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Health Reform Bill Lowers Premiums

December 3, 2009

The CBO has already shown that the Senate health care bill will dramatically increase access to healthcare and reduce the fiscal deficit over time. And now we have the missing link in the analysis – the bill will also reduce premiums, making healthcare cheaper than is presently the case.

First things first. People covered in the small- and large-group markets (159 million people) will see virtually no change – premiums in the large group market will fall by 1.5 percent and in the small group market by 0.5 percent. This is better news than it sounds. Remember, many critics of this bill were arguing that the new restrictions imposed on insurance companies would push up premiums for those who already have healthcare. It doesn’t happen.

The real news comes from the individual market, the real problem today. By 2016, about 32 million people will be getting healthcare through this market. And this is where it gets complicated – the headline numbers show premiums rising by 10-12 percent. Aha, you might say! Not so fast. As the CBO takes great pains to show, this increase is completely explained by the fact that the quality of the package will get better, in terms of more comprehensive benefits. In fact, this improvement leads prices to rise by 30 percent. The fact that they only rise by 10-12 percent suggests some countervailing cost savings, coming from the insurance reforms and the individual mandate. And when we add in the subsidies, it looks better still. Almost 60 percent of people on the exchange will get subsidies, and these subsidies will reduce premiums by 56-59 percent.

As Ezra Klein puts it:

“in the final analysis, the effect of reform on your typical individual market purchasers is to give them insurance that’s about 30 percent better but only 10 to 12 percent more expensive, and then assure them subsidies that will lower their payments by more than 50 percent. And if you’re in the small group or large group markets, your premiums are expected to fall a bit. Good deal, no?”

Indeed.

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25 Comments
  1. Pinky permalink
    December 3, 2009 3:40 pm

    So, the bill will extract 10-12% more money out of those in the individual market, and 18-20% uncompensated-for services out of the insurance companies.

  2. Paul the Other permalink
    December 3, 2009 4:20 pm

    I don’t see how “insurance reforms and the individual mandate” equates to “18-20% uncompensated-for services out of the insurance companies”. To me a 30% improvement in the product with only a 10-12% increase in price is a good investment.

  3. Blackadder permalink
    December 3, 2009 4:53 pm

    To me a 30% improvement in the product with only a 10-12% increase in price is a good investment.

    I doubt this is really true for you; it is certainly not true for everyone. For example, if you told me I could get an apartment that was 30% bigger than my current place for 12% more in rent I wouldn’t take it. Extra space would be nice, but my current place is hardly cramped and there are other things I’d rather spend my money on (you may not hold the same preference as I do regarding apartment space, but I’m betting there is some good or service out there that you wouldn’t pay 12% more for a 30% improvement in quality).

  4. Colin Gormley permalink
    December 3, 2009 6:17 pm

    Where’s the link for the report itself?

  5. December 3, 2009 6:21 pm

    Again, with the comparison of health care and housing???

  6. Pinky permalink
    December 3, 2009 6:33 pm

    Paul – “the quality of the package will get better, in terms of more comprehensive benefits” equals uncompensated-for services out of the insurance companies

  7. Navy Vet permalink
    December 3, 2009 6:33 pm

    Just a simple question – Do you really believe that any big government program is not going to end up costing more and delivering less than promised?

    My prediction – over the years, Congress will keep adding costs and cutting down on any savings due to special interest pressure groups. And this program will quickly mushroom into a staggering blind elephant that will bleed red ink like Niagra Falls.

    The list of programs passed with good intentions that quickly morphed into expensive vampires is long and growing longer.

    Can I get a prediction to remind you of in later years?

  8. Blackadder permalink
    December 3, 2009 6:35 pm

    Again, with the comparison of health care and housing???

    I don’t see what’s wrong with comparing health care and housing, but that’s not what I was doing. I was illustrating a basic principle using my preferences for housing, but I could have equally used cars, clothes, or computers as examples, just to stick to the ‘c’s. The point is that you can’t say a 30% improvement in the quality of a product is necessarily worth a 10-12% increase in the price. Surely you know this.

  9. Paul the Other permalink
    December 3, 2009 7:08 pm

    “but I’m betting there is some good or service out there that you wouldn’t pay 12% more for a 30% improvement in quality).”

    You’re right. It would depend on the product. In your apartment example I’d spend 12% more for 30% more space then spend 50% more buying things to fill that 30% up. But in the case of health care what does that 30% really mean, for those 32 million people? Personally I think the benefit of that to society – and to the individual – far outweighs the 12% higher cost.

  10. December 3, 2009 9:39 pm

    How often do the CBO’s predictions come true?

  11. Ryan Klassen permalink
    December 3, 2009 9:56 pm

    The space analogy doesn’t work because you wouldn’t simply get 30% more of what you already have. A 30% increase in quality of coverage (likely) means either having to pay less out of pocket for health care (perhaps offsetting the 12% increase in premiums) or an increased level of overall health due to additional health care services that you couldn’t otherwise afford to access.

  12. Kurt permalink
    December 4, 2009 10:16 am

    BA write: if you told me I could get an apartment that was 30% bigger than my current place for 12% more in rent I wouldn’t take it. Extra space would be nice, but my current place is hardly cramped and there are other things I’d rather spend my money on

    Fair point. But not applicable to this situation. The bill allows those who currently have individual policies the option of keeping their policies even if they are substandard (a grandfather clause, if you will). CBO estimated that practically no one in this group would choose to keep their existing policy.

    While in BA’s housing situation, it may be rational choice to limit his housing, those with substandard individial insurance clearly want comprehensive policies if they could get them at affordable rates.

