Monday, October 12, 2009

Insurance industry now speaking against health reform

Per the Washington Post, the health insurance industry, represented by America's Health Insurance Plans, is planning to advertise against the Senate Finance bill. AHIP is citing a study by PricewaterhouseCoopers for the industry; PwC is an accounting firm with a health care consulting practice.

The study reportedly projects that insurance premiums in 2013 for a single person would go up $600 more than they would have without health reform (AP article on Google News). I assume that this finding applies only to rates in the individual market, not to everybody.

I have not seen the study on either AHIP's or PwC's websites. However, the weakening of the individual mandate and subsidies was cited as the main reason in the Washington Post article. I've blogged about that here.

The industry's criticisms are not completely off base. However, it's helpful to think about two separate types of cost here.

First, there's the underlying cost of healthcare. I do not think the industry's complaints are applicable to this cost. In fact, the proposed excise tax on high cost plans is likely to reduce overall utilization somewhat, whereas the PwC study did not attempt to account for this (since not a lot of empirical evidence is yet available on that score). Additionally, health IT and comparative effectiveness research are likely to reduce health care costs.

Second, there's the cost of insurance. It is tied to the underlying cost of healthcare, but also depends on market factors (like how much competition there is between insurers). Additionally, the cost of health insurance for each person will be influenced by the market rating rules. As I stated in my earlier post, the weakened individual mandate and subsidies will mean that some people will simply be unable to afford insurance - not poor enough to get a subsidy, but not rich enough to afford individual insurance. They will either pay the fine or seek a waiver. They'll also get insurance only when they're sick, which does drive up the cost of insurance for everyone else - this is known as adverse selection.

However, there is already a certain amount of adverse selection in individual insurance markets - a number of states already limit or prohibit excluding people based on pre-existing conditions. Additionally, the number of people who won't be able to afford insurance and who can't get subsidies isn't very large. I do not think the adverse selection problem will be materially worse than it is at present. The insurers are also going to get a large influx of new customers to offset that.

The cost of insurance will be higher than it would be if 97+% of the population was insured, as opposed to 94%. However, there's not a good way around the situation. President Obama specified that a bill couldn't raise spending (before offsets) by more than $900 billion, and there's just no way to get subsidies high enough with that amount. The insurance industry is simply going to have to accept the situation and do their best to control costs and increase their own efficiency - which they have failed to do in the past. I don't think the situation is going to be unmanageable, either.

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