HealthReform.gov, U.S. Department of Health & Human Services
February 18, 2010
Recently, Anthem Blue Cross of California, an insurance company owned by the for-profit company WellPoint, Incorporated, announced that its individual market premiums would rise by as much as 39 percent in the coming months. This shocking increase isn’t unique. Across the country, families have seen their premiums skyrocket in recent years, and experts predict these increases will continue.
A Broken Health Insurance System Works for Insurance Companies – Not Families
The “value gap” in the health insurance market is evident not just in overall premium hikes, but also in the use of those premium dollars. Over the past decade, the amount private insurance companies spent on administrative costs grew faster than the amount spent on prescription drugs, a trend that is projected to continue through the next decade. Three of the top five insurers cut the proportion of premiums they spent on customers’ medical care last year, committing more to salaries, administrative expenses, and profits.
Lower Premiums.
The Congressional Budget Office estimates that reform will streamline administrative costs of insurance companies and bring more people into the insurance market, lowering premiums of a comparable plan in the individual market by 14 to 20 percent. (25)
(25) Congressional Budget Office. Letter to Senator Bayh. November 30, 2009.
http://www.healthreform.gov/reports/insuranceprospers/index.html
And…
Letter to Senator Bayh
Congressional Budget Office
November 30, 2009.
(Reference 25, above)
Nongroup Policies
CBO and JCT estimate that the average premium per person covered (including dependents) for new nongroup policies would be about 10 percent to 13 percent higher in 2016 than the average premium for nongroup coverage in that same year under current law.
• Average premiums would be 27 percent to 30 percent higher because a greater amount of coverage would be obtained.
• Average premiums would be 7 percent to 10 percent lower because of a net reduction in costs that insurers incurred to deliver the same amount of insurance coverage to the same group of enrollees. Most of that net reduction would stem from the changes in the rules governing the nongroup market.
• Average premiums would be 7 percent to 10 percent lower because of a shift in the types of people obtaining coverage. Most of that change would stem from an influx of enrollees with below-average spending for health care, who would purchase coverage because of the new subsidies to be provided and the individual mandate to be imposed.
New Market Rules Would Reduce Administrative Costs
Compared with plans that would be available in the nongroup market under current law, nongroup policies under the proposal would have lower administrative costs, largely because of the new market rules:
• The influx of new enrollees in response to the individual mandate and new subsidies—combined with the creation of new insurance exchanges—would create larger purchasing pools that would achieve some economies of scale.
• Administrative costs would be reduced by provisions that require some standardization of benefits—for example, by limiting variation in the types of policies that could be offered and prohibiting “riders” to insurance policies (which are amendments to a policy’s terms, such as coverage exclusions for preexisting conditions); insurers incur administrative costs to implement those exclusions.
• Administrative costs would be reduced slightly by the general prohibition on medical underwriting, which is the practice of varying premiums or coverage terms to reflect the applicant’s health status; nongroup insurers incur some administrative costs to implement underwriting.
• Partly offsetting those reductions in administrative costs would be a surcharge that exchange plans would have to pay under the proposal to cover the operating costs of the exchanges.
http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf
Comment:
By Don McCanne, MD
Although the Obama administration continues to advocate for reform based on private health plans, they have seized on the current outrage over skyrocketing insurance premium increases to to demonstrate why reform is essential. Although they are attacking the private insurance industry, they continue to push for a reform model that provides this market with tens of millions of new customers.
Do the proposed reforms of the insurance market really provide us with the assurance that everyone will have access to affordable health care? We already know that they could not achieve the goal of covering everyone, and will leave about 25 million with no coverage (RAND 2/10). Also there is doubt that other measures in the legislation will have much impact in containing costs. But what about the egregious administrative waste in our dysfunctional financing system?
In their report released yesterday, the administration claims that “reform will streamline administrative costs of insurance companies and bring more people into the insurance market, lowering premiums of a comparable plan in the individual market by 14 to 20 percent.” They cite the CBO letter to Sen. Bayh as their source for this statement.
And what does the CBO say? First, the premiums will actually be 10 to 13 percent higher because of the offsetting requirement for increased benefits in these plans that would increase premiums by 27 to 30 percent. For those who say that the improved benefits are worth this increase, keep in mind that the benefits move from the current actuarial value of 60 percent to an actuarial value of 70 percent. That is still significantly below the 80 percent actuarial value of current employer-sponsored plans. These individual plans will continue to leave many people who need health care exposed to unaffordable out-of-pocket expenses.
What does CBO say about the 14 to 20 percent administrative savings claimed by the Obama administration? Half of it (7 to 10 percent) isn’t even administrative savings but merely represents a dilution of the risk pool with healthy individuals mandated to purchase private health plans.
The other half of the premium savings, also 7 to 10 percent, stems from a slight reduction of administrative costs since the plans would be sold through an insurance exchange eliminating some of the costs such as underwriting and brokers’ fees. When you look at the CBO explanation of where the administrative savings would occur, it is clear that there is not much there, and some of it would be offset by the additional administrative costs of the new exchanges.
Although the Obama administration is using this to claim administrative savings, the total reduction in our national health expenditures (NHE) would be so infinitesimal that it wouldn’t even warrant a footnote in the annual NHE report.
The profound administrative waste in our system is not limited to the outrageous excesses of the private insurers but it permeates the entire system, including the very high costs of the burden that private insurers place on physicians, hospitals and other sectors of the health care delivery system.
Although the amount of the recoverable waste is disputed, everyone agrees that it is profound. Very solid data demonstrates that somewhere around $4 trillion could be recovered over the next decade merely by changing to a single payer national health program – an improv
ed Medicare that covered everyone. Those who argue that it is only half that need to explain why we should therefore refuse the $2 trillion in savings ($ 2,000,000,000,000).
Most of us have tired of conspiracy theories. But think about this. The Obama plan (to be formally released Feb. 22) is a gift of our tax funds to the private insurance industry. Recent events have suggested that the plan may not survive the legislative process. Polls and focus groups show that the public is outraged by insurance company abuses. The insurers have chosen the most inopportune time in the reform process to cram outrageous premiums into the faces of their customers. Or is it inopportune? Look at the platform that it has given President Obama and the cover that it provides for members of Congress. It is giving them an avenue that will allow them to push through this program that the insurance industry understands that it must have for its own survival.
The Obama plan will leave tens of millions uninsured. It will not adequately control health care spending. It will perpetuate the profound administrative waste in our system. Above all, it will revitalize the private insurance industry for decades to come. If we’re not going to react, then we’re simply going to have to learn to live with it.