How Would Health Reform Affect Insurance Premiums?

Yesterday, the Congressional Budget Office released its much-anticipated analysis of how the Senate health bill might affect insurance premiums. As a political matter, the analysis appears to be a clear win for proponents of the bill. Most importantly, CBO found that average premiums in the large group market—which provides about 70% of private health insurance—would decline slightly in 2016. That provides comfort to Senate moderates who were concerned by claims that the bill would increase premiums significantly.

On the other hand, the report also found that average premiums in the nongroup market would increase by 10 to 13%. That substantial boost is providing some ammunition to opponents of the bill.

To put these impacts in context, it’s useful to dig a bit deeper to understand the various channels by which health reform may affect insurance premiums. CBO identifies three such channels: changes in the amount of health insurance coverage that each beneficiary purchases, changes in the types of people with coverage, and changes in the price of a given amount of insurance for a given group of enrollees:

For me, the most interesting of CBO’s findings is that the Senate bill would make the nongroup and small group markets more efficient. The price of nongroup coverage would be reduced by 7 to 10% (holding constant the amount of coverage and the type of people covered), while the price of small group coverage would be reduced by 1 to 4%. Where do these savings come from? From reduced administrative costs and competition in the exchanges (not, CBO notes, from any material reduction in cost-shifting from the uninsured to the insured).

The second key finding is the enormous increase in the amount of coverage that consumers would purchase in the nongroup market. CBO finds that the bill would induce people in the in the nongroup market to purchase insurance that covers a larger share of their costs; the bill would also require insurers to cover a broader range of services. Both of these changes would boost nongroup premiums.

The third major finding is that the changing mix of enrollees would lower average premiums in the nongroup market. Premiums in the large group market would decline slightly.

A fourth major implication, overlooked in most discussions thus far, is that we shouldn’t assume that average premiums going up is always bad (or, for that matter, that average premiums going down is always good). Consider, for example, the increase in average nongroup premiums, which occurs because nongroup insurance would expand to cover more services and a larger fraction of beneficiary costs. To what extent is that increase harming people in the nongroup market? It depends on how much the beneficiaries value their new coverage. When consumers move up from a Honda Civic to a Honda Accord, it’s usually safe to assume that they are benefitting, even though the Accord is more expensive. On the other hand, we would look askance (I hope) at a government program that forced potential Civic buyers to purchase Accords instead.

So it is with nongroup insurance. If people are trading up willingly to more expensive coverage, we shouldn’t view that as a bad thing (there is an issue about how broader coverage affects their consumption of health services, but let’s leave that aside for now). On the other hand, if the government is forcing them to buy coverage they don’t fully value, we might be concerned (with the obvious caveat that with health insurance, unlike car purchases, there are some legitimate reasons why the government might mandate some level of coverage). But even then, the most important concern is the net burden (how much consumers value the coverage less what they have to pay for it), not simply the gross burden of paying for it. CBO doesn’t get into these particulars in detail, but it does provide the following breakdown of the amount of coverage effect: two-thirds is due to greater actuarial value of the plans and one-third is due to coverage of more services (including those induced by the greater actuarial value). The increase in actuarial value means that, on average, about two-thirds of the increase in nongroup premiums will be offset by reductions in out-of-pocket spending. As a result, I think the increase in average premiums significantly overstates the burden that beneficiaries in the nongroup market might bear (and, indeed, some may well be better off).

Of course all of these conclusions come with numerous caveats. Most importantly: (a) YMMV; individuals may experience much larger premium increases or decreases than the averages, (b) CBO didn’t model some impacts that could raise premiums — most notably the possibility that increased demand for health services would drive up prices, (c) CBO didn’t model some impacts that may eventually reduce premiums — most notably provisions that might reduce health costs somewhat after 2016, and (d) these findings don’t include the effects of any subsidies or the tax on Cadillac plans; see the CBO report for analysis of those.