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Health reform and your premiums

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It’s funny, but since the health care reform debate began, the biggest question of most Americans is also the question that has gone unanswered the longest:

“How will health care reform affect my premiums?”

Here’s what the groups involved in the process have had to say about it:

  • Democrats claimed that reform would bring health care costs down overall.  The effect on indvidual premiums was harder to say.
  • Republicans and conservative pundits… well, they’ve spend most of their time yelling about death panels and socialism.  When they do get around to talking about premiums, they claim that costs will go up, but generally without any kind of evidence to back that up.
  • Insurance companies were quiet for months, until right before the Senate Finance Committee voted- then they released a study claiming that the bill would drive up premiums.  That study was discredited almost immediately– it was so bad that the consulting firm released a statement explaining that the insurance companies had asked them to ignore huge sections of the bill.

In the absence of real information on premiums, Americans have watched the partisan bickering and come to the conclusion that health care reform won’t change their personal situation all that much.  In a survey by the nonpartisan Robert Wood Johnson Foundation, 61% said their personal financial situation would stay about the same.  Only 12% expect an improvement in their finances.

But now, six months in, an independent group has finally tackled the big question.  The non-partisan Congressional Budget Office (CBO) has issued an analysis of how the Senate bill will affect premiums, and MIT health economist Jonathan Huber has done his own analysis, using the CBO’s data.  The conclusion that both have come to?  Wait for it…

Under health care reform, on average, insurance premiums will be lower for everyone.

But, this is health care reform, so of course it’s more complicated than that.  We’ll explain.

The CBO Analysis

At the request of Senator Evan Bayh (D-Ind.), the CBO looked at the effect that the Senate Bill (the version they’re currently debating) would have on insurance premiums for all Americans.  The CBO’s report breaks the insurance market down into three groups, and looks at each individually:

  • coverage purchased by individuals
  • coverage purchased by small businesses for their employees
  • coverage purchased by large businesses for their employees

Health care reform is designed to have the biggest impact on coverage purchased by individuals, so let’s start there.

The Individual Market
According to the CBO’s estimate, in 2016 under health care reform, the average premium will be 10 to 13% higher than under current law.  Now yes, that sounds like the exact opposite of insurance premiums being lower for everyone, until you look at the breakdown of how the CBO came up with that estimate.  The CBO says that:

  • The average premium would be 7% to 10% lower because insurance companies would have lower administrative costs
  • The average premium would be 7% to 10% lower because of a shift in the type of people getting coverage.  Many more young, healthy people will be covered, lowering premiums for everyone.
  • The average premium will be 27% to 30% higher because a greater amount of coverage will be obtained.

If you add all that together, you get the 10% to 13% higher average premiums- and remember that’s before they even consider the subsidies.  More than half of all Americans buying insurance themselves will qualify for some kind of subsidy.  For those that qualify, their premiums will be on average 56% to 59% lower under health care reform.

Ignoring the subsidies again for a minute, that last bullet point is important.  According to the CBO, the only reason that the average premium will be higher is that people will have better coverage.

Part of the reason is that under reform, when you buy insurance coverage it will have to, you know, COVER you.  Right now, a lot of people that have bought their own insurance find out the hard way that when they get sick, their insurance will only cover a small percentage of the costs of treatment–if that.  People that technically have insurance still go bankrupt trying to pay medical bills.  Under reform, insurance plans will have to cover at least 60% of the costs when you get sick.  And there will be different levels of coverage above that, so you’ll know ahead of time roughly how good your insurance is, instead of having to guess.  As Ezra Klein put it:

Add it all together and we’re looking at a 10 to 12 percent increase in premiums for insurance that’s about 30 percent better than what people are getting now. It’s a steal. And all this is before we get to subsidies.

MIT economist Jonathan Huber also analyzed the Senate plan. Using the CBO’s data, he found that under the Senate’s plan individuals purchasing insurance would save $200 per year, and families would save $500.  And that also doesn’t even count the subsidies.  If you figure in the subsidies, individuals and families would save anywhere from $2500 to $7500– for coverage that comes with a guarantee that if you get sick you won’t be dropped or see your rates go up.

The Small Business Market
The CBO defines this market as any employer with 50 or fewer workers.  According to their analysis, the change under health care reform will be anywhere from a 1% increase to a 2% decrease in average premiums.  The breakdown is similar to the individual market, but the changes are less drastic.  Most insurance plans for small businesses already cover “essential” benefits and at least 60% of medical costs- so the average price of premiums of plans on the market won’t go up as much as the individual market, where cheap, crummy plans that don’t cover much will disappear.

Remember that all this refers to the average price of premiums on the market.  But the premiums for any one small business could shift dramatically.  For example:

Sharp premium jumps caused by one or two employees falling seriously ill should moderate, because of the bar on considering workers’ health when setting premiums, Gene Sperling, counselor to the Secretary of the Treasury, told Congress last month. But, that rule could also mean small businesses with a mainly healthy worker force could see premiums rise.

And the CBO’s analysis doesn’t factor in the cost of premiums for small businesses that don’t provide insurance now.  Smaller companies will be exempt, but businesses with more than 25 employees will have to provide insurance or pay a tax penalty.  These companies that don’t provide insurance now will of course see their health care costs rise from zero, but that won’t affect the average price of premiums on the market.

There is a credit for some small businesses in the Senate Bill, that works similar to the subsidies for individuals.  For those small businesses that qualify, their premiums would be an additional 8% to 10% lower than what the CBO estimates.

The Large Business Market
The CBO estimates that the average premium will be 0% to 3% lower for large employers.  Again, the breakdown works the same as in other markets, but less drastic because, again, plans for large employers almost always cover “essential benefits” and at least 60% of medical costs.

The Excise Tax
You might have already heard that one way the Senate will pay for health reform will be to tax high premium plans– the so-called “Cadillac plans,” which cost over $8500 for individuals and over $23,000 for families.  If you’re an employer providing one of these plans, then your premiums would go up, but the CBO thinks that most employers would restructure their plans to avoid paying the tax.  Because of this, they believe the average premium would actually go down because of the excise tax.

A Final Note About the CBO
Like we mentioned in an earlier post, it’s important to remember that the CBO’s report is really just their best informed guess– and they tend to guess conservatively when it comes to savings.  This report only looks at the effect of health reform on premiums in 2016, but there are a ton of other cost control elements in the bill designed to kick in after that.  With those proposals, premiums should be even lower.

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