The Simple Arithmetic of the ACA Individual Insurance Marketplace

If you have been following the news you know that 2016 has been rife with major health insurance issuers leaving the health care exchanges, i.e. Obamacare.  Some have thrown the entire line of business under the bus claiming that it will always be unprofitable.  Others like Aetna, that is the most recent exit, were less pessimistic in the long run but were losing gobs of money in the short run.  Their CEO blames Risk Adjustment saying it wasn’t properly reimbursing them for their relatively unhealthy population.  This is of course a stupid thing to say and I will point out why.  The interesting question in my mind is still whether there is a stable profitable equilibrium for the individual marketplace and this post will explore the simple arithmetic for determining this.  The answer will become particularly important if some markets are reduced to having only one issuer.

So I said simple arithmetic.  That is because the profitability of the marketplace as a whole is really quite simple, money in has to be greater than money out.  The input is member premium and government subsidies (Advanced Premium Tax Credit and Cost Sharing Reduction).  Money out is medical claims cost.  You will notice Risk Adjustment (RA) is not in there.  RA is a zero sum transfer between insurance issuers, it does not affect the sustainability of the market as whole, only the profitability of an individual issuer.  It also becomes moot if there is only one issuer.  When Aetna whines about RA they are essentially saying that they want a piece of their competitor’s profits.

Now both sides of our expression are variable based on which members are purchasing insurance.  Even with a tax penalty, not everyone will buy insurance.  So if you jack up the premium, your healthier population will likely take the penalty and you lose their premium while medical costs will only go down slightly as sicker individuals that incur most claims will continue to purchase.  Thus the question simplifies to: is there an equilibrium premium that keeps enough healthy people paying premium to cover the medical costs of the unhealthy people?

This is slightly complicated by the government subsidies which are mutable based on the marketplace.  The CSR depends on the out-of-pocket (OOP) limits of the plan.  This will induce more healthy people to purchase insurance (since the benefits are greater) and issuers are really only on the hook for very sick patients that blow through their OOP expenses.  A plan design that maximized the Max OOP expenses will extract the largest subsidy from the government.

Similarly, the APTC is based off the second lowest cost silver plan.  If issuers become monopolies in their market they could potentially set the price of this plan to whatever they want and thus determine the APTC.  This allows them to extract whatever they want from the government.  And much like CSRs we would expect more people to purchase insurance if the issuer sets the APTC such that it covers a large portion of a bronze or lowest cost silver plan.

People talk about the pillars of the ACA: no underwriting, subsidies and a mandate.  The first requires a mandate in order for healthy people to subsidize sick people.  Otherwise healthy people opt out because the premium price is higher than their expected value from insurance.  However, the presence of subsidies suggests the writers of the ACA think even the tax penalty is not enough to create a market equilibrium where expected medical costs are lower than expected premium.  In other words, the writers of the law think the only way private health insurance that covers everyone with no underwriting can be profitable is essentially if the government is the one supplying the profits!

The conclusion then is that health insurance for all is not profitable and furthermore the current design of the ACA is probably not welfare maximizing.  The tax penalty is inducing people to purchase insurance that is costlier to them than not having insurance.  This is a classic situation for government provision of a public good and instead we have a system that BY DESIGN requires the government to pump money into it for private insurers to be profitable.

Thus the only rational next step is a public option/single payer system.





Kubo and the Two Strings Review

We saw this movie over the weekend because of glowing reviews and as some kind of counter-programming from a dull summer blockbuster season.  This is coming from someone who enjoys comic books and superhero films.  Unfortunately, I can’t really understand all the adulation of Kubo.  The movie never meets the expectations it sets and seems to be gathering most of its praise due to some kind of hipster iconoclasm that praises the stop motion animation.

First, let me tackle the much lauded visuals.  I don’t really care that it is stop motion.  On an intellectual level what they did was amazing.  However, at this point it would be easier to use 3D computer animation to simulate stop motion than it is to actually do stop motion.  Also I am not sure the distinctive stop motion style really adds much here.  In general there were very few scenes of visual splendor and awe and most of them were because of some gorgeous backgrounds.  As such it’s very hard to concur with reviewers praising the movie’s visuals and it certainly does not substitute for the movie’s other flaws.

Second, the dialogue in this movie is mediocre and verging on bad.  Most of the jokes fall flat and seem like an obligatory sop to the convention of animated films and to the younger viewers in the audience.  The rest of it often falls flat, like the monkey trying to be intimidating or the witch sister’s pretty much every utterance.  There is also a lot of pseudo-philosophical rambling that tries to add depth to the film but such explicit musings are usually a sign that the story is handling the topic poorly and that is the case here as well.

On a macro level, it was really the plot that let the movie down.  The movie opens with a scene of a woman literally parting a squall with a burst of energy from her sitar.  Then the first part of the movie reveals that she is hiding him from gods and that Kubo himself is half-divine.  This could lead to some epic American Gods or Illium level god smackdown.  Instead Kubo partakes on a rather bland adventure to acquire some unimpressive artifacts that appear to be lying around for no articulated reason.  There are some decent action scenes along the way, though you wonder why all the gods seem to abandon their magic to fight with melee weapon or turn into glowing centipedes rather than just smudge Kubo off the map.

However, the ending almost ruins the movie.  It kills off some major characters quite abruptly, but due to poor quality of their interactions earlier, it doesn’t have the emotional punch the filmmakers wanted.  Then the movie just kind of fastforwards to the final confrontation between Kubo and his grandfather.  It turns out all those artifacts were Mcguffins.  Instead we get some trite nonsense about memories.  The movie ends with the grandfather being turned human with a bad case of amnesia.  At that point the village engages in a conspiracy of lying where they embed him with made-up memories to sway him towards good.  It seemed antithetical to the entire movie and the immediately prior scene about memories.

The movie really needed to expand on its mythology and present some kind of internal conflict for Kubo.  There was an eye monster that revealed unsettling truths, but they didn’t take advantage of that.  Maybe juxtapose the perfection of godhood and the inadequacies of mortality.  Maybe it’s just the fantasy lover in me, but there was also a scope for some epic battles with gods and a young boy coming into his powers that are largely untapped.

Then there are just inconsistencies.  Why are the divine sisters caricatures of evil, but the third sister looks like a typical woman?  Why did they easily overpower the third sister but succumb to a monkey and an untrained boy later?  What was the point of the artifacts and why was one just sitting in a town unknown?

I don’t know, this movie teased a much better movie.  While the team has their technical craft down, after five years their plot and characterization could have been much better.  This, in my mind, was just another mediocre 2015/2016 movie release.