In the pre-Obamacare era, the issue of health insurance coverage posed significant challenges. When individuals were responsible for paying for their own health insurance, the market became susceptible to selection games. It was observed that those individuals who would potentially generate higher claims were the ones with the greatest incentive to purchase health insurance. It is important to note, though, that there was also a selection effect that worked in the opposite direction. People with a higher level of conscientiousness were more likely to obtain health insurance and take better care of themselves. This insight shed light on the complex dynamics of the health insurance market.
Insurance companies, on the other hand, had their own set of incentives. They were motivated to avoid providing coverage to individuals who were most in need of health insurance. This predicament was highlighted by Nobel Laureate Joseph Stiglitz, who argued that this selection game might not have a viable solution and could potentially lead to the collapse of the health insurance market.
Understanding “Blackboard Economics” and its Limitations
In analyzing this issue, it is essential to consider the concept of “blackboard economics,” as coined by Ronald Coase. This approach involves examining the incentives faced by various stakeholders and drawing conclusions based on these incentives. In the case of health insurance, it is clear that insurance companies have a strong incentive to underwrite policies rather than deny coverage to high-risk individuals in the individual market. Underwriting involves assessing the risk and setting premiums accordingly.
However, the blackboard approach has its limitations. Sometimes, there is a temptation not to fully explore the incentives at play. Additionally, this approach tends to overlook the evidence available. One notable example is the analysis of the 2010 Economic Report of the President, particularly the health care chapter authored by Mark Duggan, who was the health economist of the Council of Economic Advisers (CEA) at that time and is now the head of SIEPR at Stanford.
The Evidence: Insurers Rescinding Policies
In 2010, a blog post highlighted some intriguing economics discussed in the Economic Report of the President. The post drew attention to a House committee investigation that revealed three major insurers rescinded approximately 20,000 policies over a five-year period, resulting in savings of $300 million for these companies, which would have otherwise been paid out as claims (Waxman and Barton 2009). This finding sheds light on the practices of these insurers.
However, it is important to critically assess the magnitude of this issue. Over a five-year period, the average number of policies rescinded by each of the three companies individually was approximately 1,333 policies per year. While this figure may seem substantial, considering the author’s assertion that these were large companies, it appears to be relatively small. As pointed out by a commenter on the aforementioned post, the five largest insurers nationwide have between 10 and 40 million members, equating to approximately 4-15 million policies. Similarly, the next tier of insurers also covers millions of policyholders.
Consequently, it can be inferred that very few individuals who were willing to pay a premium commensurate with their risk were left without the health insurance coverage they desired.
In conclusion, the pre-Obamacare era witnessed challenges in the health insurance market, where selection games and incentives played a significant role. However, it is crucial to consider the evidence and not solely rely on blackboard economics. By critically examining the rescission of policies by major insurers, it becomes apparent that the number of individuals who sought health insurance and were willing to pay appropriate premiums reflecting their risk was relatively small.