• Flavors of competition in insurance markets

    In a new paper, Chapin White covers issues pertaining to competition in insurance markets raised in two of my recent posts (one, two), though he covers a great deal more. The central tension is simplicity (which promotes price competition) and flexibility (which promotes innovation, though not necessarily that which benefits all consumers). He writes,

    Healthy competition consists of insurer efforts to increase value for policyholders by producing better health outcomes at lower total cost. Unhealthy competition consists of insurer efforts to avoid insuring sicker people, to confuse policyholders or to avoid paying legitimate claims.

    Standardization is one way to promote price competition and reduce innovation that promotes selection differences (some plans attracting much healthier beneficiaries than other plans). However, there are ways to mitigate the adverse consequences of selection. So is standardization really required? In the context of the ACA exchanges, Chapin answers,

    The need for standardization will depend in part on the effectiveness of these other mechanisms, and vice versa. These mechanisms include: a risk-adjustment process that will transfer funds from plans that disproportionately enroll healthy people to plans that disproportionately enroll sicker people; ∙an explicit prohibition on “marketing practices or benefit designs that have the effect of discouraging the enrollment in such plan by individuals with significant health needs;” a temporary reinsurance program that will transfer funds to insurers that enroll sick individuals when the exchanges first open; a temporary risk corridor program that will partially reimburse insurers with large financial losses and partially recoup large financial gains; and the individual mandate and associated penalties, which are designed to help ensure that healthy individuals participate in the exchanges.

    The paper is ungated and many of the issues it covers are relevant to premium support in Medicare, as well as the ACA.

    • Is standardization required?

      Depends. Are we at the stage where detrmining actuarial equivalency is good enough to destandardize plans? What we do well in 2014 may be trumped by what we can do in 2018. Play long or short depends on crystal ball.

      • Actuarial equivalence is dependent on the underlying population assumed to enroll. The papers I referenced cover this. Hence, it cannot be disconnected from selection.

        • I dont understand answer based on my conceptual understanding of the terms (forgive, have not read the reference)

          Plan A: GIves you two of “x” and one of “y”
          Plan B: Gives you one of “x” and one of “y” and one of “z”

          Both have actuarial equivalence.

          They are not standardized, meaning, they are offering different quantities of services, but delivering the same dollar value.

          My understanding of how powers that be calculate actuarial equivalence currently is crude–brave new world type of stuff.


          • Selection into Plan A may be different than B. For population in A (that which actually enrolls in Plan A), Plan A’s benefits may cover 70% of costs. For that same population, Plan B’s may cover 60%.

            Meanwhile, the percentages may be reversed for population B. Which plan is more generous? Or are they the same? For which population should it be measured?

            It’s tempting to pick a 3rd, standard population that isn’t either plan’s selected enrollment. Is that fair? What if one of the plans is specifically designed to address multiple chronic conditions? What if one is specifically designed for healthy folks? Nothing wrong with that (perhaps), but it raises questions of how you ascertain whether it is actuarially equivalent to whatever your yardstick is.

            It’s like measuring weights on two planets with the idea that you only want to pay for something that weighs 10 pounds. It doesn’t solve the problem of weighing it on a 3rd planet if 10 Mars pounds is right on Mars and 10 Earth pounds is right on Earth for whatever application you intend for this 10 pound object.

    • Brad:
      It is good to see you looking ahead 7 years.
      That is one way to provide healthy competition: which plans look better over the next 5-7 years, rather than which plan looks better today.
      Until people can look ahead, realistically, and attempt to provide increasing funds to help pay increasing health care expenses as we age, we will continue to have this pseudo competition on a year-to-year basis.
      Don Levit