CASE STUDY - THE AFFORDABLE CARE ACT MARKET PLACES

READING 1

THE CRISIS OF U.S. HEALTH INSURANCE – ON ELECTION EVE 2008:

MARKET FAILURE IN THE U.S. HEALTH INSURANCE INDUSTRY AND THE AFFORDABLE CARE ACT AS A RESPONSE TO THAT CRISIS

1. Trends in Insurance Company Behavior – Individual and Small Group Insurance (Especially Companies with fewer than 100 Employees):

In the case of health insurance for individuals not employed by a company (self-employed or between jobs), and for individuals working for small companies (with under 100 employees ), there were not markets in which they could shop for and purchase comprehensive and reasonably priced health insurance, with sufficient choice of plans, and sufficient insurance plan competition.

· Individuals with Preexisting Conditions – either cannot get any insurance or have to pay such high premium and out-of-pocket expenditures that they simply cannot afford the available insurance.

· The remaining Individuals who are eligible for and purchase Individual Plans are often disenrolled by those plans through borderline legal Rescission processes, which ended individual insurance contracts if an individual started to use substantial amounts of Personal Health Care Goods and Services.

· Small Businesses (under 100 employees) cannot afford the Insurance Plans that are offered – Small Businesses are less likely to offer Health Insurance to their employees, or Insurance is so expensive that, even if offered, employees may choose not to participate. Prior to the ACA, small businesses and their employees comprised a disproportionate share of the working uninsured. In 2011, six of 10 of the nation’s uninsured workers were self-employed or working at companies with fewer than 100 employees.

· Those Small Businesses which do purchase Health Insurance for their employees are often priced out of the Insurance Plans through borderline legal Purge processes. Purges happen if the business’s health plan members started to require substantial amounts of Personal Health Care Goods and Services, thus threatening to spend more than the value of the plan’s pooled premium funds.

· All of the above problems were exacerbated by the Great Recession which developed throughout 2007 and became a full-blown crisis in Fall 2008.

2. Insurance Company Concerns: Both Profit, and a Genuine Fear that Markets for Individual and Small Business Health Insurance could not Work:

· Insurance companies and plans did not believe that they could make a predictable and acceptable profit providing insurance to those individuals and small groups.

They were especially concerned about health insurance for individuals.

· Insurance plans were concerned that without some kind of governmental individual insurance mandate , the plans could never be sure that they would have enough healthy plan members to offset the yearly expenditures of the sick members.

They were afraid that if they tried to sell insurance to individuals and very small businesses, and there was no legally mandated individual health insurance, they would face a situation in which people would only join the plan if and when they were sick. This would prevent the health insurance plans from building up an annual store of premium funds sufficient to fully pay for care which would meet the health care needs of the insured individuals.

· This would result in expensive insurance (high and growing premiums for plan members), and large losses for the insurance plans, with the healthier plan members leaving these plans because too many individuals and small businesses would only buy insurance at the last minute when they really needed it.

· The fear was that this would result in a “Death Spiral” as healthier plan members left the plans, and those remaining in the plans would be sicker, and would not be able to pay sufficient premiums to cover their own care.

3. Market Failure in the U.S. Health Insurance Markets by the end of 2008/ The Solution of Regulated Markets established by Government.

· All markets for goods and services are more or less dependent on and subject to some form of public/government rules and regulations if they are to function fairly and properly.

· Sometimes there are serious Market Failures , as there were in the market for health insurance in the U.S. by 2008.

· A market failure is any feature of a market (like a health insurance market) that causes resources to be expended in a way that does not maximize overall benefit to society.

In the case of health insurance, there was a strong case for the social necessity and social benefit of individuals and small businesses having access to affordable and comprehensive health insurance coverage, which the insurance companies would not do on their own for the reasons indicated above

In principle, government intervention can increase that benefit (economic welfare) in such cases. So - when there are large negative social consequences of a Market Failure, government intervention may be necessary.

· Market Failure and Government Intervention: The failures of certain markets for goods and services, such as health insurance markets, may be corrected through regulated markets, thus preserving the best features and results of market-based exchange while avoiding the negative effects of relying too much on unregulated (totally “free”) markets.

The type of government intervention established under the Affordable Care Act, in addition to the expansion of the Federal/State Medicaid programs, was the creation of State Health Insurance Marketplaces. The theory on which this intervention was based was Managed Competition.

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