Health Reform … Round 2

Filed Under (Health Care) by Nolan Miller on May 18, 2010

The next round of the health reform debate is shaping up.  While the first battle was fought in Congress, the next will be fought in various federal agencies as regulators begin to flesh out the vague provisions of the gargantuan health reform bill.   I know, you’d think that a 300,000+ word bill would be pretty specific, but many of the details, from exactly how the insurance exchanges will work to exactly how provisions aimed at “curbing insurance company abuses” will be implemented, have yet to be described.

One such provision that has gained a lot of attention following Wellpoint’s well-publicized attempts to increase premiums for some of its California customers by up to around 39 percent is aimed at preventing “unreasonable premium increases.”  Of course, exactly what is “unreasonable” is not described in the bill, which has led state and federal regulators and insurance companies to return to the fight.

Of course, the model for all of this is Massachusetts, which enacted health care reform in 2006.  Using Massachusetts as a model for national reform is interesting for several reasons.  First, Massachusetts has the highest insurance premiums in the country.  Second, in designing Massachusetts’ universal coverage program, policymakers understood that they were first going to tackle the coverage aspect of the problem, expanding insurance to more people, and then take on the cost problem.  And, while we’ve seen the results of the coverage expansion, Massachusetts hasn’t yet done anything  significant to curb costs.  Those steps they have taken (described in the article above) have yet to show a real effect on cost.  It’s like we saw Massachusetts jump down the rabbit hole and jumped down after them, not knowing if they had any idea how to get us out.

Massachusetts’ approach to “unreasonable” premium increases was apparent last month.  Out of 274 applications by insurers to increase rates, Massachusetts denied 235 of them.  According to the regulator, Massachusetts “disapproved requests when companies significantly exceeded the region’s medical inflation rate of 5.1 percent, failed to justify why varying rates were paid to different hospitals, and did not forcefully negotiate prices with providers.”  This seems like an entirely plausible reason for denying an increase.  Who knows whether the regulators were right to do so or not.  I will end with a story about my own time in Massachusetts, though.  When we moved to Massachusetts in 1999, we were surprised to find that none of the large, national auto insurers offered coverage there.  When we asked around, it turned out that because of the state’s (technically “commonwealth,” la-di-dah) strict regulation of the auto insurance industry, many of the national players decided simply to bypass Massachusetts.  

Premium controls enacted at the national level may not drive insurers out of the market.  After all, it isn’t like they can just choose to operate in another country.  However, policymakers should anticipate that clamping down on premiums directly as a means of controlling costs may ultimately be counterproductive if it reduces competition.  The solution to the cost of health care is not going to come from top-down regulation of premiums and profits, but rather from reforming the system to one where we create health more efficiently, providing greater quality using fewer resources.  And, to the extent that healthcare providers are able to do this, they’ll deserve higher profits.

The Tomato/To-MAH-to of the CBO report on the effect of the Senate bill on premiums.

Filed Under (Health Care) by Nolan Miller on Dec 2, 2009

The CBO released a report this week that attempts to estimate the effect of the new Senate health care bill on insurance premiums.  The report is potentially important because supporters of the bill argue that it will lower health insurance premiums, while opponents argue that it will increase them.  In fact, not only do the two sides differ on what the bill will do, they differ on what the CBO says the bill will do.  From the New York Times:

“’The C.B.O. has rendered a fundamental judgment that this will reduce the deficit and reduce people’s premium costs,’ said Rahm Emanuel, the White House chief of staff,”

and yet …

“’The analysis by the Congressional Budget Office confirms our worst fears,’ Mr. Grassley [R, Iowa] said. ‘Millions of people who are expecting lower costs as a result of health reform will end up paying more in the form of higher premiums. For large and small employers that have been struggling for years with skyrocketing health insurance premiums, C.B.O. concludes this bill will do little, if anything, to provide relief.’”

So, I went and check out the report, which you can download here.  It’s actually quite an interesting read.

As background, what is the Senate plan supposed to do?  Among other things, the bill prohibits insurers from charging individuals higher prices based on their health status.  This is a laudable policy goal.  But, it must battle against a phenomenon called adverse selection.  Adverse selection refers to the fact that if you offer an insurance policy for, say, $5000, the only people who will be wiling to buy it are those who expect to have relatively high insurance costs.  So, someone who thinks they will only incur $500 dollars worth of medical expenses will be less likely to buy the policy than someone who expects $20,000 worth of expenses.  Currently, insurers address this problem by charging a low price to the person who expects $500 in expenses and a high price to the person who expects $20,000.  However, the new bill prevents this practice.  Suppose the insurer responds by charging a single premium of $3000.  This will attract all of the people who expect high costs and few of the people who expect low costs.  The result is that the average cost of those who buy insurance may be much higher than the average cost in the population as a whole.

