Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Posts Tagged ‘premiums

Preventive Care and Actuarial Value

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Under healthcare reform, women’s preventive services will be covered at no direct cost to women.  The Heritage foundation writes:

In addition, mandated coverage of preventive services with no cost-sharing will increase health care costs, since cost of services will simply be passed from the insurer to the patient through higher premiums.

This is only entirely true in the large group market.  In the individual and small group markets, other health benefits may end up being cut to compensate.

The key is in the restriction that *every* plan (on the Exchange or otherwise) must meet a particular actuarial value, say 60%.  What that means is that health plans must pay, on average, 60% of the cost of covered services.

Let’s assume that the Obama administration rules boost preventive service utilization up to 10% of total services (a nice round number).  Let’s further assume that these services must be paid for at 100%.  In order to comply with an overall actuarial value of, say, 60%, health plans will need to cover all non-preventive services at a rate of 50/90=55.6%.

In this manner, premiums for the 60% actuarial value plan don’t go up.  What you have done is to take from the sick and give to the healthy.  Specifically, the health plan can’t even pay 60% of the cost of other diagnostic imaging, cancer treatments, etc.  They have to reduce their effective cancer coverage in order to boost the detection of that coverage via preventive services.

[Note: through indirect and highly speculative conversations, I understand that HHS may be considering an actuarial value model that is so crude as to not be able to capture the above effects.  To the extent our federal government is not going to calculate actuarial values correctly with respect to this issue, then the Heritage analysis may end up being more correct in all markets.]


Written by Victor

March 24, 2012 at 2:23 pm

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