Healthcare Reform Fun Thought
How will the government prevent people over age 65 from entering the guaranteed-issue Exchanges? A person aged 64 earning in the low $20,000′s on fixed income can get a very nice Exchange policy for a post-subsidy amount that is less than the Part B and Part D premiums combined. Moreover, if HR4872 passes, they will get an “actuarial value” that exceeds Medicare. They may even get an actuarial value that exceed Medicare plus a Medigap plan. That means a senior may be able to save hundreds of dollars per month in premiums by staying on the Exchange … *and* get a better health benefit.
People have speculated that healthcare reform is a secret plot to destroy Medicare, but the usual thought is that it will destroy Medicare by bankrupting hospitals and causing physicians to exit the program. Millions currently on Medicare may decide to dump Medicare for the Exchanges, and millions more who age in with Exchange policies may never bother to sign up for Part B.
Just a fun thought to illustrate how this bill has not been thought through.
(note: the Basic Healthplan option is restricted to only sell to those under age 65; in this post, however, I am referring to commercial carriers. Remember also that everyone will be risk-adjusted. Therefore, a commercial carrier might find it quite profitable to market Exchange products to 80 year olds, even with the 3:1 age band restriction.)
A couple of premium increases under “Reform”
Joe is 21 and works in an auto shop. Tammy is 20 and has a job as an office assistant. They each earn $21,600. They can currently buy reasonable insurance in Arkansas for $50 a month. Under reform, because they are low-income, they will enjoy significant subsidies. This will enable them to buy insurance for $114 a month (the cost at exactly 200% of FPL). Their premiums will double.
Now, Joe and Tammy run off and get married in July of 2014. Their family income shoots to $43,200. They are obligated to report this non-economic change in status immediately to the Health and Human Services Secretary. The Secretary will forward this information to the IRS and the Exchange. The Exchange will then cut their subsidies, raising their out of pocket premiums to $171 per month. At this time, it is unclear to me whether the regulators will require them to purchase a family policy or not, which will require both of them to cancel their current coverage and start a new coverage. This may mean exposing them to an additional annual deductible, because our esteemed legislators didn’t think of things like “deductible carryover” when defining the benefit and regulatory structure. Regardless, the fact they get married will result in lower out of pocket subsidies, meaning that this premium increase of 50% will now be for a slimmer benefit.
All subsidies are to be determined on an annual basis. The first year that Joe and Tammy file a joint return, they will owe back taxes to cover the larger subsidies they enjoyed for the part of the year before they were married. Because their final income stayed below 400% of poverty, this penalty is maxed at $400. If they had been extravagantly rich, say earning $29,141 each, then they would face a penalty equal to the entire size of the pre-marriage subsidy.
Bottom line: Joe and Tammy will face large premium increases, despite the subsidy, because they are young. They will then face a 50% premium increase when they get married. They will face potential retroactive liability if they get married during the year, or if they fail to inform the Secretary in a timely fashion about their change in status. They may be forced to cancel one or both policies they are currently on, exposing them to additional out of pocket costs.
One reason I don’t buy the argument that “reform is a moral imperative” is that I know people like Joe and Tammy.
The CBO and Large Group Premiums
Lower premiums, per person, frequently mean higher premiums paid by families. This counter-intuitive fact leads commentators like Ezra Klein to a common misinterpretation of the CBO scoring of the Senate healthcare proposal:
When the Congressional Budget Office looked at this question (pdf), they found that for Americans in the large-group market (134 million of us), premiums would go down by 1 to 3 percent.
That is not a fair description of what they found. The CBO found that the premiums, per member, would go down. They did not find that the premium rates people pay will go down. There is a large and substantive difference between the two. The primary reason for the CBO finding is higher enrollment rates as employees and their dependents attempt to avoid mandates and the Exchanges. Both of those actions, however, are likely to increase premium *rates* and the cost of health insurance for families, a point that is conveniently overlooked. Here’s how this happens.
