In response to a request from Senator Bayh, the Congressional Budget Office has given its analysis of the Senate reform bill’s effect on health insurance premiums. (CBO Letter) CBO’s examination of the bill’s impact on individual and group premiums is obviously a complex task, involving a number of uncertain assumptions. In the individual market, CBO finds premiums would be 10-13% higher than under current law, primarily because the bill would set a floor on the level of coverage which is higher than prevails in the market today. For both small and large group markets CBO concludes there basically would not be much of a change in premiums.
CBO notes that for individuals, widespread subsidies would cushion the impact of these increases, but someone is paying those subsidies. CBO also notes that it believes that group and individual price increases would be held down by increased competition. Competition among insurers no longer is the primary determinant of health insurance premiums. Competition among providers is and that competition is non-existent, which means that in most markets hospitals and physicians have far more bargaining leverage than insurers do. CBO has very likely significantly underestimated both the increased cost-shifting to private payers that will result from more low-paying government program enrollees and the increase in unit costs that will occur as a result of expanded demand for a somewhat limited supply of services. While CBO has done an excellent job of explaining its rationale, it appears to have either misunderstood some dynamics of the health insurance and health care markets and/or to be ignoring the lessons of past health coverage expansions.
Here are the most important takeaways from the CBO analysis. Regardless of any obfuscation regarding subsidies, individual health insurance premiums will be ten percent higher than they otherwise would have been for everyone if this bill is implemented. Since most of the new non-Medicaid coverage is in the individual market, that is a lot of additional spending on health insurance premiums. Many people will be subsidized, so the impact on them is muted, but the money for those subsidies has to come from somewhere and it is largely coming from other individuals in the form of taxes and foregone wages. A not insignificant number of people who currently have very good health insurance will likely end up with worse benefits, and spending more out-of-pocket, as they and their employers seek to avoid the tax on high value plans. Does that really make sense–to lessen some Americans’ coverage, if the whole premise of expanding access is that it leads to people receiving more necessary medical care? Finally, CBO has very likely underestimated the effect of a significant expansion of demand for medical care on unit prices. As has almost always been the case, the cost of more health care being provided is being understated.
The good news for our audience is that the acceleration in spending this bill would cause will continue to create strong demand for services that help control health costs–wellness programs, care and disease management services, new administrative technology, etc.