Higher premiums and lower wages

Higher premiums and lower wages

The health insurance lobby, known as AHIP: America’s Health Insurance Plans, released a study last night showing that elements of the Baucus bill would make health insurance more expensive than under current law. The study is by PriceWaterhouseCoopers, and Karen Ignani, the head of AHIP, wrote a two-page memo summarizing it.

Here’s the most damaging part of Ms. Ignani’s memo (but take it with a huge grain of salt, for reasons I will explain):

The report makes clear that several major provisions in the current legislative proposal will cause health care costs to increase far faster and higher than they would under the current system. The report finds that the proposal “will increase premiums above what they would increase under the current system for both individual and family coverage in all four market segments for every year from 2010-2019.”

For example, the analysis shows that the cost of the average family policy is approximately $12,300 today and will rise to:

  • $15,500 in 2013 under current law and to $17,200 if these provisions are implemented.
  • $18,400 in 2016 under current law and to $21,300 if these provisions are implemented.
  • $21,900 in 2019 under current law and to $25,900 if these provisions are implemented.

In fact, between 2010 and 2019 the cumulative increases in the cost of a typical family policy under this reform proposal will be approximately $20,700 more than it would be under the current system.

What the study says

The PWC study purports to analyze “several major provisions” of the Baucus bill, not the whole bill. Specifically, PWC looks at:

  1. Combining mandates for guaranteed issue and community rating with a leaky individual mandate.
  2. Taxes on health insurers and health providers such as drug and medical device manufacturers.
  3. Whether cuts in Medicare reimbursement rates to medical care providers will be “shifted” to those buying private health insurance.
  4. The “Kerry” tax on high-cost health insurance plans.

The study argues that the combined effects of these provisions would increase health insurance premiums across the board, and in some cases quite significantly.

Reaction to the study

The first two parts look decent. I lack the data to check them, but the basic analysis seems right, or at least it confirms my view of things. The Leavitt/Hubbard/Hennessey op-ed warned that insurance “reforms” that would benefit the predictably sick would also raise premiums for younger and healthier workers, and would create an incentive for you to wait to buy insurance until you get sick. PWC believes both these things would happen under the Baucus bill, based on the presumption that the individual mandate is soft and “leaky,” allowing an increasing number of people each year to avoid the mandate.

It’s also solid to assume that taxes on insurers and medical care providers will be passed through to consumers as higher health insurance premiums.

While doctors and hospital administrators swear by it, I have always been skeptical of the cost-shifting argument. If you believe that a hospital will raise the prices it charges privately insured patients in reaction to cuts in reimbursement rates from government programs, you must believe (1) the hospital has pricing power and (2) it has until now charged less than it could. (1) is quite plausible in some circumstances. I find (2) incredible. If someone has pricing power, I generally believe they will exert it. Are we to believe that providers of medical care were charging privately insured patients less than they could have before the cuts in government payment rates? I am happy to hear arguments on the other side.

The PWC study assumes that medical care providers will pass through every dollar of reduced Medicare provider reimbursement rates as a dollar of higher costs to privately insured patients. That’s absurd.

PWC assumes the Kerry tax on insurers selling high-cost health plans will be passed through to consumers. That’s a safe assumption. But they also assume that those higher costs will be distributed to those who purchase plans of any cost. That’s just silly. PWC should assume that the costs will be passed through only to those who buy high-cost plans. They also acknowledge that purchasers will change the benefits and structures of health plans to avoid the new tax, but ignore these adjustments in their calculations. Bogus.

The study’s biggest flaw

PWC, AHIP, and Ms. Ignani are careful to write that they are studying the effects on insurance premiums of four elements of the Baucus bill, rather than the effects of the entire Baucus bill. This gets watered down or even lost in the press coverage, and I imagine the political discussion will center around “Baucus bill makes health insurance more expensive.” Not coincidentally, AHIP opposes the four elements studied by PWC.

I believe the Baucus bill would make health insurance more expensive, but we can’t tell this from the partial PWC study. The PWC analysis ignores three important effects of the Baucus bill:

  1. More insured people means greater demand for medical care, raising prices for both medical care and health insurance.
  2. CBO thinks competition in the exchanges will somewhat reduce premiums for those who buy health insurance outside of employment. I doubt this factor is large.
  3. The Baucus bill would subsidize the purchase of health insurance for those lower- and middle-income people who buy health insurance outside of employment.

I believe the first factor is the most significant source of premium increase in the Baucus bill. But AHIP likes this factor, so they left it out of the study they requested of PWC.

