Laws of economics will always win out


You can fight the law, but laws will almost always win. Some of those include the laws of economics. That’s the real story behind a woman’s much-publicized dealings with her insurance company. After years of cancer treatment, she was recently told her insurance policy will be cancelled.

Both sides of the Affordable Care Act debate oversimplify the problem. Conservatives blame Obamacare, while the White House blames “bad apple” insurance companies.

But greater economic principles are at work: incentives.

“For the past 20 years I have been trying to convince my colleagues in the health policy community that managed competition contains perverse economic incentives,” said John Goodman of the National Center for Policy Analysis. “These incentives do more than misallocate resources. They create ominous risks for the health and safety of patients with serious medical conditions.”

Cancer patient Edie Littlefield Sundby has Stage 4 gallbladder cancer. She’s been undergoing treatment for seven years now, despite a grim prognosis. UnitedHealthcare has spent $1.2 million so far on her treatment.

The problem is that she sees doctors in California (in San Diego and Sanford), and at M.D. Anderson Cancer Center in Houston.

But that insurance firm dropped her (as part of a move to get out of the individual market). And under the ACA, other companies would limit her treatment to the doctors in San Diego.

“Here is my prediction: the kind of coverage this woman had will never again be seen in the individual market in this country,” Goodman said. “You don’t need to be an economist to understand why. Think of a game of musical chairs. The health insurers are the chairs. And not a single one of them wants a patient who will spend $1.2 million of their money.”

The insurance market only works if insurers are able to adjust prices for risk (after all, risk is what insurance firms are investing in).

“Only if people are free to pay actuarially fair premiums can insurers offer the kind of coverage that will pay enormous sums of money to deal with illnesses that have a very low probability of occurring,” Goodman explaind. “In a community rated system [such as Obamacare], plans that are appealing to the sick will attract the sick, who will inevitably be paying premiums that are far below the cost of their care.”

Was this unforeseen?

“The health plans have an incentive to overprovide to the healthy (to keep the ones they have and attract more of them) and underprovide to the sick (to encourage the exodus of the ones they have and discouraged the enrollment of any more of them),” Goodman contended. “I don’t know why this isn’t obvious to other health economists. Nothing involved here is more complicated than Economics 101.”

For cancer patient Edie Littlefield Sundby, the loss of control is most disturbing.

“For a cancer patient, medical coverage is a matter of life and death,” she says. “Take away people’s ability to control their medical-coverage choices and they may die.”

Economic laws don’t change simply because they don’t fit some grand plan.

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