Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Archive for December 2009

Forcing Everyone to Sell their Cadillacs

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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.

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Written by Victor

December 29, 2009 at 4:03 pm

Posted in Healthcare Reform

More CBO fun

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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 more people in grandfathered plans than the SFC version!  Like all previous estimates, the size of the non-group, non-Exchange group of policies grows over time, which just doesn’t make much sense given that it will be illegal to keep these policies in force after 2013.

* 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.

Written by Victor

December 23, 2009 at 1:54 am

Posted in Healthcare Reform

Tagged with ,

A Few Healthcare Financing Gimmicks

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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.

Written by Victor

December 20, 2009 at 8:27 pm

The Senate Healthcare Bill

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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.

Written by Victor

December 19, 2009 at 11:17 pm

Posted in Healthcare Reform

Is the CBO being Overworked?

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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)

Written by Victor

December 19, 2009 at 2:40 am

Political Predictions on Healthcare Reform

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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.

Written by Victor

December 19, 2009 at 2:25 am

Posted in Politics

A Public Challenge

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I hereby publicly challenge defenders of the CBO healthcare model to address the following:

a) Produce 2010 and 2016 state-specific non-group rates, before and after reform, so that an apples-to-apples comparison on premiums after reform can be demonstrated against premiums for sale in the marketplace today.

States like Arkansas today have rates 50% of the national averages being modeled by the CBO.  After reform, the regulatory changes will push all states closer to the subsequent national averages.  The maximum geographic variation in the CBO models appears to be 0.8 to 1.2, meaning that after reform, Arkansas will probably have rates equal to 80% of the national average.  That represents a 60% increase in premiums in the state of Arkansas.  This is BEFORE any effect modeled by the CBO with respect to reform’s impact on the national average itself.

b) Provide 2016 non-group premiums divided between the grandfathered and Exchange blocks.  Currently, the CBO is advertising that the national average COMBINATION of policies issued under current rating rules (grandfathering) and future rating rules (Exchange) will only increase by 10-13%.  Obviously, it is likely that the grandfathered plans will only see part of this increase (parts due to taxes and similar provisions), while the Exchange will be subject to higher rates and adverse selection.

c) Provide 2016 subsidies by state, by FPL category.  States like Arkansas, even after reform, may have premiums 33% lower than other states, simply because of cost of care differences.  That means that low-cost states like Arkansas will get fewer subsidy dollars per enrollee than states that have out-of-control costs.

d) Provide justification for the assumption that non-Exchange individual policies will remain steady or grow between 2014 and 2019 under reform.  It will be illegal to sell grandfathered policies.  Why are their models producing sales outside of the Exchange into 2019?  Most policies issued today terminate when you move across state lines; termination of grandfathered products will result from migration, if nothing else.  The concern here is that their Technical Documentation does not seem to allow for the actual features of individual products, namely their lifetime duration and exit provisions.  One concern is that their model may not be incorporating lapse rates within that block, meaning they are understating enrollment in the Exchange, thereby understating the cost of the bill.

None of these challenges should be interpreted as a professional statement that I am ceding that the CBO projections are otherwise reasonable.  Rather, I offer these challenges so that if they are ever taken up, all of us will either see the limitations of their work more clearly, or so that these fairly obvious concerns can be abated.  It is stunning to me that they did not provide greater specificity in response to Evan Bayh’s requests for greater information.

Written by Victor

December 3, 2009 at 12:17 pm