# Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

## Rate Reductions Can Increase Your Costs

The CBO’s 11/30 premium analysis of the Reid healthcare bill estimates a 0% to 3% reduction in premiums per employee for large firms.  This has been interpreted as positively impacting large employers and their employees.  This interpretation is likely false.

A primary driver of this reduction in per-employee premiums is the addition of healthy employees and dependents driven to coverage because of the mandate.  This means that more employees and dependents will participate in the health plan.  Average costs may fall, but total costs will increase.  That will force employers to make budget decisions which, in turn, will likely increase the premium costs to individuals.

My discussion will focus on an illustrative example: a firm with 100 employees, 80 of who take up coverage.  The premium rates charged this groups are \$200 per employee per month, and the employer pays 75% or \$150.  The employer pays \$12,000 per month (\$150 * 80 employees).  Each employee pays the remaining \$50.

Under reform, let’s assume that all 100 employees participate in the plan, driving the average cost downward by 2%, so the actuarially-fair rate is \$196 per employee per month.  The employer continues to pay 75%, which is now \$147.  The employer now pays \$14,700, a 22.5% increase in their healthcare bill!

One response worth discussing would be if the firm keeps their \$12,000 total contribution frozen.  This would translate into \$120 per month off of each employee’s premiums.  This would result in the employee premiums increasing from \$50 to \$76, a whopping 52% increase.

Significant care must be taken to interpret the CBO numbers correctly.  Unfortunately, the CBO paper itself isn’t sufficiently detailed for us to discern the size of the impact I discussed above, nor how they model the employer contributions to health plans.

For the economics geeks out there, if you are still reading, you’ll recognize that the problem here is that the implicit wage reduction funding the healthplan is paid by all employees, yet the benefit is limited to a subset of people who sign up for the plan.  This results in cross-subsidization between workers.  The CBO is telling us that this cross-subsidization may fall after reform, with a resulting dynamic change in the implicit wage reduction.

(Note: they also tell us that the worst risk may bail on the employer healthplan, and go to the exchange.  This may happen for low-paid workers eligible for cost-sharing subsidies.  The fact that this may happen for some employers does not mitigate the fact that the effect I describe above will also happen for some employers.  They also tell us that large groups with better-than-average costs may be grandfathered, leaving the worse-than-average groups to participate in the Exchange-based pooling; somehow this does not impact large group premiums or cause an increase in the pooled rates insurance companies must charge).

Written by Victor

December 2, 2009 at 10:48 am