Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

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.

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Written by Victor

March 10, 2010 at 5:05 am

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