If the insurer can’t make money charging $3000, it may raise its price.  But, doing so only discourages healthy people from buying insurance even more.  The result is that the insurer may find that it is able to offer a policy only at a very high price, or maybe not at all.  So, mandating uniform prices may not, by itself, be a sustainable policy.

The Senate bill addresses this by also mandating that most people buy insurance.  Since most people without insurance do not have the option of buying it through their employers, this means that they will have to buy insurance from the non-group (individual) markets.  Some of the new purchasers of insurance will be those who are sick and could not buy insurance in the private market before.  Others will be those who are healthy and chose not to buy insurance before.  Whether the net effect increases or decreases premiums will depend on whether the new entrants to the insurance pool tend to fall more in the former camp or the latter.

A third goal of the Senate bill is to encourage competition in the private insurance market.  Through the creation of insurance exchanges that facilitate shopping for good plans and possibly the addition of a government option, the bill seeks to encourage private insurers to offer high-quality plans at low prices in order to attract new customers.

A final goal of the bill is to ensure that all insurance products offer a certain, minimum level of coverage.  In effect, the bill requires many policies currently being offered in the individual market to cover more services than they do currently.  In particular,  individual-market plans that participate in the insurance exchange will be required to offer benefits that cover at least 60 percent of typical health expenses, and they would have to cover additional services that are not typically covered by individual policies today, including “maternity care, prescription drugs, and mental health and substance abuse treatment.”  Since these services are not covered by many plans now, this requirement will increase premiums.

So, to summarize:  the new bill should be expected to change premiums by (i) changing the services that are covered by a typical individual-market policy, (ii) encouraging competition, and (iii) changing the group of people who choose insurance.  These three mechanisms operate fairly independently. In other words, covering more services would increase premiums even holding the level of competition and pool of risks constant; increasing competition would lower premiums even holding services and the risk pool constant; and changing the risk pool would affect premiums even holding the services offered and level of competition constant.  Further, since the large group market is already fairly competitive, has no risk rating, and takes all employees, we expect the effects to be concentrated in the individual market.

The CBO’s findings are summarized in the table below, which I copied from the report.


The first column of numbers represents the effect of the Senate bill on per-person premiums in the nongroup market.  Covering additional services is expected to increase premiums by 27 to 30 percent.  This is not surprising and should not be controversial.  If you want to cover more services, then it is going to cost more.  People are paying more, but they’re also getting more.  The next two rows in the first column show that the bill is expected to have beneficial effect on prices due to increased competition, lowering premiums by 7 to 10 percent, and increasing the size of the pool of those buying insurance will reduce premiums by another 7 to 10 percent.  So, the overall increase in premiums in the non-group market is estimated to be somewhere in the range of 10 to 13 percent.  The second and third columns show that the bill is expected to have negligible effects on the small group and large group markets.

So, who’s right, the Democrats or the Republicans?  Well, there’s a grain of truth in what both sides are saying.  The bill will increase premiums for those in the nongroup market.  But, this increase is due exclusively to giving them more generous policies than they currently purchase.  Holding fixed the level of benefits, the bill lowers the cost of insurance, which means the bill is achieving its goals.  So, it seems to me the debate should be centered on which services we want to mandate.   If it is worthwhile to cover services like maternity care and substance abuse treatment, then it might make sense to mandate that all policies cover such services and to incur the extra cost of covering them.  (Although we might also ask, if the market wants these services to be covered, why does the market not currently cover them?) The current debate, however, is focused rather superficially on whether the bill increases or decreases premiums, which misses the point that the product is changing as well.

Incidentally, let me mention the Democrats’ other point, which is that even though the bill increases premiums in the nongroup market overall, many people in this market will be eligible for government subsidies to help offset the additional cost.  So, while total premium will go up, total out of pocket cost (premium net of the subsidy) will go down for the majority of people in the nongroup market.  However, this point is a bit disingenuous as well, since these subsidies are coming from taxpayers somewhere.  So, while these individuals may be paying less for their premiums, the cost of the whole system is certainly increasing.