Scenario 1: A young employee, currently uninsured, buys from his company because of healthcare reform. Assume that average premiums, per person, drop from $300 to $295 for the company (like the CBO finding). The company’s overall healthcare burden, however, has increased because they are now paying for an additional person. Therefore, if the company keeps its total contributions the same, there is less money per employee, meaning that the amounts paid by workers has to increase to compensate. Only if the company increases its total contribution by more than the increased cost of the additional insureds will each family’s burden decrease. But then, of course, the company is paying disproportionately more in health benefits, putting downward pressure on wages. The CBO models and commentary quit at the per person per month costs within each segment, and don’t tell us how companies are expected to adjust their contributions in response. But either way, families that currently purchase insurance are clearly squeezed when you work through the ramifications.
Scenario 2: The spouse of a worker signs up for the plan to avoid the mandate. The number of enrollees per employee clearly goes up in this scenario. Therefore, even though the per person cost is lower, the per employee costs goes up. The resulting increase in paid costs per worker is now an obvious and inescapable conclusion. Will the employer pass this higher cost per worker on in terms of reduced wages or higher required healthcare premium contributions? Either way the families that are currently insured will be hurt.
The core logical problem is that the CBO is reporting average premiums per person. But no one actually pays health insurance on that basis. Premiums are paid on a per contract basis (per employee in the group market). The amount you are charged, a premium “rate”, is determined based on the type of contract you have, and after the employer determines an amount they will contribute toward that rate. Higher or lower per person per month costs influence this amount, but you aren’t done with the calculation at that point. You still need to calculate premium *rates*, after employer contributions, to determine the impact on actual people. And, as noted in this post, the rates can move counterintuitively relative to the premiums per person.
2010 Healthcare reform is dead
Mixed emotions here on the blog. I’m glad a terrible bill was defeated (the only thing left is to see the Pelosi/Reid/Emmanuel death throes). I’m also frustrated beyond measure at the lost opportunity for real, meaningful, and needed reform.
What next? My reform proposals amazingly still would have applied after reform; they most certainly apply now. In a few weeks when the reality of the healthcare bill demise sinks in, I’ll start blogging again. My work and young boys have required my full attention recently, and that will continue.
There is still the opportunity to build a bipartisan HIPAA-extension in the next few months. But I don’t think Democrats will give up the dream in time to pass that sort of reform this year.
Healthcare reform modeling is still going to be part of my job responsibilities. The issues that led to this craziness still exist (rising healthcare costs, decreasing ability to pay). As always, I won’t share confidential results or opinions. But one thing this debate debacle has convinced me is that opinions of people like me are vital to the debate. Next time, I’ll do better with my civic duty to be ready. And I don’t think it will take 15 years.
What a terrible tragedy.
Forcing Everyone to Sell their Cadillacs
Bob Herbert from the New York Times concisely and accurately described the so-called “Cadillac” tax today.
… it’s a tax that in a few years will hammer millions of middle-class policyholders, forcing them to scale back their access to medical care.Which is exactly what the tax is designed to do.
The tax would kick in on plans exceeding $23,000 annually for family coverage and $8,500 for individuals, starting in 2013. In the first year it would affect relatively few people in the middle class. But because of the steadily rising costs of health care in the U.S., more and more plans would reach the taxation threshold each year.
Within three years of its implementation, according to the Congressional Budget Office, the tax would apply to nearly 20 percent of all workers with employer-provided health coverage in the country, affecting some 31 million people. Within six years, according to Congress’s Joint Committee on Taxation, the tax would reach a fifth of all households earning between $50,000 and $75,000 annually. Those families can hardly be considered very wealthy.
I am a proponent of high copay/deductible plans for those who can afford it. I am an even greater proponent of letting people freely select the plan that they can live with. This policy will force millions of people onto the plans that I like. I do not approve of using the government in an under-handed way to accomplish policy objectives that I think are good. We need to convince people to voluntarily buy these plans, not coerce them.
More CBO fun
The CBO score for the Manager’s Amendment for the Senate healthcare bill is filled with fun. My kids are climbing all over me (again), so I’ll make this quick.
* the increase in the Initial Coverage Limit in 2010 is FREE. See Section 3315, which is merged with the cost estimate from Section 3301. Section 3301 should also result in a net cost in 2010, since more people will hit the catastrophic threshold. The fact that the ICL increase is costless is rather shocking. That’s a mult-billion give-away by someone to someone.
