Saturday, February 11, 2012

The Cost of Contraception: Make the Insurers Pay!

Faced with some serious outcry from the proposed regulation to make all employers offer free contraceptive services to employees, the Obama administration has come up with a clever answer: Actually, the employers don't have to provide the services, we will just make the employers' insurers cover the services, and of course with no cost to the employee.


Wait, it gets even better. According to the Administration, this won't cost anyone anything! See this from the LA Times:
Under the new plan, administration officials believe insurers will comply at no charge because the coverage may not actually cost them anything. Evidence suggests that providing birth control coverage reduces overall costs for health plans because birth control is much cheaper than pregnancy, according to administration officials and some health industry analysts.

So I guess the insurers (and employers) must just be stupid for not already giving contraceptive services for free, since they reduce health costs by more than their price. This certainly starts warning bells buzzing in my head.

There are lots of subtleties here, but let me try this angle. Suppose we have an employer who is not self-insured and pays an insurance company to cover its employees. Suppose that like most plans, contraceptive services like the pill are covered, but employees must pay a copay. Suppose also that the administration is correct in that reduced health costs from using contraception (no births) offset exactly the cost of the contraception itself.

Beginning now, this insurer must cover contraceptive services for all employees, for FREE. But probably a huge number of the potential employees who might use contraceptives are already using them and paying for them. For these employees, what we call the inframarginal ones, the insurance company simply loses revenue. Any benefit in the form of reduced health cost is already being captured. For the truly marginal employees, the ones who were not using contraceptives before but will if they are free, the administration's logic is right and the insurance company would break even.

I suspect that the first group, the inframarginal employees who already use and pay for contraceptives, is much larger than the second group, so the insurance company will on net lose a lot of revenue. This will have to be made up somehow, through larger premiums.

The insurance companies have been largely silent through all this, which does not surprise me too much given how much political pressure they are already under. But see this Reuters story:

"We are concerned about the precedent this proposed rule would set," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, the industry's trade group. "As we learn more about how this rule would be operationalized, we will provide comments through the regulatory process."

Zirkelbach said insurers "have long offered contraceptive coverage to employers as part of comprehensive, preventive benefits that aim to improve patient health and reduce health care cost growth."

Employers who have signed on for such health plans in the past paid part of the cost of birth control prescriptions, while their employees also bore some of the expense through co-payments.

That Reuters article ends with this mention of the free lunch theory:
When asked about the insurer concerns, the White House cited a report from the U.S. Health and Human Services Department that estimates the costs of providing free birth control can be offset by reducing expenses associated with unintended pregnancies.

There are probably many medications that reduce health costs in excess of their own price. I would imagine that insulin, blood pressure medications and blood thinners are three great examples. Does this mean that they should all be offered in any insurance plan for free? Are employers and insurers just stupid for making us pay for these free lunches? No, of course not, for many reasons. An employer or insurer needs to somehow cover the overall cost of the plan by charging employees. Typically an efficient plan is going to recover costs through a variety of charges on different services, balancing things like elasticity of demand for those services against costs. There is also the important effect that if something is offered for free to consumers, producers face a very inelastic demand and are more likely to raise prices.

Tuesday, February 07, 2012

Tuition Increases and Expansion of Top Universities

Following on an argument I have been making for years, I wrote a post for US News and World Report arguing for expansion of class sizes at top universities. Top universities are the gates to much of the upper economic class in our society and I think they should be open wider.

The USNWR piece can be read here.

Adverse Selection at the Supreme Court

The brief for the private respondents in the individual mandate case can be read here.

It's a good day for the concept of adverse selection on one hand-- I count twenty mentions, and they are not incidental.

On the other hand, the brief discounts the difficulty in countering adverse selection via relatively simple restrictions, such as limited enrollment periods and coverage-waiting periods.

I tend to agree that it should be possible, if one is willing to use penalties of meaningful impact, to have both must-issue clauses for insurance (so sick people cannot be refused coverage) and prices that are not "overly" based on risk. But there would have to be a cost to waiting until sick to get coverage -- worse coverage, higher prices.