There’s a reason for this.
After the (wholly justified, understated) bitterness of my last post, a moment of cheer: An old friend of mine is in the process of losing his job.
Now, normally I wouldn’t celebrate anyone—let alone a friend—losing a job, but, you see, he sells medical insurance in Texas and Indiana. And he’s been told that over the next three years, his income will be reduced, and basically eliminated entirely ca. 2015.
Translation on a macro level: insurance companies—far from acting as if they are “uncertain”—are cutting the commissions they are paying to agents in preparation for greater competition as the phases of the PPACA come into effect.
We have already seen variations on this: insurance companies that will no longer write policies for only parents, because their children have other options. Insurance companies complaining about the “cost” of having to cover basic services—you know, the preventive care that would seem to be implied when you call your plan a “Health Maintenance Organization” and which is covered by State Medicaid plans such as NJ FamilyCares.
The English translation of “the market won’t support it” is “we can’t compete with our current structure.” It is a tale told by a capitalist since the beginning of double-entry accounting, with the steel industry being a recent example of American Rebirth.) Economists us the phrase “creative destruction” to explain it, even though there is very little creative and a lot of destruction (or, in significant cases, structural shifting) that goes on at the time.
“Bending the cost curve” means producing more consumer surplus. This is what competition does in economic models, primarily by cutting margins (“excess rent”) and thereby making firms allocate capital and labor more efficiently. When your margins are large—through monopoly power, including “monopolist competition”—consumer surplus is low. Since Steve Jobs is the sexiest human being in the world, Apple products sell for higher margins than other communication/computing devices do. This may always be so—or maybe the world will shift to Android phones, a and the Apple of five years from now will look like the Apple of 15 years ago, taking cash from Microsoft in order to survive.
Health insurance is an area hasn’t had true competition—search costs are too high for most people. (Indeed, the evil of employer-provided health insurance deductibility isn’t that it is a suboptimal allocation of resources so much as it is that that pre-tax money allows insurance companies to maintain higher margins without the consumer feeling the full cost of their loss. It is a system that perpetuates excess rent being paid, effectively as a transfer from the government to the insurer.) One of the first things health economists noted about Medicare Part D is that, while one had to “shop” to find an insurer, the effort required meant that very few people would then switch, even if the insurer later reaped excess rent. When switching costs (consumer) are higher than menu costs (supplier), excess rent is virtually an inevitability. (In this case, again, the American taxpayer is footing a large portion of the bill for a transfer to insurance companies. It is impossible to believe, given the bill’s enactment process, that this was not considered a feature.)
So there are multiple areas where consumer surplus is low in the health insurance industry. Which means that many people—including my friend—have been “earning” more than they are “producing”—some of the excess rent is distributed, after all. And, for the next few years, they will be seeing their incomes decline while people believe (as Jon Stewart said to Barack Obama last night) that PPACA will not take effect until 2014.
And Obama’s reply (starting around 7:30) was spot-on:
So for the next few years, people such as my friend will see that the squeeze is hitting them, while the benefits haven’t reached all of the general populace. (They have already reached many children—including adult children who can’t find a job and can at least be insured by their parents—and helped many senior citizens who were being affected by the “donut hole.”)
We saw this same sequence in the mid-1980s and early 1990s in the travel field—slowly at first, and then quickly as internet bookings and purchases determined solely by price became the rule. The survivors were the agencies with large corporate accounts and the ones that provided specialty (“niche”) services you couldn’t get from Travelocity and its competitors.
The travel agency market existed for one reason: in the old days, it cost an airline about 16 cents of every dollar to get a seat booked. An agent who could be paid 8-11% per ticket—with incentives for volume—was a bargain. It was, to use the economist’s favorite cliché, a win-win situation. And the benefits of tour and hotel bookings could truly be treated as marginal cost increases, with their own revenue stream generally more than enough to justify for even a small office.
But true competition—the decline in the incremental Search Costs presented to consumers by Travelocity and its competitors, followed quickly by direct booking availability directly with a specific airline—meant the end of that model, leading to industry consolidation, downsizings, and closings—just as the insurance agents are feeling the pressure now of the impending “exchanges.”
And, as then, my friend noted that there are still areas that will continue to be profitable for insurance agents in 2015. For insurance, policy service for the elderly. (Showers of gratitude from the insurance agents to the unfunded, deficit-exploding Medicare Part D shall continue.) Everything else will see the agents’s livelihood affected as the insurance companies try to protect their own share of the turf.
He has four years to prepare, and a roadmap for change that remains valuable. And for those interested in “bending the cost curve,” the first fruits of that effort are being realized. And people are realizing they will have to change their lifestyle and practices to deal with the new world.