Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Posts Tagged ‘CBO

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

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

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

Rate Reductions Can Increase Your Costs

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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

Playing “What If” with the CBO numbers

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What if the CBO was more than $90 billion off its cost estimate for HR3962 (blog entry here)?  I think it may be, and it is easy to explain why.

Yesterday, I pointed out that the projected non-group enrollments outside of the Exchange were highly implausible.  Specifically, since individual new-sales outside of the Exchange would be made illegal, it seems illogical to project a static or increasing population of individual policy holders outside of the Exchange.

In today’s marketplace, people tend to cycle through individual coverage; as many as 35%-40% of policies terminate before they reach their first anniversary.  We could take all of the CBO assumptions, but simply assume that only 25% of individual policies lapse annually.  The result would be more than $90b in additional costs between 2015-2019, as illustrated in the table below.

The first three lines in the following table are straight from the various CBO reports.  The fourth line simply assumes that 25% of the policies that existed in 2015 lapse in 2016, and so forth through 2019.  I then assumed that those who lapse join the exchange at an average cost equivalent to those already on the Exchange.  The result is a whopping $91 billion difference.

This illustrates two things.  First, we have very little idea what is really going on inside the CBO models, and results this bizarre suggest that more peer review is warranted.  Second, even if the initial CBO model is perfectly fine, tiny tweaks in assumptions can result in massive swings in cost for this sort of program.  I would argue that this program design is inherently risky; the only way to keep the costs even remotely under control is to build a series of firewalls between employer-based coverage and individual coverage (less than 20% of people are even eligible for the Exchanges let alone the subsidies).  If any of these firewalls leak or if any of these assumptions are slightly wrong, we could be in serious fiscal difficulty.

2015 2016 2017 2018 2019 TOTAL
Cost of Subsidy ($b) 82 96 103 111 120 512
Baseline Non-Group Enrollment (m) 14 14 14 14 15 71
CBO Non-Group/Other Enrollment (m) 8 8 8 8 9 41
Reform Mkt w/ 75% Retention (m) 8 6 5 3 3 24
Add’t’l Subsidy Cost ($b) $0 $10 $18 $26 $38 $91
Avg. Subsidy/Subsidized Enrollee 5500 5800 6100 6500 6800

Written by Victor

October 31, 2009 at 2:35 am