Unbiased Analysis of Today's Healthcare Issues

AHIP claims health reform will increase premiums. Will it really?

Written By: Jason Shafrin - Oct• 14•09

The lobbying group America’s Health Insurance Plans (AHIP) is touting a study by PriceWaterhouseCoopers showing that health reform would increase premiums significantly.  The findings claim that insurance premiums would rise between “26 percent between 2009 and 2013 under the current system and by 40 percent during this same period” if these four health reform provisions are implemented.  The White House disagrees with the analysis and says that the PWC report is cherry-picking these four provisions.  Let’s see who is right.

Below are the reforms PWC analyzes:

  • Insurance regulation (including guaranteed issue requirement, no preexisting condition limits, no rating based on health status, limiting the differential between age bands in rating). In essence, this policy restricts the ability of insurers to price insurance based on an individual’s risk.  Because of this, the insurance companies will have a sicker population of individuals to cover in their pool and thus average premiums will certainly rise.  This does not really mean that prices are rising.  Prices will rise for people who already had insurance, however, for individuals who could not afford insurance in the past because they were too old or too sick, prices will fall.  Because these “high priced” individuals were not counted in the price of insurance (because they never bought it), their price decreases are not factored into the analysis.  In general we have a tradeoff, the average level premiums paid will increases but a higher percentage of people will be able to get insurance.  If you’re young and healthy, you don’t like this provision.  If you’re old and sick, these reforms are great.
  • New minimum benefit requirements. This provision will raise prices.  The tradeoff is that individuals will receive more comprehensive insurance coverage.  The problem is that the government will be choosing the benefits including in the policies, not the customers.  Thus, if the government does a good job of aligning the benefit requirements with individual needs, then this will again be a transfer of money from those who are receive treatment under diseases now covered by the minimum requirements from those who did not need treatment under those requirements.  However, if speicalists’ lobbyists persuade the government to include lots of low value, high cost treatments in the new benefit requirements, then the extra cost will not produce a material amount of additional value for consumers.
  • Weak individual mandate.  If there is a weak individual mandate, as insurance becomes more and more generous and prices rise higher and higher, young healthy individuals will opt-out if there is a weak individual mandate.  Thus, the people who will be left in the insurance pool will be the sick, high cost individuals, and insurance premiums will rise to better reflect the average cost to cover the relevant population.  I am not sure whether the mandate is indeed weak, but this manifestation of adverse selection could be a problem.
  • Excise tax on Cadillac plans.  Thus will drive up cost of course, but just for those who have these ‘cadillac’ plans.  What is a cadillac plan?  How does one determine what medical care is necessary and what is not?  Rather than impose this tax on Cadillac plans, Obama should just end the tax-deductibility of employer-provided health insurance..  Regardless, the tax will drive up health insurance premiums for those with more generous plans.  Ezra Klein reports that PWC does not take into account behavioral changes; taxing Cadillac plans means that fewer people will have this type of insurance.  Thus, cost increases will be smaller.  Nevertheless, a tax will drive up premiums for those that do decide to remain in these more generous plans.
  • Cost shifting. As Medicare and Medicaid becomes less generous, this could increase the cost of care for private health insurance.  However, this is only directly a problem for elderly individuals who have private insurance and Medicare.  Indirectly, the study seems to imply that physicians will raise their prices for private health insurance as Medicare and Medicaid prices drop.  This may or may not happen, but the magnitude of the effect should be very small.  Physicians likely try to maximize their profits currently from private insurance.  If Medicare/Medicaid cut rates, will they try harder to increase profits?  Why weren’t they maximizing profits from the private sector in the first place?  Are the private health insurers claiming that docs will now provide unnecessary services for individuals with private health insurance to increase profits?  The target income hypothesis could motivate this cost shifting, but again, I doubt cost shifting will have a large impact on overall premiums.
  • Fees on insurers, pharmaceutical and medical device companies.  Some portion of these will be passed on to consumers.

Obama’s blog responds with the following:

  • Grandfather policy that assures that if you like the plan you have, you can keep it.  This means that the reforms won’t affect cost in the short run for those who keep their current health insurance plan.  In the long run, however, people will switch plans and the reforms will have an effect.
  • Premium credits.  Premium credits mean that the amount of money the consumer pays will decrease even if the cost of the policy as a whole increases.  Even with premium credits, consumers as a group do pay for the additional premium costs through higher taxes.
  • A tax on insurers that provide the highest cost health plans will contribute to lowering premiums.  This argument does not make any sense. I don’t know of any tax that has worked to reduce prices…ever.
  • Medicare savings from reduced cost and abuse.  One of two things will happen.  There will be little cost savings, because the potentially savings from reducing cost and abuse is small.  Detecting these items is extremely difficult, especially with Medicare’s historically low administrative costs.  Or, there will be a real reduction in cost from decrease Medicare benefits.  Reducing cost significantly by cutting waste is a promise made by every president for the last 30 years and none has shown able to fulfill this promise.

Overall, I am tending to side with the insurance companies on this one.  I can’t verify whether their exact numbers or methods are correct, but many Obama’s reforms will increase cost overall.  Consumers will be more insulated from these cost increases, however, because the government (i.e., taxpayers) will subsidize premiums and expand Medicaid.  The major achievement of Obama’s reform proposals is that he will expand insurance coverage to many more Americans.  The major drawback, as I have pointed out in the past, is that Obama’s reform do little to cut costs.

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