Discussing California, Seriously

Paul Krugman, the Nobel laureate, Princeton University economics professor, New York Times economics blogger, and die-hard champion of the left, argues in his Saturday piece, that we aren't having a legitimate, serious discussion about Obamacare. He points to my Manhattan Institute colleague, Avik Roy's, recent piece, which claims that in California, insurance premiums are increasing, contrary to what California's Benefit Exchange is claiming.

I've written briefly about California's numbers - one problem is that the exchange is framing them as falling by comparing with small-group plans (employer sponsored insurance); the other is that California already has a large individual market, which means that the current rates shouldn't be as oppressive as those around the country, which in turn means that California isn't representative of the rest of the country.

Roy takes it a step further and actually examines what it would cost 25 year old non-smoking male to buy insurance coverage now and under Obamacare - the median cost more than doubles from $92 to $205 a month (or $184 a month for non-subsidized catastrophic coverage). Ditto for 40 year olds, who will see costs increase from $121 to $261.

It would seem that the result is pretty clear - costs will increase. But that isn't what Dr. Krugman is disputing - the point of contention is that this methodology essentially compares apples to oranges, when oranges won't be available in 2014 (a better way of putting it is comparing two apples - one weighing half-a-pound and the other weighing a pound, when the half-pound apple will be taken off the market next year). To his credit, Krugman is correct. A combination of new benefits requirements, community rating restrictions, maximum out-of-pocket limits, taxes, and various other regulations will make some plans unavailable in 2014 - ostensibly, the cheapest plans available now won't make the cut.

Before delving into questions of benefits etc., it is worth noting that this is one case where comparing apples to oranges is exactly the correct methodology. The very fact that new regulations will make some plans obsolete is one of the main points that those on the right are making. Because the plans being made obsolete are relatively inexpensive, costs will, by definition, increase. Whether consumers are, on average, better off with more comprehensive minimum benefit packages and community rating restrictions, is an altogether different question. It is certainly within the realm of possibilities that consumers could be made better off (total consumer surplus increases) with new regulations. That isn't a question that can be answered now, however - Obamacare will have to be studied years after the fact to understand its impact. Moreover, other questions remain - for instance, costs aside, since the uninsured are predominantly young and (relatively) healthy, it is questionable whether we should be requiring them to purchase relatively comprehensive insurance coverage.

The question of costs, however, is easy to answer now. Costs are - no matter how you measure them - increasing.

But what if we were to make a more "apples to apples" comparison - that is, compare relatively generous plans now, with the default generous plans under Obamacare?

Let's take our 40-year old non-smoking male, and assume that he is fairly risk-averse. Let's say he earns close to GDP per-capita - about $50,000. Our 40-year old is currently uninsured, and being risk-averse as he is, would probably like to cover a good number of eventualities, meaning that his plan should have a relatively higher actuarial value - similar to those mandated under Obamacare.

If our 40-year old currently lives in Southern Los Angeles, a good option might be the Cigna "CA Open Access Value 3000" plan - coming at $227 per-month, with a relatively low deductible of $3,000. The plan includes maternity coverage, and a prescription drug plan, and covers preventive services without a deductible. Indeed, the plan's brochure indicates that the plan design is intended to comply with Obamacare regulations. What will be the cheapest plan available on the exchange for this 40-year old? It will be 9.3 percent more expensive, at $242 dollars (and this doesn't take into account potentially higher deductibles).

This isn't quite the doubling of premiums that Roy discusses - because this does compare similar plan designs. And yes, as some have noted, premium tax credits may brunt the impact for individuals buying insurance on the exchange. But the point is the same - even comparing plans that offer similar benefits, other regulations in Obamacare will make the insurance market more expensive, driving up costs.

 Note: Current insurance rates here are based on estimates from www.ehealthinsurance.com.  

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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

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