CEI Comments on Patient Protection and Affordable Care Act, HHS Notice of Benefit and Payment Parameters for 2027; and Basic Health Program

Comments of the Competitive Enterprise Institute

Dear Dr. Oz,

The Competitive Enterprise Institute (CEI) submits these comments in support of several provisions in the rule recently proposed by CMS. The Affordable Care Act is an extremely important piece of the health care economy and provides coverage for millions of Americans. CEI believes it is overregulated but also suffers from a lack of oversight. These problems are causing deleterious effects for consumers through unwanted plans, increasing prices, and larger burdens on taxpayers. Below, I lay out how provisions in this rule would improve the health care market and benefit consumers.

More Options Benefit Consumers

Several of the provisions in the proposed rule will create new freedom for companies participating in the exchanges to offer new plans and plan types for consumers to choose from. Economically, more choices benefit consumers in several ways. First, even along a single dimension, consumer preferences can vary widely. Consider, as an example, the color of a car. There is not only demand for primary colors but also for subtle variations in shades and tones. When a car manufacturer offers a new color, it benefits the set of consumers who prefer that color over all others. This is true of every color added and applies just as much to health care. Economists call this consumer surplus or consumer welfare and have methods of measuring it.

However, this idea applies not only to single dimensions but also to products with multiple dimensions. Extending the car example, there are more variations of cars available to consumers than there are consumers. A market allows consumers to purchase the products that most closely match their preferences. In so doing, they signal to producers which factors they value most so that producers can focus their design decisions. In health insurance this takes the form of deductibles, copays, utilization management, networks, formularies, customer service, actuarial value, etc.

This principle applies most obviously to the proposal to allow for non-standardized plans and non-network plans, but also to the allowance for 10-year catastrophic plans, and privatization of states’ enrollment portals. Each of these provisions will open up the ACA market to more consumer-driven innovation and products. These deregulatory provisions allow for product innovation which, when paired with strong competition, will drive the market away from products designed by legislators and administrators who created the system 15 years ago and toward today’s consumers facing today’s economic reality.

Many argue that standardization brings benefits, too. In particular, it makes comparing and shopping easier. Of course, that’s true, but it comes at a great cost. It makes shopping easier because it’s narrowing the dimensions along which consumers can choose, and focusing the consumers’ comparison shopping on price alone, but price is not the only factor consumers care about. The lesson becomes stark when you apply it to other goods. If the government mandated a single car design, for example, and let manufacturers all produce the same car and compete on price, the consequences are clearer. The existing variety of cars would cease to exist, and consumers would certainly be worse off. The reverse is true in health insurance, by allowing firms to offer more choices, consumers will guide them toward plans that best meet their needs.

Another important point to remember is that this is not exclusively about standardization itself, but government-imposed standardization versus market-driven standardization. Government-imposed standardizations often reflect administrative convenience rather than consumer preference. Government-imposed standards are also inflexible as economic conditions and preferences change, which is less true of market-driven standards.

While the previous points apply fairly broadly to several of the provisions, next I lay out some arguments specific to certain provisions.

CMS recently proposed to allow 10-year catastrophic plans. These longer-term plans have been relatively uncommon in the health care system, but they provide several advantages. Economists have found that long-term health insurance contracts generate benefits and increases in consumer surplus for consumers. Studies of long-term contracts in Germany also found that they benefit enrollees and Germany’s implementation achieves almost the welfare-maximizing plan design. Economists have also found that guaranteed renewability, which is a slightly different version of a long-term contract, is superior to community-rating, the alternative which dominates in the current ACA.

Community rating is often considered an alternative to long-term contracts because it pools risks among a broad set of enrollees. However, it also incentivizes adverse selection, meaning that when everyone pays the same price, the people who have the highest risks stand to gain from being included with people with low costs, and the people with low costs are paying higher premiums, subsidizing the high-risk participants. This leads the low-cost, low-risk participants to want to leave the pool yet attracts more high-cost, high-risk participants. The result is that average costs and premiums go up and healthy people become uninsured.

Long-term contracts reduce this problem. They also create stronger incentives for plan providers to provide preventative services, as they want the enrollees’ long-term health to remain good and reduce costs. Since their revenues can’t adjust to account for increased costs, the plans’ incentives are to keep costs low.

CMS also proposes allowing non-network plans to be available to exchange participants. CMS hopes that companies will offer plans that rely on reference pricing rather than network management to control costs. Several studies have shown that reference pricing reduces provider prices. A study in California found that reference pricing reduced prices by nearly 20 percent. In addition, economists found that there are spill-over effects even for consumers using traditional plans.

Such non-network plans provide several other benefits to consumers. First, as discussed previously, consumer preferences vary widely across consumers. Two of these dimensions are quality of service and geographical convenience. Plans that manage networks largely make these decisions for their enrollees. Only certain providers are in network which restricts the choices of the enrollees both geographically and for quality. If an enrollee wants to go to a nearby provider that’s out-of-network, or a far-away provider that is highest rated in the world but expensive, a non-network plan makes that much easier for them. In a way, it is devolving choice of provider from the insurance company to the enrollee and making that choice even more consumer-driven than the provisions discussed previously.

Fraud

Several of the provisions in the proposed rule are designed to reduce potential fraud or improper enrollment in the exchange. These include additional verification restrictions when IRS tax data is unavailable and  when sources say the applicant’s income would not qualify them for a subsidy. There are also proposed modifications to the Failure to File and Reconcile rules and provisions targeting agents and brokers. CEI believes that program integrity is paramount and that improper enrollment is rampant. CEI analysis of survey data suggests that millions of enrollees are improperly enrolled.