  13. Pinky permalink
    December 4, 2009 11:02 am

    Kurt, why would those with “substandard” individual plans want more expensive “comprehensive” plans? They may want the most bare-bones plan available. And Ryan, additional free health care services won’t necessarily (or even likely) translate into improved health.

  14. December 4, 2009 11:28 am

    A couple of things. We need to realize that the current individual market is completely dsyfunctional. It doesn’t work. It makes perfect sense that if people on this market were getting some financial support, they would choose better policies. We’re not talking about cadillac plans here, we’re talking normal.

  15. Blackadder permalink
    December 4, 2009 11:35 am

    Kurt,

    What’s the section number on the grandfathering?

    Also, I seem to recall you talking about how the Senate had to vote on the House version of the bill before they could vote on their own version. Did that happen and I just missed it, or what?

  16. Blackadder permalink
    December 4, 2009 11:38 am

    One other question (this one is not specific to Kurt). If you listen to this interview with Howard Dean, he says that community rating is no longer a part of the House and Senate bills. Can anyone confirm whether or not this is true?

  17. Kurt permalink
    December 4, 2009 1:49 pm

    from BA: Kurt,

    What’s the section number on the grandfathering?

    Title I, Subtitle F, Part I of the Reid Substitute. The text is on or after page S11607 of the Congressional Record for November 19, 2009.

    Also, I seem to recall you talking about how the Senate had to vote on the House version of the bill before they could vote on their own version. Did that happen and I just missed it, or what?

    We are now on the Reid substitute.

    From Pinky: Kurt, why would those with “substandard” individual plans want more expensive “comprehensive” plans?

    I can understand why a person of limited means might purchase a cheaper policy that has a $50,000 cap on benefits, even though he would be leaving himself very exposed if he or his family had a major medical expense. We are not talking bare bones. We are talking plans that cover some bones and not others!!

    But, it is CBO and not me who determined next to no one would elect to use the grandfather option.

  18. Pinky permalink
    December 4, 2009 2:22 pm

    “We need to realize that the current individual market is completely dsyfunctional. It doesn’t work.”

    The main failing of the individual insurance market is that there are too few options. The Mackey proposal would increase the number of competing providers. The current proposals in Congress would do nothing to increase the number of providers, and would limit the variety of insurance policies.

    The best way to drive down costs would be to break the monopolistic power of insurance companies which exists through employers’ plans. Make it illegal for employers to provide insurance.

  19. December 4, 2009 3:15 pm

    Pinky: the main problem with the individual market is not too few options, but too few protections. The risk pool is much worse, as the lack of a individual mandate leads healthy people to stay away and take their chances. And profit-making insurers do their best to weed out the people most responsible for what they term “medical losses”. If you go up against an insurance company on your own, you are likely to get a worse plan that’s more expensive than would be the case with either a large or a small group. That’s if you get anything – trying going in with a “pre-existing condition”.

    As a fan of single-payer, I’m sympathetic to breaking the link between employment and insurance, especially since the biggest cost of private healthcare is invisible and comes in the form of lower wages. But if we were to do away with it, what would we replace it with? We would need some other mechanism to create large pools. So either single payer (one giant pool), or a private system of exchanges and heaviliy regulated companies (the Swiss and Dutch models). One think you cannot do is send the individual out on their own against a giant insurance company – this is a violation of both solidarity and subsidiarity.

  20. Blackadder permalink
    December 4, 2009 3:52 pm

    We are now on the Reid substitute.

    I’m not sure this answers my question. Did they vote on the House bill or not?

  21. Kurt permalink
    December 4, 2009 4:20 pm

    No, Reid got Republican push back to doing that, so he instead brought up another House bill, HR 3590. Because of the Constitution’s Origination Clause, Reid has to bring up a House bill or risk a Blue Slip problem with the House. So the motion to procede was on HR 3590, not the Reid substitute.

  22. Pinky permalink
    December 4, 2009 9:47 pm

    MM, I’m not talking about putting individuals against one big insurance company. I’m definitely not talking about single-payer, which puts one giant consumer against the insurance company. I’m talking about lots of individuals bargaining with lots of insurance companies.

    Insurance companies have unbalanced power in the markets which stems from two sources: the federally-mandated interstate barrier, and the custom of insuring through the workplace. If interstate competition is permitted, then number of insurers instantly increases fifty-fold. If we take employers out of the insurance business, the pooling advantage disappears, along with the non-pooling disadvantage.

    I note that you don’t like the invisibility of insurance costs, but you support a single-payer plan. That seems contradictory. Also, I stand by my statement that the problem in the insurance market is the lack of options. And this is where an internet debate usually falls apart: each exchange doubles the number of points of contention. Either we pursue them all simultaneously and create a mess of a comment like this one, or we go off on an obscure tangent. So this is probably the end of this thread for me.

  23. December 5, 2009 12:27 am

    Pinky: no, if you allow insurance companies to operate across state lines, what will happen is a race to the bottom – every insurance company will rush to set up in the state with the most lax regulations. This would be a disaster. This would only work if you have strong regulations governing insurance company behavior at the federal level. It really all boils down to appropriate regulation of the insurance companies, and the individual mandate is the quid pro quo.

    And single payer is highly transparent. You pay a dedicated contribution and that pays for your healthcare.

  24. Kurt permalink
    December 7, 2009 12:24 am

    the federally-mandated interstate barrier

    Pinky, there is no federally mandated interstate insurance barrier. There is the Constitution of the United States which, in the absence of a federal preemption, gives states the right to regulate businesses within there own jurisdiction. What you are doing is saying the federal government should pass a law taking away the right of California to regulate insurance sold in California, and so forth.

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