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The CBO Evaluates How Federal Law Affects Health Insurance Premiums

By February 22, 2016Commentary

The majority of Americans still have private health insurance coverage, either through their employer or that they directly buy, for example on the health insurance exchanges.  The price of that insurance one way or another is borne by the covered people.  They may pay a portion of the premium directly, but the part paid by employers generally is viewed as a substitute for paying a higher wage to the employees.  The cost of health insurance and health care is a hefty financial burden on many people and families.  A report from the Congressional Budget Office evaluates what effect federal laws have on those insurance premiums.   (CBO Report)  The CBO estimates that individual coverage cost an average of $6,400 and family coverage $15,500 in 2016.  The agency says that will rise an average of 5% per year through 2025, to $10,000 for an individual policy and $24,500 for a group one.  In the same time period it is projecting per capita income growth of only 3%.  You can see the ever-worsening financial hit to consumers.

The biggest effect of federal law is that premiums paid by a company for employer-sponsored health insurance are not treated as income to the employees and can be deducted by the company as a business expense.  This amounts to a $250 billion annual subsidy by the federal government and increases health insurance premiums on the theory that if the person or the company bore the expense of health coverage on a post-tax basis, much less rich coverage would be selected, and there might be more cautious use of services.  CBO estimates that this tax treatment raises premium costs by 10% to 15%.  But note that if coverage was less rich, people would have higher out-of-pocket costs for health services, so consumers wouldn’t necessarily be paying less in total.

The other big impact stems from the reform law, which created an individual mandate to have health insurance and created insurance exchanges to facilitate purchase of that insurance.  The federal government subsidizes purchase of that insurance by low-income individuals, which will cost the federal government an estimated $40 billion in 2016.  CBO says that the mandate, because it requires even healthy people to buy insurance, meaning that the average use of services should decline, should cause a lowering of premiums.  Gee, kind of surprising then that instead they are rising on the exchanges, and at an accelerating pace.  (Actually not surprising at all, for anyone who understands how health insurance and health insurance markets work.)

CBO notes that other provisions in the reform law will definitely cause premiums to rise, including the requirement that insurers take everyone who applies, that they charge them all the same regardless of health condition or health care usage, that they cover pre-existing conditions and that there is only minimal adjustment permitted for age.  Yep, those features will definitely cause premiums to rise a lot.  Now everyone is starting to realize what a virtuous loop this causes, the higher the premiums, the less healthy people feel like buying, the less healthy people buy, the higher the premiums, etc, etc.  And the mandate is leaky as can be; anyone with a brain can figure out to avoid the penalty for not having health insurance.

In addition to these federal law provisions, CBO says that action by insurers obviously can affect premiums and premium increases.  For example, how aggressively do they try to control health costs.  Of course, federal and state law in a number of ways limit insurers’ ability to do this–making them cover certain services, making them pay for services from all types of providers and all providers, limiting certain managed care techniques, etc.  We are on the cusp of another moronic round of such legislation, this time to limit separate cost-sharing and other controls on specialty drugs.  The effect of that, as it was of earlier similar legislation, will be to jack premiums for everyone up significantly.  And of course CBO recognizes that the amount of insurer competition will have an effect and the federal antitrust authorities have for years turned a blind eye to consolidation and concentration, and may be about to do so again with two large pending mergers.  That certainly will help keep premiums lower.  So if you want to know who to blame for rising insurance premiums–look right at the federal government.


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