We’ll compromise: free contraception coverage

Now that’s the kind of compromise with Republicans that I can totally get behind:

After two solid weeks of Republicans rapidly escalating attacks on contraception access under the banner of “religous freedom,” Obama finally announced what the White House is proposing an accomodation of religiously affiliated employers who don’t want to offer birth control coverage as part of their insurance plans. In those situations, the insurance companies will have to reach out directly to employees and offer contraception coverage for free, without going through the employer. Insurance companies are down with the plan, because as Matt Yglesias explained at Moneybox, contraception actually saves insurance companies money, since it’s cheaper than abortion and far cheaper than childbirth. Because the insurance companies have to reach out to employees directly, there’s very little danger of women not getting coverage because they are unaware they’re eligible.

If only all the compromises were like this. For more, go here.

31 thoughts on “We’ll compromise: free contraception coverage

  1. This shouldn’t be characterized narrowly as a dispute with Republicans; the opposition to the HHS mandate crossed party lines. A number of Democratic politicians (e.g. John Kerry, Bob Casey, Bill Nelson, Ben Nelson, Joe Manchin, Joe Lieberman, Tim Kaine) opposed the mandate too, as did a number of Obama’s prominent liberal defenders in the public eye (e.g., E.J. Dionne, Chris Matthews, Amb. Doug Kmiec), not to mention an awful lot of religious adherents and Free Exercise Clause fans of every political stripe.

    As for insurance companies being down with the plan, pace the depressingly anti-Catholic Matthew Yglesias I have yet to see this sentiment expressed by the insurance industry, so I am not certain the industry agrees that the Administration’s second draft of the mandate will actually save them money. I understand the argument that paying for contraception is cheaper than paying for childbirth, but the Administration made the same arguments with regard to preventative coverage generally, which studies suggest is – albeit perhaps counterintuitively – not actually true. (I’m not sure why the fact that contraception is cheaper than abortion should be relevant, since the particular employers at issue here weren’t going to be offering health plans with abortion coverage anyway.) The argument that this won’t represent a net *cost* to insurers seems plausible enough, since insurers would presumably adjust the employers’ premiums upward to cover the outlay (the money has to come from somewhere, not just putative future savings). Of course, that suggests that the supposed “compromise” doesn’t really accomplish much from an objecting employer’s perspective.

  2. Just to clarify my last observation, if the supposed compromise prevents an insurer from increasing premiums on a religious employer, it would presumably shift any additional costs to the rest of the pool.

  3. Nemo, that can’t be right. If an insurer could charge more money to “the rest of the pool” without losing them as customers, then it would have done that already. It’s charging as much as it can charge without losing them. So it cannot shift additional costs to them.

  4. Jamie, mightn’t the incremental cost increases be outweighed by the costs of switching over health plans? Also, if many insurers are going to be in the same boat, then this would apply across much of the industry. You seem to be suggesting that at any given time, companies are charging their customers the maximum they can charge without losing business, but that can’t be right (I know I don’t start shopping for new insurance every time my premium rises slightly). If that were true, it would mean companies couldn’t pass along cost increases to their customers, but we know that they’re very good at doing that.

  5. This comment comes from a distance, but it does seem amazing to me that the chief executive of a nation which can and will (if it feels it necessary) assassinate me in a foreign land with a missile through my window fired by a comuter, which has military bases in perhaps a hundred countries, which “reads” all my emails, which “knows” what we are up to and with whom, does not have the power to, cannot or will not order some agency of the federal government (say, through local post offices) to distribute contraceptives to all women who desire them, after a free medical check-up.

    Something is radically wrong with your system of government and with your society, when the most powerful man in the world cannot (or is not willing to) take simple, decisive steps in such a basic health question.

  6. I’m actually unconvinced that the original version of the mandate was an affront to religious liberty insofar as it would have violated Catholic moral teaching for Catholic institutions to comply– I think double effect should apply here since it seems the relevant act would be subsidizing contraceptives– and that’s not morally illicit (after all, the church already does it for certain medical purposes). But nonetheless, the compromise doesn’t bother me in the least, though the bishops aren’t having it anyway.

  7. SW, it’s worth bearing in mind that the federal (and to some extent state) government already agressively funds gratis or low-cost contraception for low-income Americans and has done so for decades. So far as I am aware, the percentage of even low-income Americans who forgo contraception due to unavailability or unaffordability is vanishingly small (I’m not talking here about controversial potential abortifacients under the category of “emergency contraception”).

    As for the chief executive having or lacking as the power to do some of these things, I trust you’ll agree that although (perhaps) the president has the practical power to, as you say, send a missile through your window, that doesn’t mean it would be a proper exercise of such power.