Chairman Baucus’ response

Chairman Baucus’ staff is emphasizing the subsidies. This is a weak response that should make other Democratic members nervous. They are, in effect, conceding that their bill makes health insurance more expensive. Sure, it’s more expensive, but don’t worry, we subsidize a lot of people so it ends up costing them less on net.

Once again, this confuses gross and net costs, and conflates reducing health insurance costs with shifting those costs onto others.

This argument fails on policy and political fronts:

  • Policy: The President’s primary goal has been to slow the growth of health insurance costs. The PWC study is flawed, but its qualitative conclusions are correct: the Baucus bill would make private health insurance more expensive, not less. The bill therefore fails to achieve the President’s core policy goal.
  • Policy: Subsidies are available only to those who buy health insurance outside of employment. If the Baucus bill makes health insurance more expensive, then everyone who gets health insurance through their job loses: higher costs, lower wages, and no subsidies.
  • Politics: The last time I checked, more than 100 million people get their health insurance through their job or the job of a family member. Question for Chairman Baucus: How does your bill help a relatively young and relatively healthy worker who gets health insurance through work? Doesn’t your bill make this worker’s health insurance more expensive, and therefore cut his wages?
  • Politics: Some of those who buy health insurance outside their job would get government subsidies larger than their wage cuts, and some Congressional Democrats think this makes these people winners. I think most Americans would say they would rather not have a policy that cuts their wages by $1 and in exchange promises them a government subsidy worth slightly more than $1. I would rather keep $1 in wages than exchange them for $1.05 of government subsidies.

The politics of this study

The politics of this study cut both ways. The headline numbers make it harder for Democrats to vote for the bill, even though the study is weak and incomplete. The timing makes it look like AHIP is trying to kill the bill by releasing the study and new ads the day before the Finance Committee is supposed to vote.

At the same time, nobody likes the health insurers, and Democrats may hope that Congressional Republicans “align” with AHIP so Democrats can have an easy-to-attack enemy alliance. Health insurers helped kill the Clinton Health Plan in 1994, but they are unpopular so nobody wants to be seen as their ally.

Foolish AHIP

AHIP’s strategy is inscrutable. If your goal is to kill the bill, fine, release a study like this the day before markup ends, and come out guns a-blazin’. But this outcome has been foreseeable for months. If AHIP’s goal was to kill this bill, they should have done this months ago.

A much better explanation is that AHIP is trying to use this study to generate support for modifying the bill. This would be consistent with AHIP’s and Ms. Ignani’s rhetoric, and with their apparent strategy to work with the White House and Democratic Congressional majorities to support legislation and try to modify it to their liking. Ms. Ignani is a Democrat and former union official inclined to work with a Democratic President and Congress. She may also be playing strategic defense, hoping that by not directly opposing legislation she can avoid an all-out war with a White House and Congress that can hurt her members in countless ways.

If this is still AHIP’s strategy, they still got the timing wrong. Washington Democrats are inclined to pick fights with the health insurers, and the timing of this release gives them an excuse to do so. Left-wing Democrats can use this move to justify shifting more of the policy pain to insurers, not less. We already saw an absurd “windfall profits tax” on health insurers floated last week.

And these provisions in the Baucus bill have been telegraphed for months. Why wait so long to go public opposing them?

Health insurers win financially if and only if final legislation includes a strong individual mandate and does not take too much directly out of health plan hides. That requires threading a tiny needle. If Ms. Ignani’s strategy backfires, she could destroy private health insurance in America.

What Republicans should do

Congressional Republicans should not embrace the AHIP study, but instead focus on the critical policy questions raised by it. Does the Baucus bill make health insurance more expensive? Does it cut wages for most Americans who today have employer-provided health insurance? If so, by how much?

Republicans should ask CBO to answer these questions about the Baucus bill, and quickly. The AHIP study opens the door to this debate by framing the questions, but CBO is the only trusted source of information to answer them.

It is important that CBO be asked the right questions. Important details can skew the answer. For instance, the Baucus bill would cause about 3 million people to lose their employer-provided health insurance. These people would end up with higher wages. The vast majority, in contrast, would see premium increases and lower wages. It is important that CBO analyze these two populations separately rather than net out the effects as they have done in their previous publications.

The PWC study is flawed in its details, but qualitatively correct in its conclusion: the Baucus bill would make health insurance more expensive for most Americans, and in doing so would mean a wage cut for most. If CBO confirms this, the bill will die.

(photo credit: Lift-off by aussiegall. No, it has nothing to do with the post. I just think it looks good.)

33 responses

  1. Keith, that last point is (it seems to me) essential: netting out the effects on wages is a weird way to present the analysis; I'm not sure I really understand it. Is it just parsimony?