* The bill moves Grandfathering up to the date of enactment. The Senate Finance Committee delayed grandfathering until 2013, and the House delayed it until 12/31/2013. Despite this, the new score has <i>more people in grandfathered plans than the SFC version</i>! Like all previous estimates, the size of the non-group, non-Exchange group of policies <i>grows</i> over time, despite the fact that it is illegal to sell them and it is illegal to keep them after you die or after you move between states.
* It is still apparently too difficult to break apart non-group, non-Exchange average premiums from the Exchange premiums. It’s also too difficult to calculate the subsidies by state … premium impacts by state … uninsured by state. Etc.
I’m quite glad I’m not a politician having to vote for this thing without better information. I don’t think many understand the degree to which these numbers are shoe-horned into a particular result, rushed to completion, and insufficient to judge the wisdom of this bill’s provisions.
A Few Healthcare Financing Gimmicks
You may love healthcare reform. You may hate it. Either way, there are some very troubling developments that we should be able to agree on. Specifically, in order to achieve CBO scores that are politcally palatable, serious legislative gimmicks are being employed. This post documents a few, focusing on the Manager’s Amendment of the Reid bill.
* The additional Medicare payroll tax is applied to anyone who earns over $200,000 a year. That threshold amount is not indexed for future inflation. If and when inflation happens, more and more people will pay this tax. Why did the Senate do this? Healthcare inflation threatens to outstrip CBO-scored revenues. By not indexing the tax bracket, tax revenues will escalate at a faster rate, causing the bill to be estimated to pay for itself even in the second decade. I strongly suspect the average person would not support this structure.
* The lower-income premium subsidies are designed to require ever-increasing premium payments, as a percent of income. What this means is that even subsidized premiums become increasingly unaffordable in future years. This was done to help limit the increased cost of subsidies. Again, however, this is bad policy. If someone can’t afford more than x% of their income as premium in 2014, what justification is there to presume that they can afford a higher percentage of their income in 2019?
* There are more than 125 million Americans living at between 100% and 400% of the federal poverty level. Less than 20 million of those will receive the subsidies in the bill. All others will be behind “firewalls” that are estimated to keep them from receiving the subsidies. I doubt that these firewalls are sufficiently strong. Aside from that criticism, however, this mechanism makes the bill seem much less costly than it truly is.
* CLASS Act revenues are scored during the budget window. These revenues are dedicated to future benefits, but this liability is not scored during the budget window. In other words, we are using the revenue from a new entitlement to pay for cost overruns in another entitlement. Further, the CBO has to score the CLASS Act overall as not contributing substantially to the deficit because, according to the proposal, premiums will simply be increased to whatever level is necessary to pay for the ongoing costs of the program. I trust that the deceit of this mechanism requires no further comment.
* The tax on “Cadillac” plans serves two purposes to help scoring that may or may not translate into true cost savings. First, the number of plans that get hit by the tax are expected to increase because the threshold for what defines a Cadillac plan does not increase at the same rate as healthcare costs. Secondly, the CBO likely overstates the revenue from this provision because it assumes that an employer that slims their healthplan to avoid this tax will give workers a dollar-for-dollar wage increase to compensate for the cut in health benefits. Any leakage to profits, solvency, other non-taxable benefits is assumed to not exist in any substantial fashion.
* The Medicare in-patient cuts are assumed to happen as scheduled. All experts are quite skeptical that this will happen. These cuts are designed to be a crude function of economy-wide productivity. This means that in an economic downturn, which typically has employment falling and productivity climbing, per-stay reimbursements are expected to be cut more heavily than during economic upturns. The appropriate policy response for reform supporters was to delay the spending until *after* these cuts had happened, rather than commit ourselves to the spending on the hope that these cuts will happen.
* The Medicare physician cuts that have been over-ridden for almost 10 years in a row are assumed to be enforced through 2019. This is almost guaranteed not to happen, and this is worth more than $200 billion.
* The Medicaid program itself is unsustainable, but this problem remains unaddressed in this bill. In fact, Medicaid becomes stressed even more heavily as more people are placed onto that program. Can states absorb these costs? The CBO has to assume that doctors will serve the new Medicaid enrollees, and that states will find their share of the money and will cooperate in expanding enrollment.
* In general, there are only four full years of scorable expenditures on premium subsidies (2016-2019), but ten scoreable years as revenue. The illusion that the bill pays for itself in the latter years is supported only by many of the aforementioned gimmicks.