    The power to provide free medical checkups would indeed be a great power; unfortunately, so far as I know, no government on earth has figured out how to make medical checkups free.

  8. Kathy, does the Church already subsidize so-called emergency contraception for some purposes? I thought that was the sticking point in the proposal. At any rate, I suppose we can’t substitute our judgment for the bishops’ with respect to what the religious requirements dictate.

    Regarding the purported compromise, there’s a letter now circulating from a number of philosophers, jurists, economists, political scientists, physicians, scientists, theologians, university presidents and others, arguing that the compromise doesn’t fix the ethical and religious freedom issues posed by the Administration’s original proposal:

    Click to access Garvey-Glendon-George-Snead-Levin-stmt-Feb-11-2012.pdf

  9. Nemo, no worries! By the church, I meant catholic organizations. So, Catholic hospitals will provide certain kinds of contraceptives to rape victims to prevent conception (that’s outlined in directive 36), and Catholic organizations are allowed to (and many do) provide contraceptive coverage to women employees when the contraceptives serve a licit medical purpose (from the Catholic perspective, e.g., balance hormones, regulate cycles, etc.). So, it seems to me that the moral wrong, on the Catholic framework, is located at the level of the individual who uses contraceptives with the intent of achieving an illicit end– not at the level of subsidization.

  10. Sorry Nemo, I mean to specify– the coverage provided to rape victims includes certain kinds of emergency contraceptives.

  11. Kathryn, that’s an interesting line of reasoning regarding double effect. Two potential difficulties I suspect the Catholic moral philosopher would have to surmount would be his/her knowledge that the subsidized drugs would be used chiefly in illicit ways, and whether there is a proportionately grave reason to subsidize EC generally (which, considered as an act in itself ,he/she would probably struggle to characterize as a good act or even as a morally indifferent one). That he/she would locate a moral wrong at the level of the individual user does not mean that would be the sole locus of culpability. I bet we will see the “double effect” argument teased out in the press in the days to come, although that would be an argument to persuade some people to drop religious objections to the subsidy. I don’t think it would serve as an argument that the mandate doesn’t need to make available a carve-out for religious-affiliated employers.

  12. Nemo, when the costs to every firm in the industry increase, across the board, then *some* of that cost gets passed to consumers. (How much depends on the elasticity of demand for the good.) But that is not the case here. If United is providing coverage to the employees of a Catholic organization, and Wellpoint is not, then United cannot pass its increased costs to its customers because they will simply switch to Wellpoint.
    It won’t matter much if there are high costs of switching. That just means it will take longer.
    You note that you do not start shopping for insurance every time your premiums go up slightly. So tell me, why does your insurer not raise its premiums a little higher than they are? Pure altruism, a concern for your financial welfare?

  13. Nemo, I hadn’t really thought about it in that much detail. I was thinking in more general terms of providing insurance, and a small portion of that cost subsidizing contraceptives, with the intent of providing healthcare and avoiding fines, with the unintended consequences that contraceptives would be used for illicit purposes. It will be interesting to see if a general consensus can be reached. I’m surprised actually that I haven’t seen more discussion of this in the debate.

  14. Nemo:

    When we talk about public services being free, we generally mean that there is no charge to the user. In that sense, many countries offer free medical check-ups, but you already know that and what’s more, you know that I know that and I know that you know that I know that, so why make the point?

    As for the U.S. presdent’s power to send a missile through my window, it may surprise you that I have no problem with the fact that he has that power, as long as it is well used.

    At present, the drones used to assassinate suspected terrorists throughout the world kill many more civilians than they do suspected or alleged terrorists, and in a situation of a suspected or alleged terrorist, in contrast to one of an imminent terrorist threat, collateral damage is almost always ethically unacceptable. (I’m sure that you can find examples where it is not ethically unacceptable.)

  15. Jamie, I don’t know how many players in the insurance market are engaged in providing insurance to the religious-affliated (but non-church) institutions such as hospitals and schools that would be affected. Perhaps it is a small segment of the companies in the market; perhaps not.

    With regard to the price question, I note that companies generally set prices in a range between a price floor (cost plus a minimally acceptable margin) and a price ceiling (the maximum they think the market will bear). This means that market price is generally lower than the price ceiling; you seem to be suggesting that it is always *at* the price ceiling. As for why my insurer doesn’t simply raise my rates even absent a particular cost increase they want to offset. I think there are several explanations, depending on what their pricing strategy is. One is the fact that it doesn’t actually know for certain how much I am willing to pay (which it would know in a perfectly efficient market, but the more precise information a supplier tries to gather in this regard, the more costly it is to acquire).

