Schrödinger’s Rates: Insurance Markets in the World of Trump
In quantum mechanics, a particle only takes on a property when it is observed. Electrons have spin, either up or down. These are distinct states – there is no middle ground. However, until the spin of the electron is observed, it does not behave as if it is actually in either state. Rather, it behaves as if it was in a strange mix of the two states put together. This is the thought experiment of Schrödinger’s Cat; we can theoretically construct a cat that is both alive and dead – two distinct universes, superimposed, until you make your observation. This report from Pennsylvania’s Insurance Commissioner made me think about quantum states.
In case you don’t want to read the report, here is the short version. Pennsylvania has just received proposed health insurance rate increases for the five insurers in its market. On average, they have requested:
8.8% increase under current regulations
20.3% if the Trump Administration doesn’t pay the cost-sharing reductions to insurers, as it has threatened to do
23.3% increase if the individual mandate is repealed (which Trump has threatened to do unilaterally and is also in the AHCA)
36.3% increase if both of the above occur
Pennsylvania is not the first state to receive different rate submissions for different regulatory environments, but it is the first I have seen where it is so clearly spelled out: the policies of the Trump Administration and GOP Congress will increase insurance premiums. This is not the opinion of politicians, pundits or even the staff of Pennsylvania’s Insurance Commissioner. This is what will actually happen, as determined by the private companies in the market. We didn’t need any more proof but here it is: Obamacare is not causing most of the rate increases. The presence of five insurers shows real competition in these markets; Pennsylvania has not taken actions to hurt their risk pool as happened in Tennessee and Iowa. Rather, intentional Trump-led subversion of markets is the real culprit of spiraling insurance costs.
Pennsylvania was smart, it allowed its insurers to submit different rates for different regulatory regimes. I don’t believe most states are allowing multiple submissions (although I could be wrong). Imagine trying to price your policies, not knowing which of these quantum regulatory states will be found upon observation.
You could probability-weight the outcomes and charge accordingly. But this causes its own problems. If the Administration doesn’t follow through on its threats, you will have some competitors priced much lower than you. You will not win any business. If the Administration does follow through, you will be selling policies for less than their cost in the Trump regulatory regime. In both cases, you will experience severe losses.
This uncertainty, caused entirely by the Trump Administration and GOP Congress, would cause me to seriously consider leaving the non-group market. Without the uncertainty, I would be able to estimate underwriting costs accurately and therefore be quite happy to participate. Obamacare is not causing lack of choice and increased costs – Trump is. Quantum uncertainty doesn’t play out well in insurance markets.
As an aside, that 8.8% number might look big to you – nothing else you buy is seeing such a year-over-year price increase. But there are two factors not included. First, these are the premium increases that Pennsylvania insurers propose. As the Insurance Commissioner goes through the rate approval process, you’d expect the increases to get a bit smaller (they usually have in the Obamacare world). More importantly, it doesn’t account for plan switching. To explain: say there were two plans instead of five. If one insurer raised premiums 17.6%, but the other asked for no increase, the average increase would be 8.8%. But consumers have a choice, and many would presumably move to the plan that had no increase – it will now be cheaper. So the “consumer-experienced” price increase will be lower than the headline increase. The amount will depend on the “spread” of increases, but this HHS study showed that “switchers” experienced large savings in 2016. People considering options and moving to cheaper or better products is the sign of a health marketplace for any good or service. In case you needed just another example that the ACA is not the problem.