The Pointless Search for Meaning in Exchange Prices

By Alan Weil

July 1, 2013

 

With ten states and D.C. having reported preliminary information on the prices of plans in their new health insurance exchanges, partisans on both sides of the Affordable Care Act have pounced on the news to reinforce their preconceived notions.  Supporters of the law report that “rate shock is a crock” and that prices are “surprisingly low,” while opponents look at the same data and conclude that “Obamacare will increase individual health insurance premiums.” Gary Cohen of CCIIO’s recent announcement that rates on the federal exchange will be made public in September will surely raise the fevered pitch of commentary.

But what do these numbers actually represent?  Carriers submitting bids start with the prices of their current products and then adjust them for the myriad changes in the insurance market that go into effect on January 1, 2014.  Those changes include:  elimination of health status underwriting, compression of rates by age, partial standardization (and in most instances significant expansion) of the benefit package, expansion of the market to a largely unknown population due to premium subsidies, effects of the “three Rs” (risk adjustment, reinsurance, and risk corridors), a completely new product distribution system, and a host of other changes in the health care and health insurance environment.  Needless to say, these many changes introduce a tremendous amount of uncertainty.

Carriers want to price as low as possible to secure market share, but they also worry about losing money on this new line of business.  Exchange administrators want low prices so they can gain customers, but they can’t push carriers too hard on price or they will scare them away and have no plans to offer.

I view the initial plan bids on the health insurance exchanges as somewhat akin to an initial public offering.  In an IPO, the price is based on a complex set of known and unknown factors.  There are negative consequences if the price is set too high or too low.  The analogy is imperfect, but the critical shared feature is that the price is set in an environment of significant uncertainty before there is a market to determine the price.

The health insurance exchange prices we are observing today are not market prices; they are opening bids in a not-yet-existent marketplace.

Exchange prices matter—to those purchasing coverage and to taxpayers subsidizing that coverage.  But the first round of exchange bids mostly tell us about the assumptions different health plans are making and how they want to position themselves in this new market.   They tell us nothing about the ultimate prices in the exchange or the ability of competition within the exchanges to drive improvements in the health care system.

The promise of the health insurance exchanges is that they will create a more effective and efficient marketplace.  I don’t know whether or not they will live up to the promise.  And neither do the partisans touting initial exchange prices as evidence to support their claims.