Monday, October 19, 2009

The Senate Finance Insurance Reform Rules Have to Be Fixed in Spite of the Gang That Can’t Shoot Straight

Last week the health insurance trade association (AHIP) released a report it sponsored, and was authored by PricewaterhouseCoopers (PwC), that claimed the Senate Finance bill would be problematic for the insurance markets only leading to much higher costs.

As I posted last week, my own analysis of the Finance bill gives me big concerns about what it would do to health insurance costs and the integrity of the small group and individual health insurance pool.

When you are going to issue a report of the kind AHIP and PwC did—in terms of its intended consequences on a national political debate--you better be sure you can back-up everything you say in simple and unambiguous terms.

The ineptitude on the part of AHIP and PwC is startling. That either organization was not able to clearly and decisively defend their conclusion in the midst of the health care reform finals is one thing. That they couldn’t defend a conclusion that is generally right and consistent with common sense is even more startling if not aggravating.

But then AHIP starts from way behind anytime it has tried to do anything in this town. You will remember AHIP as the organization that briefly got the NAACP to support the extra payments to Medicare Advantage arguing paying the HMOs more was a way to improve benefits to poor seniors. Then there was the Congressional hearing this summer where three of their members told a House committee that they planned to continue retroactively canceling individual health insurance contracts even when they found only inadvertent and immaterial errors on the original applications.

Then, of course, there was the silly $2 trillion cost savings offer they spearheaded at the White House this spring, which Republican Chuck Grassley dismissed as nothing more than “fairy dust.”

When you have that kind of track record and lack of credibility and you want to issue a game-changing report you better have every duck in line. I swear, if AHIP issued a press release on a crystal clear day telling DC the sun was shining no one would believe them.

In spite of AHIP's and PwC's failings the fact is that the Senate Finance bill’s insurance market reforms are severely flawed and have to be fixed or costs will be much higher than they would have been anyway and, more importantly, efforts to make the health insurance market more accessible for the uninsured to guaranteed coverage will be undermined.

Here is a table produced by the Center on Budget Priorities (via Thursday's WSJ) comparing the net cost of health insurance families would be expected to pay for coverage under each of the three pending bills (you can click on it to enlarge).

Under the Senate Finance bill, coverage for the poor and near poor would be pretty accessible and affordable—a family of three making $27,465 a year would have to pay only $1.236 a year, or $100 a month. Fair enough.

But look at what happens when you get close to the median American income ($52,000 a year). At $54,930 a year in income that family would be required to pay $6,592 net of the subsidy. How many families making $54,930 have an extra $500 in their monthly household budget?

A family of three making $73,240 a year—middle-class as it gets—would have to pay $8,789 for a policy that would have a deductible of $3,000 a year! Know any families like this with an extra $9,000 in their checking accounts?

Now consider the Senate Finance penalties for going without coverage.

In 2013, for example, there would be no fine for not having insurance. By 2014 the penalty would be $200 per adult and it would rise to $400 in 2015, $600 in 2016, and $750 by 2017.

But the Finance bill also eliminates medical underwriting and pre-existing conditions in 2013—anyone could go to the insurance exchange and at any time and demand a health insurance policy at normal rates that would begin paying their medical bills immediately no matter how sick they were.

Faced with no fine in 2013, why would lots of these families pay $6,592 or $8,789 a year in premiums when they could just skip coverage until they needed it and it was clear they could make money on the deal?

Even in 2017 when the penalty was just a total of $1,500 for mom and dad they would be thousands ahead waiting until they got sick to buy coverage. Given normal health care trend, the required family's share of premiums would likely rise by thousands of dollars more over the years.

While the House and Senate bills have stiffer penalties that would discourage families gaming the system you will note that their premiums aren't much more affordable for the middle-class.

Critics of the PwC report often point to the fact that PwC did not take into account the value of the new federal insurance subsidies in doing their evaluation. The family costs I just gave you are net of the subsidies.

Critics point to the fact that PwC did not assume that insurance costs could be lower given the efficiencies the insurance exchanges would likely bring to the market. That is fair. But any efficiency gained by lower marketing costs, a relatively small part of the overall cost pie when compared to medical costs, will quickly be swallowed up and overwhelmed by much higher prices wracked by an insurance market plagued by gross anti-selection that can only occur in this scenario.

It has been argued that the Senate Finance bill sets up a $20 billion reinsurance pool to reimburse health insurers in the individual market for unacceptable claims experience. That is right but the $20 billion is collected from the insurers themselves and is really a mechanism to smooth results between insurers and among product lines--it will not fundamentally lower costs if the entire individual pool is coming in higher because of systemic anti-selection problems.

Some have argued that things are running just fine in Massachusetts. Really? I hear the insurance exchange trend rate is pushing 15% (price increases and offsetting benefit cuts together). Harvard Pilgrim recently told us that, "Between April of 2008 and March of 2009, about 40% of the people who purchased individual insurance from Harvard Pilgrim stayed covered by us for less than 5 months. Even more amazing, they incurred, on average, about $2,400 per person in monthly medical expenses - roughly 600% higher than what we would have expected."

In spite of the AHIP/PwC “gang that can’t shoot straight” the Senate Finance bill is clearly flawed and needs to be fixed or it will drive health insurance prices up far more and make access even more problematic.

And, while the Congress is at it, the same middle-class subsidies need attention in the other bills as well.

Recent summary of the cost of health insurance in Massachusetts by Columbia Journalism Review:
Health Reform Lessons from Massachusetts, Part VII: Unintended consequences for small business
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