As the Senate starts its debate of the health-care bill introduced by Senate Majority Leader Harry Reid, the back-and-forth has intensified over what the legislation would do to insurance premiums and rising costs in the coming years.
Over the Thanksgiving break, M.I.T. economist Jonathan Gruber released a short paper in which he claimed the Reid bill would reduce premiums for people buying insurance in the individual market. It was clear from a story in Politico that the Obama White House was gearing up to argue the Gruber analysis was proof positive of the virtues of the Senate legislation. Unfortunately for Team Obama, Gruber’s paper was quickly shot down by a new study from the Congressional Budget Office (CBO). CBO estimates that the Reid bill would drive premiums up, not down, in the individual market — by 10 to 13 percent compared to current law. For family coverage, the Reid bill would increase premiums by, on average, $2,100 in 2016, according to CBO. So much for the argument that Obamacare will cut premium costs across the board. It clearly won’t.
But even this CBO analysis is terribly optimistic. For weeks, experts have been warning that the Senate legislation would lead to serious “adverse selection” in the individual and small-group insurance markets. Adverse selection occurs when, on average, the pool of insured lives becomes less healthy over time compared to a relevant comparison group. The Senate bill would require insurers to take all comers, with heavily regulated rates. These rules would help those with chronic conditions get less expensive coverage. But they would also drive up premiums for the young and healthy. If the healthier people left or stayed out the insurance risk pool, premiums for those who remained would go up quite dramatically. Indeed, that’s exactly what Wellpoint, a large national insurer, predicted would occur under the bill prepared by Senate Finance Committee Chairman Max Baucus, which formed the basis of much of the Reid plan. The Wellpoint actuaries estimated that, under the Baucus bill, premiums for a person at the average age and in average health would go up by more than 50 percent in the individual insurance market in California, and by more than 20 percent in the small-group market.
CBO argues that risk selection problems will be mitigated by the presence of new insurance subsidies, penalties for those who don’t get coverage, a once-a-year enrollment window which will limit the opportunity to come back into insurance, and the tendency for people to comply with mandates even if they are costly. But, as others have shown, even with subsidies, the cost of coverage for many low and moderate wage families will be very substantial. Many people could reduce their costs if they paid the penalty instead of premiums and signed up with insurance only when they really needed it. Would the fact that they might have to wait a few months before getting insurance be enough to keep them in coverage all year? Hard to predict. In fact, as pointed out here, it appears that none of most-cited models used to estimate the impact of health-reform plans, including CBO’s, has an explicit capacity to calibrate insurance take-up rates based on the penalties imposed on those who go without coverage. Apparently, the premium estimates are based as much on judgment as analytics, and CBO’s judgment is clearly on the optimistic side. But what if they are wrong? What if adverse selection is more pronounced, as many experts are predicting? At a minimum, before any votes are cast, CBO should make it clear how sensitive their premium estimates are to their assumptions about the risk pool. That way Senators could decide for themselves what to believe.