Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

What Healthcare Reform Means for You

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Part I: Individual Coverage Purchased after 2013

The House healthcare reform bill will significantly change the way you buy individual coverage.  Here’s a summary of the more striking provisions, and possible ramifications:

  • Beginning in 2013, all individual insurance must be purchased through the government’s Exchange.  No more ehealthinsurance.com, although I wouldn’t be surprised if they aren’t a bidder for the government contracts to build the Exchange.
  • Premiums on young men must be at least 50% of the premiums charged men age 64; the impact of this will differ around the country.  In states like New York where full community rating is already in place, this may lower premiums for young men; in most of the country, this will significantly increase premiums for young men.
  • Premiums cannot reflect the cost differences between men and women; since women utilize care more intensely than men, at least through most of the age spectrum, this means that women will enjoy better value from plans offered after 2013.
  • You will have up to 4 possible plans to choose from, three of which will basically be the same but with slimmer copays, with the fourth potentially adding dental and vision benefits.  These plans will focus on the use of copayments, avoiding coinsurance whenever possible.  Plan design will be governed at the national level through the Benefits Advisory Committee.
  • Member copayments will increase faster than medical cost inflation which in turn will almost certainly continue to increase faster than the Consumer Price Index; the reason for the rapid rise in copayments is technical, and I’ll reserve for another post.  This is also little different than what is going on in the market today; the important distinction is that the Exchange plans will be tightly constrained by this law in how they deal with this mathematical problem whereas in today’s market, consumers decide how they want to spread this cost around.
  • Over time, the basic plan will converge into something that will look like a $5000 deductible, 100% coinsurance major medical plan; the other plans will likely follow suit unless Congress intervenes.
  • For members with incomes less than 400% of the Federal Poverty Limit, payments will be made by the Commissioner to the offering healthplans to help offset lowered copayments.  Healthplans, in turn, are to require lowered copayments, consistent with subsidized actuarial values.  How this consistency is determined is quite complex theoretically, and the proposed law is silent on measurement and enforcement, other than that the Commissioner’s actuarial models are to be used to establish the size of the payments from the Commissioner to the healthplans.
  • For healthy members, the basic plan will almost certainly be the best value.
  • For poor members, the basic plan will almost certainly be the best value, since the plan will be enhanced, for free, through government subsidies.
  • You will need to annually file evidence of coverage.  Healthplans will send you information on what months you had qualifying coverage.  You will owe 2.5% of gross income in taxes if you did not have qualifying coverage for yourself or your dependents.  This is prorated if you let coverage lapse for any portion of the year.
  • You will need to notify the commissioner when your income or family status changes.  This way your subsidies and plan design can be reconfigured by the Benefits Advisory Committee.  Failure to do so may result in penalties, especially if your benefits or subsidies should have been reduced because of an increase in income.
  • If you don’t like the commissioner’s reconfiguration (i.e., change in copayments), you will be allowed to change plans during your annual election period.

Some other items (either more obvious or related to features that exist today):

  • Individual plans purchased on the market today are “guaranteed renewable”, meaning that the healthplan cannot drop your insurance if you get sick.  Other laws prevent them from raising your premiums because of your health status, after you have insurance.  Plans under the Exchange will most likely NOT be guaranteed renewable; this isn’t a problem, for the most part, since you will have guaranteed issue rights to a new policy from the same or different carrier.  Your premiums still won’t increase because of your health status; in addition, they won’t be able to increase your initial premiums based upon your health status.
  • The policies won’t have pre-ex periods or exclusion riders.
  • The first few years are likely to see volatile premiums; after that, however, rate increases should be more stable than what you see in the individual market today.  That’s because rate increases due to aging will be limited (you will pay a much, much higher premium when young, but the flip side of that is that your premiums won’t increase as much as you age), rate increases due to “duration wear-off” won’t exist because initial underwriting won’t exist; and you will be part of a larger risk pool.
  • The larger risk pool likely means you will be included in a higher average cost risk pool, but administrative expenses may be somewhat lower because of reduced underwriting costs.  This improvement in administration costs may be offset by behind-the-scenes reporting requirements for risk-adjusters, monthly copayment recalculations, plan coordination, and increased bureaucratic oversight.  The CBO has net yet modeled these administrative costs.

For CNN’s perspective on what healthcare reform means to you, see this piece by Sahadi.  Obviously, I think CNN’s discussion focuses more on the talking points than the likely result of the specifics of the legislation.  Lastly, these plans are in flux and so any of the aforementioned opinions or predictions may be obsolete at the time of this writing.  I also wrote these while reading the legalese of the House bill while playing with my oldest son.  Caveat emptor.  But I feel confident that these predictions are reasonable enough that they should be contravened carefully before being dismissed.  The devil is truly in the details.

Part II of this series details the House’s $20,000 annual household cap on medical costs.

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Written by Victor

July 25, 2009 at 3:18 pm

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