Spending less on health care means paying workers less. You don't want to make them angry.

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Deductibles Are the Price You Pay for Obamacare

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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This weekend, in the New York Times, Robert Pear wrote about the high deductibles of the exchange policies that most people are buying. While some things, such as birth control and an annual wellness visit, must be covered, effectively these are catastrophic policies that require people to spend a considerable amount of money out of pocket before the coverage kicks in. This has come as quite a shock to many; as one person told Pear, “When they said affordable, I thought they really meant affordable.” Which it is -- if you don’t get sick.

This is actually good insurance design. Insurance that covers routine expenses isn’t really insurance; it’s a sort of inefficiently expensive prepayment plan. If Obamacare forces people away from "first dollar" coverage with low or no deductible, and toward plans that cover people only for unanticipated emergencies, that would be a win for economic logic.

The problem with this is twofold: First, unless they’re pegged to income, high deductibles are regressive, forcing the poorest people to pay the largest share of their income. And second, people absolutely hate economically logical health-care plans. This is why you see unions giving up quite a lot of other concessions on wages and benefits in order to keep those gold-plated health-care plans.

The regressiveness of the deductibles is mitigated by Obamacare’s cost-sharing reduction subsidies, which limit your deductibles if you make less than 250 percent of the federal poverty line (about $60,000 for a family of four). But those subsidies are available only on Silver plans, which carry higher premiums. And economically strapped families often have trouble spending more money now to save money later.

Regardless of subsidies, the political problem remains: Insurance on the exchanges is quite expensive considering how high the deductibles are, and how limited the provider networks are. That’s making people unhappy, and seems likely to generate political pressure to make the policies more generous, which is to say, more expensive. It’s also a market problem.

Over the past five years, health-care wonks have started to see health insurance less as a way to ensure health, and more as a way to avoid financial disaster. (As one health-care economist told me, the results of the Oregon Medicaid Study, which raised questions about how much insurance really improves health, actually aren’t that surprising. Insurance is a financial product, and what it does really well is give people financial protection.) In other words, the alternative to buying health insurance may not be “dying young”; it may be bankruptcy, or at least, a trashed credit report after you’ve negotiated settlements on all your medical bills.

That substantially changes the calculation people make when they decide to buy insurance. Bankruptcy is terrible. But you’d probably pay a lot less for bankruptcy insurance than you would for insurance that actually made you healthier. Especially if high deductibles mean you’re going to face a trashed credit report either way. This may, in fact, be the calculation that people were making before Obamacare passed -- and may explain why uptake has been slow among people who don’t qualify for large subsidies.

Republicans, naturally, are eager to capitalize on discontent with deductibles. But the high deductibles and narrow networks are not some strange artifact of Obamacare’s design; yes, the coverage mandates have made the policies more expensive than they used to be for a given level of deductible, but mostly they cost a lot because … well, health insurance is quite expensive. There are only really three ways to reduce insurance premiums: cover less, pay lower prices for what you cover, or force consumers to pick up a bigger share of the costs. The government doesn’t want plans to cover less; it wants them to cover more. So the first is out. The second is why Obamacare plans have smaller networks --  a result of paying lower prices to providers, many of whom then choose not to accept the insurance. The third way is also pronounced “higher deductibles and copays.”

Yes, yes, liberal in the back, I see you waving your hand. You would like to tell me that there is a fourth way: The government could “use its bargaining power” to “negotiate down costs,” effectively price controls. (“Bulk buying” is not why Canada pays lower prices for things than Aetna, which covers about a third more people than our neighbor to the north.)  Theoretically the government could do this. A lot of other governments do. But it’s a lot harder than you think, as I have explained ad nauseum. European governments have largely held down prices by not letting them grow so fast. That is a much different political operation from suddenly slashing the income of all the people in the health-care system.

Because that’s where the money is going, in the end: to people. And not just to greedy, viperous health-care executives. Or to rapacious pharmaceutical firms, whose products constitute just 9.3 percent of total health-care spending in America, much of it on off-patent generics rather than pricey brand-name drugs. With the exception of pharma, which is more like the tech industry than a health-care business, profit margins at insurers and hospital groups are surprisingly modest. Vast oceans of money flow in, yes, but almost all of it flows right back out in the form of payments for wages, facilities and supplies.

A recurring theme of discussions of health-care reform is the desire to believe that there are a small number of villainous cretins out there who are siphoning off large percentages of the trillions we spend on health care each year. All we have to do, this suggests, is hold those villains upside down and shake them until all our money falls back out of their pockets. If only. The health-care sector is one of the few remaining that offers stable, well-paid jobs -- well paid at all levels, from doctors down to LPNs. If you want to hold health-care costs, you’re going to have to grab all of their ankles and shake hard -- and they are apt to scream about it. Which is why no member of Congress has really dared to try.

It’s not Obamacare’s fault that it didn’t manage to do the impossible: provide cheap, nearly comprehensive health-care coverage without ballooning the deficit. No other reform could have done it either, without tackling provider prices -- and no politically feasible reform could have tackled provider prices, because America’s 12 million health-care workers would have been marching on Washington with pitchforks, or at least running tear-jerking ads to great popular effect. To paraphrase G.K. Chesterton, the idea of providing more generous coverage by cracking down on provider prices has not so much been tried and found wanting, as found difficult and left untried, by both conservatives and liberals.

You can’t really blame Obamacare for the fact that the most "affordable" insurance offers rather scanty coverage for the average user. Though of course, you can blame the law’s architects for overpromising. They should have been more honest, with themselves and with voters, about the limits of what they could actually do. But of course if they had been, the law probably would never have passed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net