May 1, 2017
What Healthcare Policymakers Can Learn from Other Industries
New study by Steve Cicala finds valuable lessons from the energy sector.
By Elizabeth Austinvia Harris School of Public Policy
When federal policymakers sit down to draft health care regulations, it’s useful to have an energy economist in the room – because electric utilities and health insurance companies are more alike than most consumers (and elected officials) might imagine, says University of Chicago economist Steve Cicala.
In a new working paper published by the National Bureau of Economic Research, Cicala, an assistant professor at the University of Chicago Harris School of Public Policy, found that a provision of the Affordable Care Act (also known as Obamacare) resembles a type of regulation that sometimes has been used to set prices for utilities, usually resulting in increased rates. Although this provision of the health care law was aimed at making private health insurance more affordable, it had the similar unintended consequence of raising health care costs.
In the study, Cicala and his co-authors, Ethan M.J. Lieber, an assistant professor at University of Notre Dame, and Victoria Marone, a Ph.D. candidate in economics at Northwestern University, looked at the politically popular “80/20” rule of the Affordable Care Act (ACA). Under the ACA, every health insurance company must meet a minimum Medical Loss Ratio (MLR), defined as the percentage of premiums that is actually spent on consumers’ health care. If an insurer pays less than 80 cents of every premium dollar to health care providers, the ACA requires that insurer to rebate the difference back to consumers. These rebates have provided an annual opportunity to praise the rule’s success, with President Obama remarking in 2013: “Already millions of families have actually received rebates from insurance companies that didn’t spend enough on their health care. So this law means more choice, more competition, lower costs for millions of Americans.”
Limiting insurance companies’ profit margins may sound like a good deal for the insured, Cicala said. But in reality, the regulation created a strong incentive for health insurance companies to overspend; when regulations cap only the percentage of each dollar that companies can keep without managing total expenditure, the companies can simply spend more to protect their profit margins...