase prices without much fear of losing the business.  This will provide a far better explanation of “Search Frictions.”  

In many ways, I think the uproar is positive.  It’s sad though to think that what is happening with cancellations is not new.  In fact, depending upon particular market they are less than before any mention of ACA or Obamacare.  Here is a September 2007 working paper entitled “Dynamic Inefficiences in Employment-Based Health Insurance System:  Theory and Evidence” by Hanming Fang and Alessandro Gavazza for the National Bureau of Economic Research.

A more in depth analysis can be found in the 28 August 2008 paper “Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance” by Randall D. Cebul, James Rebitzer, Mark Votruba all of Case Western Reserve University, and Lowell J. Taylor of Carnegie Mellon University.

The abstract to this paper reads:

“In the United States, health insurance for those under age 65 is typically provided through group plans purchased by employers from commercial insurers. In the health insurance market, insurers provide complex multi-attribute services, and search frictions arise as employers undertake the costly process of finding appropriate health insurance for their workers. These frictions distort market outcomes by increasing insurance turnover rates, increasing the price of health insurance. Our empirical analysis indicates that frictions are most severe in the “fully insured” part of the health insurance market and that the magnitudes of the frictions in that market are sufficient to transfer a quarter of the consumer surplus from policy-holders to insurers (a transfer of 32.5 billion dollars in 1997). The capture of consumer surplus and high rates of turnover have the effect of reducing incentives to invest in the future health of policy holders.”

Why weren’t those people in an uproar today speaking out in the past?  Nothing is new about the cancellations.  I hope the uproar is not about people having coverage for pre existing conditions and to deny access to preventative services to those currently without coverage.  I hope the uproar is not to continue having the “middle class” subsidizing the usage of emergency rooms for routine services provided to individuals who have no access to other medical services.

Could the uproar be because of partisan politics?  Could it be because of this continued to push to impede any change to the status quo under the smokescreen of bantering about terms such as socialist and constitutionalist?  I admit that a lot of things claimed are written in the Constitution.  Most of those rights, however, were not recognized for many years after ratification in 1789 and a lot of blood, sweat, and tears transformed those ideas into privileges enjoyed and then into rights actually recognized.  Could it be a personal dislike of President Obama?

Whatever one’s reason, healthcare is one of a multitude of issues that the United States must address if it hopes to maintain its status as a world leader.

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