Healthcare and freedom of choice

There’s a somewhat conflicting dynamic between competition and cost-pooling.  The larger the pool, the cheaper the premium (at least theoretically) because more healthy people subsidize the cost of the sick people.  Conversely, the more competition the better, because insurers must compete for customers by offering better service and cheaper rates.

To make both of these seemingly conflicting concepts work together, you basically need national competition.  And you basically need few, but fierce, competitors.  The idea is, it’s better to have more competition but it’s not necessarily better to have more people competing.  Again – this sounds like a conflicting concept, but it’s not.

The current system, and the state-by-state exchanges that would be set up by the Senate bill, keeps national competition off the table.  This means that you have big players locally and regionally, that don’t really compete with one another.  So you have smaller pools and less competition than if you had say five really big insurers competing all across the United States.  These big players would have the benefits of very large cost-sharing pools, and would also give the consumer the benefits associated with having to compete with one another.

This seems like such a basic, fundamental concept of insurance and markets that it’s almost jaw-dropping that it isn’t being taken seriously by legislators.  Ron Wyden gets it, and that’s what he’s been pushing with his Free Choice amendment.  Here’s Ezra Klein:

Enter Wyden. The Free Choice Act is not a health-care-reform bill. It is best understood as a reform of the health-care-reform bill. In particular, it reforms the nature of the Health Insurance Exchange. Under the bills being considered right now, the exchange will be limited to the uninsured, the self-employed and small businesses. Maybe it will be expanded over time. Maybe not. In addition, it is barricaded by what’s called a “firewall.” The firewall essentially bars individuals from entering the exchange so long as their employers offer them a basic level of health-care coverage.

The Free Choice Act starts by setting the rules for the exchange: Within five years the exchange is open to all employers. More importantly, it’s open to all people. The firewall is extinguished. But as the late, great, Billy Mays would say, that’s not all!

The key component of the Free Choice Act is called “cash-out.” Under the Free Choice Act, if I decide that I don’t like any of the health-care coverage options being offered by my employer and would prefer to choose from the many options being offered on the Health Insurance Exchange, my employer has to give me a voucher that covers 65 to 70 percent of the cost of the lowest level of exchange plan. (That is the average portion that an employer pays of his employee’s health insurance premiums.) I can take that voucher and, along with whatever money I want to throw in, choose a plan on the exchange.

This does a couple of things. First, it changes the health-care system for the currently insured. It doesn’t take what they have. But it gives them a choice. If the political yin of health-care reform is that you can keep what you have if you like it, the policy yang should be that you can choose something different if you don’t. The Free Choice Act gives the insured something concrete: autonomy. If they don’t like what they have, they are assured options. In 1994, Bill Clinton’s plan was defeated because people believed it would restrict choice. Given the apparent power of the objection, it makes some sense to try to sell health-care reform atop the concrete promise that it will increase choice.

Second, it gives people an incentive to choose cost-effective plans. If your employer is paying 70 percent of your $10,000 health insurance premium, and you find a $9,000 plan on the Exchange — maybe it’s an HMO rather than a PPO — you pocket $1,000. Currently, since I pay only 30 percent of my health-care premiums, making the same choice within the HMO and PPO offerings that The Washington Post gives me would only net me $333 dollars. Wyden’s plan would put 300 percent as much money in my pocket. That changes behavior. And even the CBO thinks so. This is one of the main reasons the Congressional Budget Office scored Wyden’s Healthy Americans Act — which had a similar provision — as saving, rather than costing, money.

Third, it begins to build a viable alternative to the employer-based health-care system. Experts think that the exchange will need at least 20 million participants to really start seeing advantages of scale. This will ensure it has much more than that. And if the exchange works? If direct competition between insurers lowers costs and increases quality, if standardized billing and administrative efficiencies save money, if the massive pool of customers helps insurers bargain for discounts with providers, then the exchange will become a progressively better deal, and more people will choose — there’s that word again — to enter it. And if more people choose to enter it, then that cycle happens again, more people enter, and so forth. Soon, you’ve built the system we want rather than the one we have.

Got that?  The Free Choice Act….

A) Gives everyone access to the exchanges, increasing the pool and competition.

B) Gives people an incentive to control their own costs.

And (C) begins to reinvent the very foundation of our insurance system, moving us slowly and gently away from employer-based coverage.