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CBO Analysis of Effects on Premiums

The CBO has released a letter to Sen. Evan Bayh estimating the effect on premiums of Harry Reid’s legislation. This review has revealed yet more puzzlements to ponder.

CBO actually projects premium increases of 22% to 30%, which are reduced to increases of 10% to 13% because of other savings n the non-group market. And this is without any consideration of moral hazard, which CBO declines to project. This 10 – 13 percent increase is net of a savings of 7% to 10% due to lower insurer cost in “delivering the coverage.” It finds those savings in things like standardizing benefit design and prohibiting underwriting.

It does not mention what is happening with agent/broker commissions. This is a key issue because the Senate bill requires states to allow employers with up to 100 employees to purchase coverage through the Exchange. I have not yet been able to find anything in the bill that says what happens to commissions when a buyer uses the Exchange. I must assume they disappear until I get other information. I hope the broker community is paying attention.

It also says that there will be 7% to 10% lower per person costs due to lots of healthy youngsters entering the insurance pool. CBO seems to think the mandate will be effective. This assumption is dubious since the penalty for noncompliance is a mere $750 and young people will not get much of a break on their premiums.

The allowable spread for age is only two-to-one. It offsets these premium increases with the subsidies available to some, but this is a pretty hollow calculation. Subsidies don’t change the additional cost of the coverage. It only changes who pays the additional cost.

In the large group market CBO is projecting zero to negative 3% effect on premium, but it says it excludes the effect of the excise tax, but I’m not sure what that means.

It says 19% of all workers would be effected by this tax, but it expects most to avoid the tax by lowering their coverage and hence their premium. This seems like an odd calculation. Of course we can reduce our premiums by lowering our coverage, but the costs those premiums were paying don’t disappear. They are just switched from covered to OOP.

Now, I am a big fan of raising OOP and reducing premium, but this 40% excise tax that only kicks in at $23,000 is a pretty crude way to do it. CBO finds the “public option” would attract a higher risk population than private plans, mostly because of a wider provider network and not doing much to manage benefits. It thinks that risk-adjusted premiums would do a poor job of balancing that selection problem.

This raises a couple of things. First, it is interesting the CBO recognizes that plans can direct selection independently of underwriting, by tweaking internal practices. Second I am curious about the reliance on risk-adjusting premiums.

Last time I looked most people agreed there was no very good way to do this. CBO supposes that the “fee” on Rx companies would not be passed on to private plans since the fee is imposed only on drugs sold in government programs.

How can this be? The government imposes a tax on the drugs it buys, and then pays the higher cost resulting from that fee? What is the point? More likely the fee is imposed and the Government program does NOT pay the higher cost, resulting in higher costs to the private payers.

Overall, the CBO report raises many more questions than it answers. And if this thing becomes law, it is just the beginning. Implementing this monster will be impossible.

SOURCE: CBO on premiums http://cbo.gov/doc.cfm?index=10781

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December 3, 2009 - Posted by | Federal Government, healthcare | , , ,

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