Nonprofit Health Insurers (Co-ops) Go Under

I’m sitting here trying to figure out what I could possibly write about on an economics blog. While flipping through the recent Bloomberg Businessweek magazine, an article caught my eye with fun little comics entitled, “Your Health Plan Will Now Self-Destruct.” This topic interests me as I am responsible for choosing the health plan(s) that the company I work for offers to its employees. Our company has seen the cost of healthcare nearly double over the last few years, and we often wonder how we will be able to continue to afford it in a few years at this rate.

The demand for skilled workers has also increased lately. In turn, those skilled workers demand good benefits including health insurance. But, the supply of skilled workers seems bleak. I must admit, the U.S. economy does seem to be improving. Furthermore, as the economy improves, the demand for skilled workers increases. This requires companies to pay a higher price to keep their skilled workers.

While browsing the internet earlier, I even found an advertisement from McDonald’s stating they now offer health insurance. It appears this is their new recruitment technique. You can check out the details here: McDonald's USA Announces New Employee Benefit Package Including Wage Increase and Paid Time Off at Company-Owned Restaurants.

But getting back to the original article, Tozzi (the author) reports that the Obama administration loaned $2.4 billion to establish 23 health insurer co-ops. Ten of those co-ops have already gone under. If you are interested in how much that cost the government – it’s $1,072,174,773. Yes, over one billion dollars was loaned to co-ops that have failed. At least half a million people now have to find new coverage. I’m sure many people have also lost their jobs. I guess we will just have to wait and see how the ACA will continue to affect the economy.


Dr. Tufte said...

Vicki: 100/100. The last half of the second paragraph is really kludgy, but I don't think it rises to the level requiring a markdown.

Vicki: can you make the second link look like the first link please? I will ding you for that if you don't fix it.

Yeah: someone's got to be first, right? And as Vicki noted, it's pretty easy to find a topic you have something to say about once you start looking.

I don't think it's typical for healthplan costs to employers to have doubled over the last five years. I'm not saying it didn't happen, just that it isn't typical. First off, I wonder if Vicki's company has increased in size, so a cost per employee might not have actually doubled. Even if that issue is there, and we corrected for it, I'm quite sure that the plan at Vicki's employed went up by quite a lot. There's two parts to that. First is the general increase in the cost of healthcare. Interestingly, that hasn't gone up as much as people think (the big run-ups in healthcare costs in the U.S. were in the 70's and 80's). And one part of Obamacare that even critics are conceding seems to be working is, that by either action under the law or the threat of future action, costs of existing procedures don't seem to be going up too much. But then the second problem shows up: many companies used to offer fairly stripped down healthcare plans that Obamacare made illegal. So a lot of the price increases we're seeing are from mandates for coverage of things that used to be optional.

It was new to me that McDonald's is offering a healthcare plan nationwide. Most people don't know (and Vicki doesn't seem to) that fast food places have commonly offered healthcare plans in parts of the country with already high wages for a couple of decades. I'm not saying it was common, but it happened.

Dr. Tufte said...

My comments are sometimes long, but not usually this long. I had to break it into two parts.

Vicki's last paragraph talks about Obamacare co-ops. This one really frosts me, both professionally and personally.† Obamacare created a method for financing healthcare plans through non-profit co-ops. A few dozen of these sprang into existence, were seeded with money (which in and of itself is not a bad thing when trying a new idea), but most of them underestimated their costs and lost money, and now about half have gone out of business. All that, in just a couple years. As a general proposition, any time you hear of legislation which has a goal of creating some new form of business that didn't exist in the private market before ... you should run away fast. It's fairly basic economics: if that business structure doesn't exist it's because it wasn't viable. Tilting the field in a direction to make it viable can work, but it's expensive and does not have a good track record. More generally, I think a lot of legislation, and social legislation in particular starts out by dividing up the world, and deciding who you like (they get to wear white hats!) and who you don't like (and making them wear black hats). In the case of Obamacare, health insurance companies were presented to the public as the guys with the black hats, who made ... (gasp) ... profits off of the health misfortunes of others. This was, and is, patently ridiculous: health insurance companies bring in a lot of revenue, and can make a lot of profits because of their size, but those aren't the key variables for tracking corporate performance. Instead, we want something like a net profit rate, or ROI. And on those counts health insurance firms are amongst the worst performers over the last few decades. All those horror stories you hear, most of which are no doubt true, are motivated by those companies merely trying to stay in the black at all. So, getting back to co-ops, the legislation pushed the idea that if we organized those as non-profits, somehow things would work out better. But that defies common sense: the for-profit health insurers were making close to no profits already, so the for-profit bugbear just couldn't have been that significant in the first place. This is very much a case of we/economists told you so (but politicians didn't listen).

