Health Care Legislation, Part 5:
What happens to private insurance?
28 Oct 2009 in Regulatory Economics, Regulatory Policy, Legislation
Recently we have posted on the so-called "public option" (see here and here). Today we look at the effect of proposed health care legislation on the private market.
By necessity, it is private insurers that have both the interest and comparative advantage to estimate these effects. The federal government, and especially the Congressional Budget Office, is almost exclusively concerned with federal budget outlays, not social costs and benefits. To keep federal outlays down, legislators focus on shifting costs off budget -- typically, onto private insurers and their customers.
Analyses recently made public by one private insurer are instructive.
WellPoint has analyzed the effects of the leading House and Senate bills in 14 States where it does business. The company claims it is "the largest publicly traded commercial health benefits company in the United States and an independent licensee of the Blue Cross and Blue Shield Association."
A separate report is provided for each State, and the methodology is reported in an appendix at the end of each report. Having reviewed the results and methodology, we offer two important information quality caveats: First, WellPoint's estimates are uncertain. The methodology and discussion do a good job explaining this, but nonetheless readers will be inclined to interpret them as if they are certain.
Second, WellPoint's estimates are reported with excess precision. Changes are reported to the nearest dollar per month. This is far more resolution than is warranted given the uncertainties in the methodology and the bills themselves. Excess precision subtly cues readers to believe that small differences are meaningful when they almost certainly are not. Lacking information about the magnitude of uncertainty, we can only report WellPoint's point estimates. To deter readers from overinterpreting these figures as precise, we display them graphically.
STATEWIDE AVERAGE EFFECTS OF PROPOSED FEDERAL LEGISLATION ON PRIVATE INSURANCE RATES
Proposed health care legislation would raise average private insurance premiums in all 14 States examined by WellPoint. These increases by State are shown below in rank order for the individual market for insureds of average age and health status. (New York is excluded because its individual insurance market is too small to model. Having adopted many of the changes federal legislation would mandate, such as guaranteed Issue, but without an individual mandate to prevent adverse selection, the individual market has essentially vanished.)
Percentage increases in rates range from about 25% to about 175%. In no State do rates decline for insureds of average age and health.
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Price increases are more pronounced on younger and healthier insureds, as shown below. Rate increases are clustered around 100% and 200%. (The rank ordering of States has been left unchanged to allow the charts to be visually compared.)
The only people in the individual insurance market who save money are those who are older and less healthy. That's because the proposed legislation requires guaranteed issue and community rating. Younger and healthier people would pay much higher rates than would be actuarially justified based on their risk. Older and less healthy people would pay much lower rates. In short, the proposed legislation would force young and healthy people to cross-subsidize older and less healthy people. For this reason, legislation must include a mandate to buy insurance; otherwise, the private insurance market would collapse from adverse selection.
There are some exceptions: Maine and Connecticut. Premiums for older and less healthy insureds are predicted to increase more than 50% and 150%, respectively, mostly because proposed federal legislation would require insurers to provide many benefits not currently required by the State to be offered in the standard plan. Maine (and, to a lesser extent, Connecticut) has already legislated several of the changes that proposed federal legislation would require of all private health insurance. (The other driver for increased premiums is the new tax on insurers. Also, WellPoint's model predicts a 3% increase in premiums for this older and less healthy cohort in Virginia, but we interpret this difference as too small to be significant given uncertainties in the estimation model.)
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In all cases, estimated premium increases do not take account of the indirect effects of a "public option." Most of the bills under debate would require the public option to reimburse providers at Medicare rates, which are 20% to 40% below rates paid by private insurers. Just as Medicare shifts costs to private insurers (and ultimately to insureds), a public option that pays providers less than the cost of service will result in more cost-shifting to private insurers (and ultimately to insureds).
WHY IS THERE SO MUCH VARIATION ACROSS STATES?
States have very different laws and regulations governing private health insurance. These laws and regulations include such provisions as "guaranteed issue" (which prohibits insurers from refusing to insure people with serious pre-existing conditions) and "community rating" (which prohibits insurers from charging rates that correspond to health risk. In combination, guaranteed issue and community rating lead to massive adverse selection: high risks sign up for coverage, driving up the average risk, which leads low risks drop out of the market, thus raising the average risk even more, which causes more market abandonment. To preserve the market, adverse selection must be controlled, and the usual way this is done is by requiring everyone to buy insurance. Financial penalties for failing to buy insurance must be higher than the cost of insurance.
Variation across States can be seen in WellPoint's baseline rates. The three graphs below pre-legislation, baseline rates in the individual market for the same three rating scenarios discussed above. Caution: States are presented in rank-order in each graph, but the rank-orders are different.
There is about a fourfold difference in baseline rates vary across the 13 States (excluding New York) for the 25-year old male scenario and across 14 States (including New York) for the family example. For the 60-year old less-healthy couple, however, the difference in base premiums if eight-fold. Rates are highest in New Hampshire in all scenarios.
LESSONS FROM THESE DATA
For many people without insurance -- especially young and healthy people -- the problem is that it is too expensive relative to the value of benefits. The New England States in this sample (and especially New Hampshire) are the extreme cases. Monthly premiums of $131 to $195 for healthy 25-year old males are significantly greater than the actuarial value of coverage, so it should not be surprising that they choose not to buy insurance. If they were able to purchase insurance in (say) Ohio, they would save $1,000 per year or more. Though not all healthy 25-year olds would choose to do so, it's likely that many would. The $52 per month premium is considerably less than a monthly cable TV or cell phone bill. The proposed legislation does not offer this simple alternative, and because it would make insurance for young and healthy people so expensive, a highly coercive individual mandate (with a huge penalty for failing to buy insurance) is essential to prevent the insurance market for young and healthy people from catastrophe.
For older people not yet eligible for Medicare and not covered by an employer's health plan, the decision where to live has significant potential adverse health effects. Two 60-year old couples in poor health -- one in New Hampshire and the other next door in Maine -- now pay vastly different premiums: about $400 per month in Maine and about $3,200 in New Hampshire. These differences, which are the result of State regulation and subsidies, make it desirable for the New Hampshire couple to move to Maine.
That incentive would vanish under proposed federal legislation. The New Hampshire couple would save about $1,000 per month because their private insurer could no longer charge them premiums befitting their poor health status. But the Maine couple would see their insurance rates almost treble. The current $2,800 difference in monthly premiums would decline to about $1,100.
Kentucky, Ohio, and Missouri fare the best (or least badly) under the proposed federal legislation. For the 40-year old couple with two children and the less-healthy 60-year old couple, premiums decline to $600 to $800 per month. For the 25-year old male, premiums rise threefold but, unlike the other States, don't exceed $200 per month.
The WellPoint analysis cannot answer an obvious question: should the proposed federal legislation be enacted? WellPoint obviously is opposed, and for good reason: it would drive away many of the firm's customers unless it included a highly coercive mandate to buy insurance. In the bills analyzed thus far, this mandate is relatively weak.
