Unintended Consequences of De-Insuring Insurance
By David Henderson
Kevin Drum alerts us to some unintended consequences of a law that he advocates.
Over at Mother Jones, Kevin Drum has noticed that some health insurers are charging a huge co-insurance rate for HIV drugs. He writes:
If all your HIV drugs are expensive, then people with HIV will look for another plan. Technically, you’re not discriminating against anyone with a pre-existing condition, but you’re sure giving them a reason to shop around someplace else, aren’t you?
At the moment, this practice appears to be confined to just a few insurers and a few classes of drugs. But if it catches on, it will prompt everyone to follow suit. After all, you can hardly afford to be the insurance company of choice for chronically sick people, can you? This is worth keeping an eye on.
Under ObamaCare, health insurers are no longer allowed to price for risk. (The one major exception is that insurance premiums for the elderly can be as much as 3 times as high as premiums for the young.) In other words, ObamaCare has taken the insurance out of health insurance. This is a set-up for what economists call “adverse selection.” (I have written about adverse selection here, here, and here. Bryan Caplan has written about it here.) The standard way to avoid adverse selection is to price for risk. People with pre-existing conditions tend to be higher risk. So the obvious way to avoid adverse selection is to price higher to people with pre-existing conditions. This is no different, in principle, from charging higher auto insurance premiums to single young men than to middle-aged married women or charging higher life insurance premiums to men than to women.
So, if an insurance company is to do well, it will look for ways to come as close as possible to charging for risk. One way is to charge high co-insurance rates for HIV drugs. This isn’t as good a method as charging directly for risk because the insurance company doesn’t want to dissuade people who are low-risk for HIV but who want to be insured for it. The best the insurance company can do is lump those who already have HIV together with those who don’t but who might get it. That’s one of the problems with the ObamaCare law.
Kevin Drum nails it with his second-last statement quoted above:
After all, you can hardly afford to be the insurance company of choice for chronically sick people, can you?
Exactly. Which is why we should expect to see more of the practice that Kevin Drum decries. But I predict that none of this will cause Kevin Drum to reconsider his pre-existing view that pricing for pre-existing conditions should be illegal.
H/T to Tyler Cowen.