    Still, as usual, I have a couple of questions. 1) If the vast majority of workers with employer-provided insurance will have lower wages and higher premiums, wouldn't the net effects still look pretty dreadful? I mean, "97 million bad / 3 million good" is not exactly a wash. And if the CBO's analysis makes it look not dreadful, then doesn't that mean they are using rosy assumptions that would not give the results we would assume under a population analysis? I'm sure I'm failing to comprehend something here.

    Third, and last, do you have any Senators' ears? They need to be clear on what you're pointing out. Republicans have twigs for weapons, and the only big cannon they're possibly able to get a hold of is the CBO. They must use it skillfully, Enter the Dragon-style: the art of fighting without fighting.

    • 1. CBO answers the questions they're asked. They haven't been asked the question this way.
      2. A worker who loses health insurance sees their wages jump by roughly $12K – $15K if they have a family policy. In contrast, the wage loss for a worker who keeps his health insurance but sees his premiums rise is a relatively small fraction of that amount.

      • Whoa! 12-15k! I see, I see–since they're gaining the whole cost of their policy, whereas the others are simply losing the much smaller amount that premiums increase.

        Thanks for the tidbit on CBO. I thought it was more of a general thing, like "Do an analysis of the effects on wages," and then they provided some overall picture with particular breakdowns in areas that seem salient.

  2. According to Fox News this afternoon, the tax penalty for the mandate in 2013 would be $0 and would ramp up to $750 by 2017. I didn't catch which bill that was from though. Reguardless, if they go that route, the number of people covered may go down, not up.

    So I'm forced to take the health care provided by my employer, right? Then they drop the coverage because it's cheaper to pay the penalty. Now I've got a higher wage and no insurance. Let's be honest here. My family has never gone over $10,000 in one year and that's a cheap policy. If something bad happens, I pick it up then because the government says the insurance company has to take me.

    In that system, you'd be a fool to carry insurance UNLESS you had a preexisting condition. You would be wasting hard earned money every year something catastrophic didn't happen.

  3. Unfortunately, the public has been blinded by hearing of the uninsured and of the universal plans in other countries where health care costs are half of ours. Sadly, consumers believe we can implement the health provision side without adjusting the cultural side. The result will be a universal plan than spends even a higher portion of our GDP.
    Under the current proposal no penalty or incentives will be included that would encourage lifestyle changes, reduce usage, or even reduce provider (doctor wages). All of these represent a major portion of the differences in costs (along with end of life costs, drug costs, technology overuse, controls on physician numbers) versus other countries.
    I have an individual plan. A 55 year old healthy individual can buy a high deductible HSA for under $200 per month (not including any tax benefit). A 25 year old can get one for $50. Under the mandated plans the cost would be similar to that of a typical government employee group plan gross cost or over $500 per month. And of course there is talk of eliminating HSA's.
    The mandates work like this: not only will you not pay more if you smoke but instead of having an incentive(or penalty) to quit and lower your cost (in premiums or over time by not purchasing cigarettes) you get to have your lifestyle subsidized by somebody who works his/her tail off to stay fit and who practices healthy lifestyles. So up go the policies on those who don't use them. Punish those who practice lower cost behaviors seen in other countries in order to subsidize poor behaviors. Now that is truly an American plan for success. What a con!

  4. Keith,

    Your advice to republicans in good. Do you think someone is likely to ask CBO the "right" question? Let's hope so, if it means the "bill will die."

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  8. 1) Baucus and his staff understand they are undercutting private insurance mortally for the reasons you've described. They set out to design a slightly gentler path to single payer.
    2) As you say, the elements of the Baucus plan studied by PWC have been known for some time. But PWC couldn't know in advance all the elements, so some were omitted. The study on the four elements probably could have been released long ago, so the timing is intentional.
    3) And the intent? To go nuclear. Ignani knew that's how the WH would react, so for AHIP this was a strategic declaration of war. Reform and AHIP are both well past the stage of nuances.

  9. Actually the entire bill is designed so that people will pay more for their health care as all the taxes on medical device manufacturers, insurance and pharmacy companies will be passed down to the consumer – meaning us. It will also mean a curtailment on what senior citizens who have paid into Medicare can expect in ways of treatment as the first $500 billion comes from their medical costs in so called abuse and waste. If their is such an abuse and waste how come they have never gone after it before?
    The CBO has only priced the plan on an outline and not the actual bill that will be passed so this is faulty and misleading information from the Democrats who are afraid to give them the actual plan.