† On a personal note, I know someone who is an independent health insurance broker. When Utah's co-op, Arches, came online, they offered sales people very high commissions. Now a broker makes their money on the initial commission, and on the annual renewals from satisfied customers. My friend refused to work with Arches: when she looked at their business plan, she figured that Arches was not in it for the long-haul, and the overall present value of signing up new customers for them would be lower than what she could get elsewhere. She made that decision a few years ago, and got proved right this autumn.

Dr. Tufte said...

I don't normally try to overload you with extra information in the comments of this blog, but I came across a graphic that you may find interesting.

I got this from The Wall Street Journal. The two bars on the left show the total revenue of the health insurance industry. The bar on the right is the interesting one: despite a huge increase in revenues (16%), and an Obamacare act that the insurers signed off on as a way to shore up their bottom lines, only about a third of healthcare insurers made a profit last year. Everyone seems to think these firms are ripping everyone off, and yet it's almost unheard of to have a majority of an entire industry losing money outside of a recession.

Anyway, you have to click through to the source article for this one. It's entitled "Health Insurers Struggle to Profit From ACA Plans", and it appeared online on November 1, and in the print edition on November 2.

Vickie said...

Interesting... Actually, this is a little scary considering how much premiums cost nowadays.

CChilds said...

Part of the problem, I think, is many people forget that buying insurance is hedging your bet (not reducing costs). You spread the financial risk of being injured or getting sick over a larger group of other people doing the same thing and the insurer is the facilitator. When it is mandated to bring people onto your plan who were previously un-insurable, some because of higher risk, the price of the plan will go up because the costs payed by the plan goes up. But many of these new individuals can’t afford the higher cost, so the “government” gives them a break. Well, who then foots the bill for the higher costs? The other members of the group surely have in higher premiums and taxpayers definitely have in the Obamacare payoffs. We can see that insurance companies have, based on the losses they have reported. In reality, the best way to reduce insurance cost is to reduce medical costs driving them. As already mentioned, Obamacare has seemed to stop rising costs to some degree. Another way is to reduce usage and be smarter about how you use medical facilities and prescriptions. People need to know that having insurance is not a free-use pass to medical care but a safety-net in case something catastrophic happens.

Dr. Tufte said...

Vickie: (no score for this one, because I see that you did an extra comment in this block)
CChilds: 50/50

I think CChilds has blown this thread wide open. Everything in there is economically sound.

But it does open up some other dimensions, so let me add a few things.

1) Healthcare is expensive, in part, because it works. And the improvements in health outcomes over the last 50 years or so are not small.

2) Outside of economics few people want to admit to it, but the income elasticity calculations show that healthcare is a luxury. We have a list of other things to buy first, but when our incomes rise, our healthcare spending rises even faster. Don't believe me? Think Lasik or boob jobs, neither of which is typically covered by health insurance, but which middle and upper class Americans have little trouble justifying out of pocket.

3) Healthcare demand is also somewhat like the demand for addictive substances, in that satisfying the demand for it today increases its demand tomorrow. The mechanism is different — treating sick people makes them well so they can consume more healthcare in the future — but the end result is similar.

4) Americans are largely ignorant of the fact that healthcare outcomes are better in America for just about all conditions. The thing is, you have to match nearly identical incoming patients and then check how their outcomes compare. A big difference between American and other countries is that we have more patients who show up in bad shape than other countries do. That's a problem, but not exactly a financial one.