The oddball start-up that shows how ObamaCare has made a friendlier insurance market

Whatever our political divisions, one thing Americans agree on is that dealing with health insurance is a Kafka-esque hassle.

Oscar, an oddball start-up health insurer in New York state, aims to change that. It's got a user-friendly website that offers providers after you type in your symptoms, along with free 24/7 internet consultations with doctors. It lets you compare prices from different providers and refill prescriptions with one click. It's even partnering with CVS to build care locations throughout the state, and it's hiring nurses to offer in-home follow-up services, especially for new moms.

Oscar got started in New York when ObamaCare's exchanges opened. In the last year, it's tripled its value on the stock market to a staggering $1.5 billion, and tripled its customer base to 40,000. Oscar is already selling plans on New Jersey's exchange, and will enter Texas and California shortly.

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Way back in 2009, David Goldhill wrote a sweeping piece for The Atlantic on how to reform the American health care system. One of his ideas was the introduction of "health care agents" who would help consumers navigate their health care choices and act as advocates for them. When you think about it, health insurers are perfectly positioned to do that. Yet they've long been considered the predatory enemies of consumers.

Oscar is the first inkling of what the shift into the agent role might look like. So why haven't we seen more of this already?

In short, up until recently, we didn't have ObamaCare.

Before the health reform law, all the incentives encouraged insurers to exploit consumers rather than help them. Most people who weren't on government-provided insurance got their private coverage through their employer. (And still do.) In that case, insurers have an incentive to make employers happy, but little reason to offer customers transparency or quality service.

As for the individual market, insurers were free to deny people coverage or charge them sky-high premiums based on their medical history. That drove out sick customers, leaving premium-paying healthy customers who need little in the way of care. Insurers could make a profit by gaming their risk pool.

The way markets are supposed to work is you have lots of companies, all experimenting with different prices, business models, and innovations. Customers flock to those that do better on those metrics, rewarding them with higher profits. Companies that don't successfully experiment die off. When people talk about "market forces" or "market-oriented systems," this is what they mean.

But for markets to work, profits actually have to reward better deals and innovations. Until ObamaCare forbid insurers from denying coverage based on pre-existing conditions, that wasn't the case in the health insurance market.

The pre-existing conditions regulation does shift costs around — sick people are charged less, so insurers have to charge healthy people more — but people are still shopping on the exchanges, and insurers still have every incentive to offer them the best prices and innovations they can come up with. Put concretely: This regulation doesn't interfere with what Oscar is trying to do in the slightest.

The same goes for the age band regulations, which limit insurers to charging older people three times what they charge younger people; prices may go down for old people at the expense of a hike for the young. But the market forces remain intact.

Now, a few other aspects of ObamaCare do mess with market forces somewhat, and could arguably crimp Oscar's style.

The first is actuarial values, which govern how much of the costs of care insurers can pass on to customers through deductibles and co-pays and the like. They set the "metal" ratings on the exchanges. If the insurer covers 60 percent of the costs, that's a bronze plan; if it covers 70 percent, that's a silver plan, etc.

Freedom to innovate on cost-sharing is important; the fact that Oscar allows customers to compare prices will mean little if customers aren't picking up some of the tab. But ObamaCare also allows insurers to use whatever combination of cost-sharing approaches they like as long as they hit the overall percentage mix. So it's hard to see how much this regulation actually impinges on Oscar's freedom to innovate.

Second are the essential health benefits, which all insurers are required to provide — things like emergency services, lab work, maternity care, etc. That's an interference, no doubt about it. But each state decides the details of which benefits meet that list, so they can experiment with different mixes. And most of these benefits are already common and popular, which is why the federal government settled on them — insurers would need to make minimal changes.

So again, yes, the essential benefits are a market interference. But not much of one.

Critics of ObamaCare have accused it of stifling innovation in health care, and driving the sector away from a reliance on market forces. Regardless of whether you consider "market-orientation" a good or bad thing in health care, this is simply incorrect. In fact, it's just about the opposite of the truth.

Many of the major regulations on ObamaCare's exchanges are simply irrelevant to how market forces operate. Those that do interfere only do so modestly, and could easily be altered by surgical reforms that leave the overarching structure of ObamaCare entirely intact. For instance, lawmakers could simplify the actuarial value requirements — by, say, creating a floor percentage below which plans may not fall — and tone down the essential benefits list. Then just make sure whatever actuarial mix an insurer is offering is transparent on the exchange, and increase the generosity of the ObamaCare subsidies that cover cost-sharing. (The key thing to remember about subsidies is that as long as they can be spent on anything, not just the thing they're ostensibly meant to subsidize, they don't mess with market forces, and can be as big as we want them to be. And that's how ObamaCare works.)

In short, health care reform gave us something we've never seen before in America: a market where the incentives drive insurers to treat customers humanely — to offer them lower prices, better packages of care, and better ways to access care. This is precisely why we should want Americans who currently get their health insurance through their employers to eventually migrate onto the exchanges. And while liberals might gnash their teeth at the suggestion, this is also why eventually migrating Medicare and Medicaid's populations onto the exchanges as well isn't an entirely crazy idea.

Because, hopefully, Oscar is just the beginning of what customers will be able to find there.