Opinion: Do We Need Less Transparency on Obamacare?
INN Breaking News, October 11, 2013
(Bloomberg) -- A few days back, David Goldhill, whose writing about health care I have long admired, wrote a column for Bloomberg View suggesting that the Obamacare health insurance exchanges would actually raise prices for insurance, as insurers converge around a single price for the reference product that sets the subsidies to be offered:
Goldhill’s argument is complicated. Here’s the gist: First, the subsidies are determined by the price of the second cheapest silver plan on the exchange. The system calculates what percentage of your income you’re supposed to pay -- for a family of four making $32,500, that amount is 3.29 percent of income, or a little more than $1,000 a year. The system looks at the second cheapest silver plan, and subtracts the amount that you’re supposed to pay. What’s left is your subsidy. If you buy a cheaper “bronze” plan, you can pay little or nothing, with the subsidy covering the whole thing. If you buy a more expensive plan, you have to make up the difference.
Goldhill’s contention is that insurers will basically converge around one (high) price for silver plans, which will maximize the subsidies they get. Transparency is supposed to improve markets, but Goldhill is arguing that it will actually undermine the market for insurance.
Is this possible? Well, there’s one intriguing experiment that suggests it is. In “More Information, More Ripoffs: Experiments with Public and Private Information in Markets with Asymmetric Information” (Review of Industrial Organization; Vol. 36 No. 1, 2010), Bart J. Wilson and Arthur Zillante tried to replicate George A. Akerlof’s famous “lemons” problem, where asymmetrical information between buyers and sellers causes sellers to pass off inferior goods, and undermines the market until only shoddy products are being offered (such as the market for used cars). They couldn’t replicate it -- until they posted the prices publicly. Here’s Wilson describing the experiment to me in an e-mail:
Sellers know if they are hocking regulars or supers, but the buyers won't know until they have purchased the good which one they have. Supers cost more to produce, but they also have a much higher value for the buyers than regulars. If the posted prices by all of the sellers are public so that everyone, especially the sellers, can see them, then the sellers of regulars price just below the cost of the supers and sell lemons to the buyers. But if the prices are not publicly posted but buyers can visit the sellers and comparison shop on their own, the prices separate to distinguish regulars from supers and no buyer purchases a regular thinking it is a super. The results are quite stark. This isn't an iffy finding.
This seems crazy. How could transparency undermine a market? Isn’t transparency supposed to make markets better? But in the experimental market, it was the opposite: When sellers could see what the competition was doing, that increased their ability to cheat the customer.
Nor is it only in experimental markets that you see results like this. For example, witness the “AudioQuest K2 Terminated Speaker Cable -- UST 2.44 m Plugs 8' Pair” available on Amazon for $13,000. (Actual value: maybe as much as $200, according to my audiophile husband, but probably significantly less.) This sales price spawned some of the best humorous Amazon reviews ever, including this classic of the genre:
We live underground. We speak with our hands. We wear the earplugs all our lives. PLEASE! You must listen! We cannot maintain the link for long... I will type as fast as I can. DO NOT USE THE CABLES! We were fools, fools to develop such a thing! Sound was never meant to be this clear, this pure, this... accurate. For a few short days, we marveled. Then the... whispers... began. Were they Aramaic? Hyperborean? Some even more ancient tongue, first spoken by elder races under the red light of dying suns far from here? We do not know, but somehow, slowly... we began to UNDERSTAND. No, no, please! I don't want to remember! YOU WILL NOT MAKE ME REMEMBER! I saw brave men claw their own eyes out... oh, god, the screaming... the mobs of feral children feasting on corpses, the shadows MOVING, the fires burning in the air! The CHANTING! WHY CAN'T I FORGET THE WORDS??? We live underground. We speak with our hands. We wear the earplugs all our lives.
All Insurance Networking News articles are archived after 7 days. REGISTER NOW for unlimited access to all recently archived articles, as well as thousands of searchable stories. Registered Members also gain access to exclusive industry white paper downloads, web seminars, podcasts, e-books, and conference discounts. Qualified members may also choose to receive our free monthly magazine and any of our e-newsletters covering the latest breaking news, opinions from industry leaders and developing trends.