Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Archive for March 2010

Healthcare Reform Fun Thought

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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.)

Written by Victor

March 20, 2010 at 3:43 pm

Posted in Healthcare Reform

A couple of premium increases under “Reform”

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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.

Written by Victor

March 20, 2010 at 1:49 pm

Posted in Healthcare Reform

The CBO and Large Group Premiums

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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.

Written by Victor

March 10, 2010 at 5:05 am