  16. SW, perhaps I used an overly cute way of making the point that government services are not without cost, so I apologize if that came out lamely. I do always try to bear the point in mind, though. As both a consumer and a financer of public services, I rarely find myself thinking that they are “free”, and I do sometimes worry that thinking of “free” chiefly from the consumer’s perspective feeds the perception – which is shared by a surprising number of people (not you, I realize) if they don’t pause to think about it – that public services actually are free, when in fact they are not only costly but often more costly than they would otherwise be if they were provided privately.

  17. Nemo, I would like to hear why a firm, having discovered the price floor and price ceiling for a good, sets their price below the ceiling. I suppose it’s some kind of altruism at work. In my experience, that’s an unusual trait for insurance companies, but perhaps your experience is different.

    Obviously, the firm does not know the exact ceiling for you personally; this is quite irrelevant to the question of whether they might be setting their prices below what they think they can get for their product (it just means they have to estimate, pay for market research, experiment with prices, etc.).

  18. Jamie, for a better explanation of pricing theory, I would have to refer you to outside but easily available sources. Here is one from a Georgetown University course:


    One of the things it points out is that a firm might price close to the ceiling to maximize per-unit margin, or it might price closer to the middle of the range in an attempt to trade margin for volume. I’m not sure how this plays out in the insurance industry. Yet I feel there’s really no need to make the sarcastic comments you did about my experience with altruistic insurance companies.

    At any rate, for what it’s worth, I note that the letter I linked above suggesting, among other things, that it is unreasonable to expect that insurance companies will not pass on the costs in question, was signed by five or six economists. While I’m aware that the “dismal science” is not exactly known for consensus, and for all I know more economists disagree than agree, still I take that as some indication that the idea is not far-fetched and may reasonably be debated by folks more knowledgeable than I.

  19. Nemo,

    I don’t understand how that document helps. I do understand this: when a firm is a monopoly, it chooses a price based on a trade-off between volume and per-unit profit. But that doesn’t seem to me to be relevant. (The document is loaded with jargon that is unfamiliar to me, so maybe the answer is hidden.)

    Maybe this will clarify. Of course, as the letter you linked remarks, an insurer of, say, Notre Dame employees, will pass on costs of insuring Notre Dame employees to Notre Dame employees. Everybody knows that. But you said that if the insurer could not do that (by law), it would pass on the costs to *others*, and that is what I said couldn’t be right. Because if the insurer could make non-ND people pay more for their premiums and thereby collect a bigger profit on them, then it would do so irrespective of whether it had to pay for Notre Dame employees’ contraceptives.

    I am sorry that you were offended by my sarcasm, which was quite mild by my standards. I will be more delicate in the future.

  20. Jamie,

    No worries. Well, I’ve gone about as far as I can on the economics, though I’ll be interested to see what the industry experts have to say in the coming days and weeks. I duly note the nuance you pointed out in the letter. In fact, I do think that the most likely place for these costs to be recovered are the customers of the plan in question, and though my understanding is that the Administration is proposing not to allow that, I think it will be very hard to police, particularly since I think there is a lot of price differentiation in group plans sold to different employers by the same insurer. But assuming it was effectively prevented, I’m not the only person who thinks these costs could then be passed along to other employers. For example, this Reuters article reports:

    “In the case of the new requirement on free birth control, insurers may still seek less obvious ways to pass it through, either to the same employers or other corporate clients.

    “Thomas Carroll, an analyst who covers health insurance companies for Stifel Nicolaus [the investment bank and brokerage house], said that, ‘in the grand scheme of things, it doesn’t seem like a material cost to be added to the managed care company or the employer.’

    “‘Any services that are mandated are ultimately covered in the premium, either to the specific group or to the system in general,’ Carroll said.”


    So that analyst seems to think that a pass-through to other corporate customers is a feasible possibility for the affected insurers, if I am reading that correctly. With regard to his reference to the “grand scheme of things”, that suggests to me that the relatively small size of the cost would make it easier to dissimulate in premiums, particularly if passed to along to all the insureds. I’m drawing numbers out of the air here, but If an insurer wanted to pass through $20 million in extra costs resulting from the federal mandate to a $20 billion aggregate premium pool, it seems plausible to me that not only would it be willing to try but that it could manage to do so successfully. Maybe not. There’s a decent chance we won’t have to find out, as I’m not sure even the compromise plan is long for this world.

