The idea was to attack fragmentation, which is a huge cost center in the health industry. A smaller individual insurance plan
* Has to pay more for drugs (less bargaining power vs a big plan)
* Has more statistical risk (# people goes with N, stdev in # people with a given illness goes with sqrt(N), so risk/person goes with sqrt(N)/N and larger plans have less risk)
* Has larger legal/consulting overhead
* Forces doctors to incur overhead with nonstandard forms
* Is vulnerable to the bandwagon effect (if, by accident, it happens to favor X group of costly individuals, the costly individuals proceed to pile on and sink the plan)
* Has the ability to discriminate based on fine-grained geographical knowledge and other factors
* Has an under-leveraged customer base (if the plan is "secretly evil" and dumps people who need expensive treatment and 1% of people require expensive treatment, a 100 person plan will have 0 or maybe 1 person being screwed at any given time, while a 10000 person plan will have ~100 people being screwed who are much more able to band together and fight a legal/PR battle)
Previously, small plans were able to flourish because of #6 and #7, incurring #1-5 as costs of doing business. This was bad for everyone except insurance companies. The best way to turn a profit in the insurance industry is to sell insurance priced for a medium-risk person to a low-risk individual(or hi-risk price to a medium-risk person). If you look closely, this kind of "innovation" is actually just restoring the pre-insurance reality of charging sick people a lot and healthy people very little. It defeats the purpose of insurance while increasing costs (#1-5) and letting the people in charge of the purpose-defeating process pocket a hefty cut of the proceeds by fooling people into buying overpriced coverage.
Exchanges are designed to put an end to the tragedy of the commons. The savings from #1-5 can be recouped at the expense of eliminating #6 and #7, which were perverse incentives anyway.
Even if you disagree with my explanations, it is objectively true that employer plans are much more efficient than individual plans (E(payout)/E(cost) is larger). You can then see the ACA exchanges as an attempt to reform individual plans to emulate employer plans. Of course, it remains "cargo cult economics" unless you can figure out why you expect the emulation to close the gap in value, which is what I was doing with the list in the first place. In other words: I have provided 7 possible explanations that I think make sense but there are even more out there which I don't agree with and haven't listed.
You forgot one of the biggest reasons for the exchanges: they're the mechanism through which the government provides premium subsidies to people who qualify.
I think there are a variety of reasons for that (e.g. keeping better tabs on the large amount of money spent on subsidies, easier administration of the subsidy tax credit), but the bottom line is the law says people only get the subsidies if they go through an exchange, so...
The government has many mechanisms through which it distributes subsidies, and while I'm sure the centralized exchange is going to be one of the most efficient and convenient, I'm not nearly so certain that the difference will be larger than the effects it has on the market.
Let me be concrete. According to [1] (which gets its numbers from the CBO), individual plans have 29% administrative overhead as opposed to 12% for employer plans. If the exchanges successfully emulate employer plans, they save 17%*$300b = $51b per year in health care costs. Unless the exchange program is 10,000% more efficient than its alternatives (tax subsidy, payments to companies, etc) then the effects I listed dominate.
In any case, the exchanges were designed with the explicit intent of making the individual insurance market more efficient, not merely making subsidy disbursement more efficient.
Comments
The idea was to attack fragmentation, which is a huge cost center in the health industry. A smaller individual insurance plan
* Has to pay more for drugs (less bargaining power vs a big plan)
* Has more statistical risk (# people goes with N, stdev in # people with a given illness goes with sqrt(N), so risk/person goes with sqrt(N)/N and larger plans have less risk)
* Has larger legal/consulting overhead
* Forces doctors to incur overhead with nonstandard forms
* Is vulnerable to the bandwagon effect (if, by accident, it happens to favor X group of costly individuals, the costly individuals proceed to pile on and sink the plan)
* Has the ability to discriminate based on fine-grained geographical knowledge and other factors
* Has an under-leveraged customer base (if the plan is "secretly evil" and dumps people who need expensive treatment and 1% of people require expensive treatment, a 100 person plan will have 0 or maybe 1 person being screwed at any given time, while a 10000 person plan will have ~100 people being screwed who are much more able to band together and fight a legal/PR battle)
Previously, small plans were able to flourish because of #6 and #7, incurring #1-5 as costs of doing business. This was bad for everyone except insurance companies. The best way to turn a profit in the insurance industry is to sell insurance priced for a medium-risk person to a low-risk individual(or hi-risk price to a medium-risk person). If you look closely, this kind of "innovation" is actually just restoring the pre-insurance reality of charging sick people a lot and healthy people very little. It defeats the purpose of insurance while increasing costs (#1-5) and letting the people in charge of the purpose-defeating process pocket a hefty cut of the proceeds by fooling people into buying overpriced coverage.
Exchanges are designed to put an end to the tragedy of the commons. The savings from #1-5 can be recouped at the expense of eliminating #6 and #7, which were perverse incentives anyway.
Even if you disagree with my explanations, it is objectively true that employer plans are much more efficient than individual plans (E(payout)/E(cost) is larger). You can then see the ACA exchanges as an attempt to reform individual plans to emulate employer plans. Of course, it remains "cargo cult economics" unless you can figure out why you expect the emulation to close the gap in value, which is what I was doing with the list in the first place. In other words: I have provided 7 possible explanations that I think make sense but there are even more out there which I don't agree with and haven't listed.
You forgot one of the biggest reasons for the exchanges: they're the mechanism through which the government provides premium subsidies to people who qualify.
I think there are a variety of reasons for that (e.g. keeping better tabs on the large amount of money spent on subsidies, easier administration of the subsidy tax credit), but the bottom line is the law says people only get the subsidies if they go through an exchange, so...
The government has many mechanisms through which it distributes subsidies, and while I'm sure the centralized exchange is going to be one of the most efficient and convenient, I'm not nearly so certain that the difference will be larger than the effects it has on the market.
Let me be concrete. According to [1] (which gets its numbers from the CBO), individual plans have 29% administrative overhead as opposed to 12% for employer plans. If the exchanges successfully emulate employer plans, they save 17%*$300b = $51b per year in health care costs. Unless the exchange program is 10,000% more efficient than its alternatives (tax subsidy, payments to companies, etc) then the effects I listed dominate.
In any case, the exchanges were designed with the explicit intent of making the individual insurance market more efficient, not merely making subsidy disbursement more efficient.
http://www.americanprogressaction.org/issues/healthcare/repo...