A Year of Dramatic Increase in Insurance Coverage

Jan 27, 2014, 9:00 AM


2014 marks the start of coverage for those who are newly insured via the health insurance exchanges. In general, healthy behaviors and lifestyle are probably the most important inputs to health, especially for those of us free of serious chronic conditions. But for those of us who are sick, quality health care and access to drugs is crucial for health and happiness. We will soon know to what extent the health insurance exchanges have overcome their implementation problems and have connected previously uninsured Americans to health care.
When markets for health insurance work efficiently, they can deliver access to crucial health services to those who need and want them most. Unfortunately, free, unregulated markets for health insurance rarely function efficiently. The market failures in health care have long been noted by economists, most famously by Nobel Prize winner Kenneth Arrow, MA, PhD. In my view, one the most important changes that the Affordable Care Act (ACA) brings with it is an attempt to address and correct market failures via the exchanges.

The ACA exchanges put in place mechanisms that embody theoretically-grounded, practical solutions for dealing with the inherent inefficiencies of health insurance markets: A mandate (or tax penalty) eliminates a free rider program in which the healthy could wait until becoming sick before enrolling in insurance. Community rating, in which premiums do not depend on a person's health conditions, protects consumers from the financial risk associated with being born with or acquiring poor health. Risk adjustment, which compensates insurers for enrolling high-risk people, avoids incentivizing insurers to skimp on the services that tend to attract high-cost enrollees. And the online marketplace (if and when it functions properly) may begin to address the serious difficulty of comparing health plans head-to-head on benefits and costs.
These features of the exchanges aren’t merely technical minutia. They are central to creating a well-functioning, stable market that can deliver health insurance to those who would not have it otherwise. From recent history, we know that health insurance markets without such regulations tend to lead to high prices, poor coverage for certain conditions, denial of insurance for the very sick, and many other problems. And we have experienced success with some of these mechanisms in other markets, including Medicare Advantage and the individual market in Massachusetts.
No doubt there will be many improvements to make in the exchanges along the way. Economists, including myself, will make hay out of all the unintended consequences and room for improvement that our experience with the exchanges in their first few years reveals. Some of my own ongoing research examines the hidden insurer incentives embedded in the risk adjustment and reinsurance formulas that determine payments to insurers in the exchanges. However, while regulators and researchers continue work to improve on the design of health insurance markets, there are many Americans whose lives will be made better in the interim via the substantial reform that the ACA exchanges already represent.

This commentary originally appeared on the RWJF Human Capital Blog. The views and opinions expressed here are those of the authors.