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Health Reform's Impact on Premiums: Winners, Losers And, For Many, A Question Mark

Nov 25, 2009

As the health care battle rages on, one central question keeps popping up: How would legislation affect premiums paid by individuals and small businesses, two groups that currently face wildly unpredictable rate increases year to year?

Republicans say premiums would go up, partly because of the possibility of new taxes on insurers. Democrats say they’ll go down because of sweeping new regulations on insurers, as well as billions in federal subsidies to help individuals and small businesses.

Who's right? Perhaps both. There's heated debate over the long-term outlook. But, initially, many economists, insurers and health policy analysts agree, there would be a change of fortune for some people. Those with health problems would likely pay less, for example, while younger Americans would likely pay more.

The Senate and House bills would overhaul the way insurance is sold to individuals and small groups. They would buy policies in new, regulated marketplaces, called exchanges. Insurers could no longer reject applicants with health conditions, or set annual or lifetime limits on coverage. New rules would alter how they set premiums, tightening limits on how much rates can vary by age, for example.

Those rules, including a ban on insurers basing premiums on factors such as health status and gender, mean people with medical problems and women should initially see their rates drop compared with what they currently pay, says economist Paul Ginsburg, president of the Center for Studying Health System Change, a nonpartisan research group in Washington. 
 
Proposed limits on how much insurers can adjust premiums based on age could initially lower premiums by more than 20 percent for older residents compared with current averages, an analysis by America’s Health Insurance Plans, the insurance industry’s lobbying group, says. Yet, those limits also mean that rates for younger ones could rise by more than 70 percent.

Sharp premium jumps caused by one or two employees falling seriously ill should moderate, because of the bar on considering workers’ health when setting premiums, Gene Sperling, counselor to the Secretary of the Treasury, told Congress last month. But, that rule could also mean small businesses with a mainly healthy worker force could see premiums rise.

So many factors affect premiums --- some that would push up premiums and others that would lower them -- that calculating the effect on individuals or families is very difficult, the CBO said in September after analyzing the Senate Finance Committee bill, which became the basis of the legislation now on the floor.

To be sure, without passage of any legislation, insurance premiums for employers and individuals are projected to continue to rise faster than inflation for the foreseeable future. As a result, more employers, especially small ones, would be likely to drop coverage, while others would continue to raise the amounts workers pay toward premiums and out of pocket costs, a study by the Urban Institute found. Under current law, the Commonwealth Fund estimates that the average cost of a family plan offered by employers, large and small, would approach $24,000 by 2020, up from about $13,000 now.

In the long run, economists say, controlling overall medical spending is the most effective way to hold down premium increases. But other factors would come into play, too: How well the exchanges work, whether enough young and healthy people enroll and the breadth of the coverage required by Congress.

--Exchanges: These state or national marketplaces could increase the number of insurers competing for business and allow consumers to compare prices among standardized policies, which could slow premium growth. But if the exchanges attract too few policyholders, they may not achieve the level of competition economists envision. Insurers would have lower overhead and administrative costs in the exchange, the CBO says. They would also face annual federal review of their premiums and could be excluded from the exchanges if they seek excessive increases.

-- Subsidies and penalties: Premium growth would be tied closely to whether the carrot and stick approach gets the young and healthy to enroll. Insurance spreads risk, so those who use little medical care help subsidize those with high costs. The legislation offers subsidies to people earning up to 400 percent of the federal poverty level, currently about $73,240 for a family of three. At the same time, the legislation would fine those who don’t enroll, with some exemptions. The Senate penalty would phase in, from $95 per person the first year – 2014—to $750 per person by 2016. Insurers and some economists say those penalties would fail to prevent some people – especially younger, healthier ones – from forgoing insurance until they fall sick, which could raise premiums for everyone else. The House bill would fine the uninsured: 2.5 percent of their adjusted gross income, with a cap set at the average national premium cost.

-- Benefit levels: The more benefits Congress requires, the higher the premium would be. Under a basic package each insurer selling in the exchange must offer, benefits would include coverage of preventive care, such as mammograms, along with hospitalization, doctor visits, prescription drugs and maternity care. The basic plan in the Senate bill would cover at least 60 percent of estimated medical costs; the House plan, 70 percent. Some policies currently bought by individuals and small businesses don’t cover those minimums. So those policyholders, if they change plans, must meet new minimums – and would likely pay more. The CBO estimates that the basic policies would carry annual premiums of up to $5,300 for an individual and about $15,000 for a family by 2016. Those premiums are less than what the CBO projects individuals would pay in 2016 under current law, $6,000, but higher than its projected family premium of $11,000.

The bills take a stab at slowing national spending on medical care and services, which is projected to rise 6.2 percent a year through 2018. They include such steps as payment reductions in Medicare, incentives for doctors and hospitals to coordinate care, and a tax on high-cost insurance, says economist Len Nichols of the centrist New America Foundation, a think tank in Washington.

“There will be a lot more incentives to deliver high-value care, which means lower premium growth over time,” Nichols says.

Still, there isn’t agreement that such measures go far enough to slow spending.

That’s “not being addressed much in any of the legislative proposals,” says Christine Eibner, an economist with RAND, a think tank. Because of that, “I don’t think there’s any reason to think (premium growth) will moderate.”







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