  21. Suppose the insurer will have $20 million in extra costs in case it has to start covering contraceptives (which it cannot charge its Catholic employers for). And suppose its plan is to pass this cost along, by raising the premiums of a bunch of *other* employers and their employees, who have always had contraceptive coverage in their plans.
    So here’s the question: Why didn’t it raise those premiums yesterday? If it can get $20 million extra out of its customers, then why hasn’t it already done so? (Angry shareholders demand to know!

  22. Notre Dame is effectively self-insured anyway, so there isn’t anyone to pass costs on to I believe. Of course, I think that also means they would also still be paying for contraceptives, just not directly offering them.

  23. Jamie, I understand your lingering question. Would it be fair to summarize that you think that, in principle, it is infeasible for ordinarily-run companies ever to pass along even a small customer-specific cost increase to other customers (*unless*, presumably, it is a kind of cost that applies to enough of the industry to affect the market generally), because companies will generally have zero headroom between their existing prices to the other customers and the applicable price ceiling?

  24. Not exactly.

    It’s that there is no more opportunity or incentive for the firm to close up that headroom after the arrival of the new cost (paying for more contraceptives) than there was before.

    Suppose you are in charge of marketing at Aetna. The Board tells you, “Unfortunately our CFO just embezzled $60,000,000. We’d like you to pass this cost along to our customers.” I think you’d explain to them, “Look, if I could squeeze another $60,000,000 out of our customers, I would have done it already.”

    Maybe this is basically what you meant.

  25. I guess it basically is. But couldn’t you say could be *some* incremental additional incentive? As we already alluded, there is some uncertainty as to how close the pricing is to the other customers’ price ceiling (or respective ceilings, plural) at any given time. The company can do some experimentation with prices and so forth, though I would think there are limits to how often it wants to be experimentally changing prices for fine-tuning purposes, or be seen by its clients as taking aggressive price postures. At some point, I would think the company says “We think we’ve come up with a price very close to the ceiling, and taking our other budget and forecast assumptions into account, this price will let us hit our forecast targets, keep the analysts who track us bullish, etc., so we’re comfortable with using that price for the time being.”

    But if the company’s expenses go up, such that, for example, it now forecasts that it will come in just a hair *under* its targets (or its prior margins, or whatever) with the current pricing, will it not have just a little extra incentive to push the price envelope a bit? (“Now might be an opportune time for an minor unscheduled pricing experiment!”)

  26. I don’t see the relevance of targets, prior margins, etc. If they think they can make more money by raising prices, they’ll raise prices; otherwise they won’t. That has nothing to do with whether they are paying for somebody’s contraceptives (or a CFO’s embezzlement).

  27. Jamie,

    I came across a 2008 working paper entitled “The Empirical Evidence on the Pass-Through of Firm-Specific Cost Changes to Prices” from an academic economist, Simon Evenett, that I think is relevant here (though frankly much of it is beyond my ken):


    The paper suggests, as I read it, that how much cost increases are generally passed on to customers depends on the proportion of the relevant industry that are affected by the cost variation. Since excise taxes and intermediate goods cost variations usually apply to an entire industry, evidence from studies in that area is taken to be indicative of the level of pass-through when a very high percentage of firms are affected. Since exchange rate variation tends to affects some competitors but not others, evidence from studies in that area is taken to be broadly indicative of what happens when cost variations are experienced by some but not all firms. The smallest body of empirical work thus far seems to have been devoted to what happens when cost variations are specific to a single-firm (as is typically the case for cost variations arising from merger transactions, for example).

    Evenett quotes Stennek and Verboven (2001) (which in 2008 Evenett describes as the last available assessment of the subject) as follows:

    “The empirical results vary sometimes substantially from sector to sector. Yet it is still possible to make some empirical generalizations. It seems fair to say that literature on the effects of excise taxes and intermediate goods prices finds that pass-on is close to 100 percent, at least when one considers a sufficiently large time horizon (10 weeks or more). The literature on exchange rate pass-through tends to find incomplete pass-on, of an order of magnitude of 60-70 percent. … Finally, the scarce literature on firm-specific pass-on finds a relatively low degree of pass-on, especially when the market share of the firms is small. The estimates are in the range of 10-20 percent.”

    I’m not sure how many firms in the US health insurance industry are engaged in providing health plans to the kinds of employers we’ve been talking about, and would be affected by the compromise mandate (beyond my assumption that it’s more than one firms but less than all).

    I don’t have the mastery to set out a theoretical framework for such pass-through, or to know what considerations specific to the insurance industry would influence the outcome. But given all this, does it not seem as though there is empirical cause to believe that insurance firms – if somehow prevented from passing along the cost of “free” contraceptive coverage specifically to the employers in question – would pass on some of it to their prices generally?

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