Will Health Reform Lower Premiums?

Yes and no, says the Congressional Budget Office.

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Congressional Budget Office Director Douglas W. Elmendorf

We’ve heard a lot of debate about what health care reform would do to the price of health insurance. Shortly before the Senate finance committee passed its version of the bill, the health insurance lobby issued a report arguing that 10 years down the road, premiums would be 32 percent higher than they would be if the bill weren’t passed. But that excluded from consideration several cost-saving measures in the bill. Soon after, Jonathan Gruber, an MIT economist who specializes in health care, issued his own estimate. The finance committee bill, Gruber concluded, would lower premiums by $230 to $8,550. (He reached a similar conclusion when he updated his calculations for the version of the bill now on the Senate floor.) But Gruber’s analysis focused only on individuals and families buying policies in the nongroup market—that is to say, it excluded insurance costs for the 59 percent of Americans who receive health insurance through their employers.

Calculating health reform’s effect on premiums involves many “complexities,” the Congressional Budget Office told Sen. Max Baucus, D-Mont., in September. Consequently, “CBO has not modeled all of those factors and is unable to quantify them or calculate the net effects at this time.” But the U.S. Senate is not accustomed to taking no for an answer, so, after further prodding from Sen. Evan Bayh, D-Ind., the CBO has released an estimate. Or rather, two.

The nongroup market. Health reform is almost entirely concerned with this sector, even though it represents only about 8 percent of the total private health-insurance market (the rest being employer-based). Partly, this is because the nongroup market is where the industry’s worst abuses (like rescission) are found, but mainly it’s because the reform bill would restructure this market through the creation of “exchanges” in which private health insurers (and perhaps a “public option” government health insurer) would compete to sign up the currently uninsured, whom the law would require to get health insurance.

The bad news is that the CBO estimates that per person covered, in 2016 the average premium in the nongroup market would be 10 percent to 13 percent higher with health reform than without.

Expect the GOP sound bite to end here.

The good news that the GOP probably won’t acknowledge is that most of the people who purchase health insurance in the nongroup market through the new exchanges—fully 59 percent—won’t be paying sticker price. That’s because their incomes will be sufficiently low to qualify them for a government subsidy toward the purchase of their health insurance. For this subsidized majority, premiums will be 56 percent to 59 percent lower than they would be if health reform were not passed.

You could argue that these people, not having had health insurance previously, will be paying more for it than the amount they were paying before (zero). But, of course, the goal is to make health insurance more affordable for those who can’t afford it now, which the bill certainly achieves. (Whether it’s affordable enough is a subject of legitimate debate; the Senate bill’s subsidies are less generous, and less concentrated on people at the lowest incomes, than the House bill’s.)

The employment-based market. Remember when I said health reform is almost entirely concerned with the nongroup market? That’s reflected in the CBO’s calculation that the bill will have virtually no effect on premiums in the employment-based market. For small businesses (defined here as having 50 or fewer employees), health reform’s effect in 2016 falls within a range varying from an increase of 1 percent to a decrease of 2 percent. In the large-group market, the effect falls within a range varying from zero effect to a decrease of 3 percent.

This calculation does not take into account the 40 percent excise tax on so-called “Cadillac” health care plans valued at $23,000 or more for families, which won’t have taken full effect in 2016. If you’re one of the roughly 19 percent of workers whose policy is worth $23,000 or more, then it’s expected your employer will lower your policy’s value below the threshold to avoid the tax, thereby lowering your premium an estimated 9 percent to 12 percent. That’s the good news. The bad news is that your benefits will be curtailed to reflect the new price.

Why does health reform drive up sticker prices in the nongroup market? Remember that health reform isn’t aimed only at reducing the cost of health insurance; it’s also aimed at imposing minimum standards on the policies that are sold. By law, these would contain significantly fewer deductibles, co-payments, and other out-of-pocket expenses, and would provide a slightly wider range of benefits. This “better” factor raises prices by 27 percent to 30 percent. Balanced against this is a reduction in cost of 7 percent to 10 percent attributable to efficiencies in the new exchanges and a separate reduction in cost of 7 percent to 10 percent attributable to the introduction of a younger, healthier clientele newly required to buy health insurance and newly able, through subsidies, to do so.

There’s very little discussion in the CBO report of the public option, which has always shown the greatest promise of reducing health care costs generally and private-sector premiums specifically. It receives scant mention because, in both the House and Senate bills, it is shackled and diminished to the point where the CBO expects its premiums to be not lower than those of its private competitors, but slightly higher. (This, mind you, is before rather than after the Senate starts whittling away at it further.) Obviously a public option more expensive than private nongroup insurance can’t exert downward pressure on private nongroup premiums.

But the CBO says the public option would nonetheless “reduce slightly” its private competitors’ premiums by giving them a place to dump less-healthy customers. The most blatant methods for doing so—rescission, refusal of insurance to individuals with pre-existing conditions, sky-high premiums—are outlawed under health reform. But it’s expected that private health insurers would continue to employ less-overt means to discourage the unhealthy from purchasing or continuing coverage, and that a public-option plan would not. The fewer unhealthy people private insurers covered, the lower private premiums would be.

At this point, I don’t believe that the Senate will pass anything even vaguely recognizable as a public option. The promise of passing a shriveled public option is that, over time, it could be strengthened to the point where it became a powerful check on health care inflation. Without the public option, health reform would still be necessary. But as this CBO analysis shows, health reform without a strong public option must rely far more on government subsidies than on government muscle to make health insurance affordable.

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