It is our duty as private citizens to demand good government. I don’t think anyone, regardless of whether they support reform, should support the fgimmikcs described above.
The Senate Healthcare Bill
No links here, just a few comments while my kids pound my computer and yank my arms.
Relative to my predictions yesterday, this is a much more workable bill, from an insurance perspective, than I was expecting.
I was expecting the unpopular individual mandate to get watered down; it got strengthened. There are still real adverse selection problems in 2014 and 2015, and I don’t know why the CBO models aren’t picking that up. By 2016, however, the addition of the House’s tax as a percentage of income should have real bite, potentially forcing higher income individuals to purchase qualified insurance, rather than just self-insuring. Call this the Britney Spears amendment (although Britney herself is not a good insurance risk, many wealthier people are). This additional tax makes the CBO estimates more reasonable.
Many unfortunate pieces survive: the unworkable CLASS Act; the new benefit design restrictions; etc.
It is also unfortunate that we are going to raise the Medicare tax this much and not dedicate those revenues toward reducing deficits. Because these heavier taxes aren’t indexed, my sons will face doubled Medicare tax rates, assuming they earn at least a modest middle-class income lifestyle.
If this thing passes conference, I’ll be doing an in-depth bill analysis series throughout 2010.
Is the CBO being Overworked?
Another embarrassing gaffe has surfaced in this memo from the over-worked health staff at the CBO. The problem is the parenthetical after the opening sentence:
(A medical loss ratio, or MLR, is the proportion of premium dollars that an insurer spends on health care; it is commonly calculated as the amount of claims incurred plus changes in reserves as a fraction of premiums earned.)
Ahem. The medical loss ratio is simply the amount of estimated claims incurred as a fraction of premiums earned. They are getting way too clever by half. What they suggest is a meaningless calculation.
One typical way you calculate incurred claims is to take paid claims and then add the change in reserves. That would result in an estimate of claims incurred which could be used in the loss ratio calculation. But if you already have claims incurred, there’s no point to adding the change in reserves.
Regardless, putting the CBO nonsense on an actuarial exam would warrant a failed paper and a well-deserved one year delay on the road to Fellowship.
My lesson is not that they are ignorant, but that they need more sleep. After missing the CLASS Act premiums by 20-ish percent, and other recent problems, I think we have sufficient reason to be worried that they are being over-worked.
(note: they might be referring to active-life reserves. This would not be something I would get into in a parethetical to talk about what is “typical” in healthcare, however, also suggesting overwork)
Political Predictions on Healthcare Reform
Just for fun predictions for the healthcare bill that Reid is set to unveil at 6:30 AM tomorrow.
* It will not have any substantive “public” option and will make some headway on the abortion issue;
* It will have significantly reduced individual mandates, but the CBO models will not have those result in significantly higher uninsurance rates;
* It will have woefully insufficient levels of subsidies for poor Americans, and will limit their growth in future years. I define “woefully insufficient” as subsidy levels that will not reduce Exchange premiums for a family at 200% of poverty to lower levels than premiums available today in non-guaranteed issue states (like Arkansas). As a rule of thumb, a 40-year old man can get an 80% actuarial value plan for under $100 per month today in Arkansas.
* It will not have the CLASS Act;
* There will be some sort of trigger that states can pass to “opt-in” to the Medicaid and other provisions of the bill;
* This bill will garner 60 votes for the 1 AM cloture vote on 12/21, and all subsequent cloture votes through the 12/24 vote. This will be a straight party-line vote;
* This bill will be virtually impossible to reconcile with the House’s bill;
* The CBO will again fail to offer a final score, and will fail to offer any of the following:
* Estimated premium and uninsured impact by state, considering the rate regulations currently in place in each state;
* Estimated total subsidies by state;
* Estimated impact on national health spending;
* Exchange-only premiums, as opposed to average individual premiums which include grandfathered plans;
* Estimated impact on labor-force participation rates (and therefore Social Security) of the near-elderly;
* A result that has a reduction in grandfathered individual membership from 2014 through 2019;
* US Senators will be asked to cast deciding votes without knowing whether this bill will help their state, specifically, or by how much. This damaging information will trickle out from 2010-2014, if this bill can be reconciled and signed by the President.
