Monday, October 12, 2009

The Senate Finance Health Bill Has No Clothes

Readers of this blog know that I have lots of concerns for the Senate Finance health bill primarily because it does not so much represent health care reform as just an expensive entitlement expansion.

Readers also know the insurance lobby--AHIP--is not one of my favorite organizations.

But I will tell you the report by Pricewaterhouse Coopers (PwC) commissioned by the AHIP and released this morning is accurate. The Senate Finance bill would do nothing short of blowing up the insurance market.

You don't need to be Einstein or a PwC actuary to come to that conclusion. Common sense is all the credential you need.

Beginning in 2013, the Senate Finance bill would make uninsured individuals eligible for premium credits to buy a health policy. But those credits would leave these people far short of being able to really afford a health insurance policy. A family of four at 250% of poverty and making $55,000 a year ($52,000 is the median household income in the U.S.) would have to pay about $4,000 toward their premiums and that for a policy with a $1,000 deductible and a maximum of about $7,000 in out-of-pocket costs each year.

At 300% of poverty, $66,150, a family would be required to pay $8,000 in premium for a policy with a $3,000 deductible!

How many families making $55,000 a year or $66,000 a year do you know that could add this kind of expense to their annual budgets?

It is really no better for a family making 400% of poverty, or $88,200 a year. They would have to pay $10,600 a year in insurance premiums for that policy with a $3,000 deductible!

Senate Finance, knowing they could not enforce this kind of individual mandate to buy health insurance then set about to exempt many from paying a fine (if it costs more than 8% of income) or just gutting the fine if they did not buy the 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 starting in 2013 the Senate Finance bill says that the insurance companies have to get rid of medical underwriting and pre-existing conditions provisions.

So in 2013, any consumer could simply go to the health insurance company and demand to be covered under any one of the mandated benefit plans. No medical underwriting before getting in and no pre-existing condition limitations. Just sign the application and go to the doctor.

In one sense you can understand the political logic here--the Democrats can't very well mandate middle class families to pony-up $4,000, or $8,000, or $10,000 out of their already challenged budgets. So they just found a way to exempt them or make the fine a tiny one.

But they left the insurance reforms in place.

Let me ask you a question. Why would any family buy health insurance under such a scheme?

I will suggest the answer is that they will buy it when they need it. No sooner. Even in 2017, a family with two adults would pay no more than a $1,500 annual fine against a premium that would be $4,000 to $10,000 a year in these middle class income brackets.

I'll give you another one. Why would any small employer provide health insurance?

I will suggest the answer to that one is the smart small employer will just cash-out any benefits they do provide today and tell the employee t0 pay the fine until they need it and then go to the exchange and get it (there is also no small employer mandate in the bill to provide coverage). The worker would likely be thousands of dollars ahead each year!

The problem the Democrats have here is that they are trying to get a health bill to cost under $1 trillion. That has made them back off on premium subsidies and policy benefits. They have had to back so far off that the Democratic proposals are not offering health insurance policies anything close to being affordable for middle class families.

The political response in Senate Finance has been to waive the individual mandates but keep the underwriting reforms.

The sum of it all is a health insurance market disaster in the making. In the business we refer to it as a "death spiral." Simply, the higher the premiums go the fewer that will buy, the sicker the pool, the higher the premiums go once again, even fewer people are left in the pool, and so on until all of the sick are in the pool and all of the healthy have left it.

The PwC report says that average family premiums of $12,300 today will rise to $25,900 under the Senate Finance proposals in 2019. They say premiums would be driven by these underwriting reforms, cost shifting from Medicare cuts, and new insurance taxes simply being passed through to consumers.

I don't know if the PwC report is exactly correct, but as to its conclusions regarding the gutting of the mandate to buy insurance and that insurance company taxes will be passed through to customers, common sense certainly takes one to about the same conclusion. Frankly, I thought it would be worse.

The Senate Finance Democrats could not have created a bigger insurance pool train wreck in the making than the one they have devised here.

What is really amazing is how all of these Senators sitting around that Senate Finance table have just sleep walked their way through all of this as if they don't have the common sense to figure this out on their own.

PwC Report


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