  10. Keith,
    I have a few thoughts on cost-shifting. I have been thinking about this a lot and would like to hear your response to my framework.
    Under the current system, a provider has to look at pricing this way: some people pay N, the rate negotiated with insurers, while others pay fractions of N, say 70% (Medicare) and 50% (Medicaid). The key is that the provider can't know in advance how much a patient will pay.
    However, it is likely that the provider can approximate the odds of seeing each patient.
    In response to this calculation, some providers can choose not to accept any of the underpaying patients. There is obviously no cost-shifting here.
    A second group of providers will decide not to offer the service any longer because it is not cost effective.
    A third group will modify N to make up for revenue that isn't coming in from other patients.
    My argument would be that group 2 eventually gives group 3 pricing power. I am very interested to hear your thoughts.

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  12. There's another factor to consider. As long as that penalty is less than what most employers cover, many will simply pay the fee, forget about self insurance (as many companies do up to a point) and let folks spend their own money. Don't expect a raise either, with any luck, business owners may hire more people though, although the resulting hit to the economy as we send more of our money to the government may be devastating.

    For all of those who complain about the cost of employer or even private paid insurance, you've likely never really needed it. But get a serious illness or two and the millions your insurance company will pay out will make every penny you pay worth it.

    • The problem with what you are saying here is that you assume the insurance companies are going to pay what you assume they will pay in the event of a catostrophic illness…the reality is that too often they aviod paying, or it turns out that in the fine print you were not covered the way you thought you were…think Hurricane Katrina victims who had Hurricane policies, but who were shocked to hear that they were not going to recieve claims becuase their homes were destroyed by the flood of the hurricane instead of the wind of the hurricane.

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  15. To have "must issue" you must have "community rating" and if your goal is to increase insurance market penetration you need "must issue."

    So, you're shifting costs all over the place but increasing demand (share of GDP). If you're trying to hold costs, you have to restrain use or cost per procedure/incident. Since you're committed to the current model, low deductible, low-copay prepaid medical rather than insurance against extraordinary events, you have not incented the individual to exercise cost restraint. So the government will use its oligopsony power in Medicare and Medicaid, and now as an insurance regulator, to rule certain procedures out of bounds as too expensive, or reduce payments more generally which will reduce supply; or, both.

    Everything we've been going through for months has been pretending these truths can be evaded. Baucus bill just a way to game the CBO scoring rules.

    (continued onto another comment)

  16. In the end, you either get govt control (direct, or less direct thru regulations, subsidies and taxes), or you need a system of real insurance (as opposed to prepaid medical) with significant deductibles and copays that incent the user to consider cost-effectiveness, and then layer in protection for those too poor to afford market insurance and the deductibles/copays (as Medicaid), and deal with chronic conditions thru high-risk pool or such.

    That's all there is.

    So the idea of the insurance industry EVER going for this suggests a few years of quick profits followed by getting out of the business and using those profits to diversify into something else. Because all the Dem proposals are unsustainable and in the end the insurance companies will be casualties.

    We can beat on the details of this bill or that bill, but unless I missed something fundamental it all comes out the same in the end.

    So, Keith, what did I miss?

    btb, any savings ought first to go against the $37T unfunded Medicare liability before biting off new entitlements–imho.

  17. Keith,

    As an ER doc and one who has spent much time negotiating with insurers, I can attest that cost-shifting does occur, though imperfectly. You asked, "Are we to believe that providers of medical care were charging privately insured patients less than they could have before the cuts in government payment rates?" To some degree the answer is yes.

    I wrote an in-depth reply at my blog: Moving Meat



  18. "While doctors and hospital administrators swear by it, I have always been skeptical of the cost-shifting argument. If you believe that a hospital will raise the prices it charges privately insured patients in reaction to cuts in reimbursement rates from government programs, you must believe (1) the hospital has pricing power and (2) it has until now charged less than it could. (1) is quite plausible in some circumstances. I find (2) incredible. If someone has pricing power, I generally believe they will exert it. Are we to believe that providers of medical care were charging privately insured patients less than they could have before the cuts in government payment rates? I am happy to hear arguments on the other side." How about this argument – further decreases in medicare reimbursement rates will reduce the supply of medical care (doctors may choose a different profession where they can earn a better living, for example), and the reduced supply of medical care without a corresponding decrease in demand will drive the cost of private medical care up.

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  20. "Subsidies are available only to those who buy health insurance outside of employment. If the Baucus bill makes health insurance more expensive, then everyone who gets health insurance through their job loses: higher costs, lower wages, and no subsidies."

    Not quite. Employer sponsored coverage still gets a tax subsidy.


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