The health insurers stumble into an argument for a public option.

The health insurers stumble into an argument for a public option.

The health insurers stumble into an argument for a public option.

How to fix health policy.
Oct. 13 2009 7:05 PM

Harry and Louise, Meet Marx and Engels

The health insurers stumble into an argument for a public option.

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Illustration by Robert Neubecker. Click image to expand.

Health reform cleared the Senate finance committee, 14-9, without a public option. Now the trick is figuring out how to put it back in. One powerful argument for doing so comes from an unlikely source: the private health-insurance lobby.

On the weekend before the Senate finance committee vote, America's Health Insurance Plans released a report by Price Waterhouse Coopers stating that the bill would cause premiums to increase 32 percent over the next 10 years. Premiums would rise, AHIP's report said, for seven reasons:

    1. The bill's "individual mandate" (i.e., its requirement that everyone obtain health insurance) had been weakened so much through exemptions and reduced tax penalties that insurers would fail to attract sufficient healthy new customers to offset the new customers in poor health whom they would no longer be permitted to turn away or penalize with higher premiums.
    2. The bill's limit on how much more insurers could charge older people versus younger people would raise premium prices too high for younger people.
    3. New minimum benefit requirements would increase insurers' costs.
    4. The combined effect of the previous three changes would further drive young, healthy people away, requiring health insurers to raise premiums ever-higher for the sickly older population that remained.
    5. A new excise tax on "Cadillac" (i.e., unusually generous) health insurance plans would drive premium prices even higher.
    6. Restrictions on Medicare and Medicaid spending would cause hospitals to shift costs onto private insurers.
    7. New fees on various health industry sectors would drive premiums still higher.

Taken together, these reasons don't argue that health reform needs to be tweaked. They argue it needs to be abandoned altogether.


In a press releaseissued after the finance committee vote, AHIP President Karen Ignani said that her group continued to support "bipartisan health care reform." It was quarrelling only with the finance committee bill's "workability and cost." But most of AHIP's seven reasons for its eleventh-hour objections have been a given with health reform all along.

It was always clear that imposing an individual mandate would have to be done delicately, lest it provoke a rebellion among voters. Distributing the cost of insurance more evenly among different age groups—which is to say, among people who tend to get sick and people who tend not to—was always a central reason to enact health reform. So was the imposition of minimum benefit requirements. Cost-shifting is a reality (albeit somewhat exaggerated by reform opponents; by one estimate, Medicare and Medicaid cost-shifting accounted for only 12 percent of the increase in private health insurance costs between 1993 and 2001). It therefore should surprise no one that putting the brakes on Medicare and Medicaid spending may cause some hospitals to charge private insurers more rather than find ways to spend money less wastefully. But what is the federal government supposed to do? Write a blank check to Medicare and Medicaid? None of these reasons AHIP cites for opposing the bill in its present form can be changed significantly; they're intrinsic to reform. The best AHIP might hope for would be to defeat the tax on Cadillac health plans (substituting, perhaps, the House's surtax on high incomes) and to knock back the other new health care fees.

How does health reform propose to curb rising premiums? The finance committee bill includes several mechanisms for doing so, all of them ignored in the AHIP report. Price Waterhouse Coopers admits this freely; in a press statement released Oct. 12, after the report had caused a furor, it said:

The reform packages under consideration have other provisions that we have not included in this analysis. We have not estimated the impact of the new subsidies on the net insurance cost to households. Also, if other provisions in health care reform are successful in lowering costs over the long term, those improvements would offset some of the impacts we have estimated.


How much difference do these other changes make? Hard to say. New subsidies for the purchase of health insurance would seem likelier to inflate premiums than reduce them, though other provisions in the bill limit health consumers' out-of-pocket expenditures. (I should point out that, apart from the tax provisions, virtually all the changes enacted under health reform leave employer-based group policies unaffected in any direct way; the changes are limited almost entirely to the individual market.) MIT economist Jonathan Gruber, working from the same data, came to very different conclusions than Price Waterhouse Coopers did. Gruber calculated that, within the individual market, premiums would, by 2016, go down $685 for the average 25 year-old and down $7,890 for the average 60-year-old. Because Gruber and Price Waterhouse Coopers were looking at different things, it's not clear their findings are entirely incompatible. Price Waterhouse Coopers certainly wouldn't be the first party to suggest that the finance committee bill fails to control private health costs; the respected Princeton health care economist Uwe Reinhardt (working off the unamended bill) said much the same thing Sept. 16 in his New York Times blog.

What happens if we don't pass health reform?

That's where the Price Waterhouse Coopers study gets really interesting. Health reform would, according to the report, raise premiums 32 percent over the next 10 years. But without health reform, the study says, premiums would still rise—by 79 percent! In other words, the cost of health reform (probably exaggerated by Price Waterhouse Coopers) is paltry compared with the cost of out-of-control medical inflation and the health insurers' own overhead and profit. Drawing attention to this doesn't seem like a terribly bright thing for the health insurance lobby to do.

Now that the AHIP has us worrying about spiraling health insurance premiums, how might we keep this rising cost in check? The finance committee hopes newly created nonprofit health co-ops will do the job, but as Sen. Jay Rockefeller, D-W.Va., pointed out before casting his reluctant aye, there is absolutely no reason to think they will. The only reliable solution, as has been noted here and elsewhere time and again, is creation of a government health insurance program. Even Republicans agree that the government can compete far more aggressively on price than any private health insurer, even when the government effort is required to be self-sustaining, as any public option likely to win enactment would be. The GOP says that's a reason not to enact it. Huh?


The most recent stark illustration of the government's superior ability to curb health costs came when Sen. Rockefeller got the finance committee to amend the health reform bill to put 14 million low-income children who were going to be shepherded into the new private health insurance exchange into the State Childrens' Health Insurance Program instead. The cost? There was no cost. The change will save the government "somewhere between $30 billion and $35 billion," according to Edwin Park of the Center For Budget and Policy Priorities, a nonprofit that tracks budget issues affecting low-income people. You didn't see AHIP put out a study about that.

Actually, nobody said much about it, because it's a little embarrassing that health reform's central idea, the creation of a health exchange within which private health insurers will compete vigorously to sign up the uninsured, is so clearly inferior to single-payer (well, double-payer, since SCHIP is a state-federal program) at cutting costs. Rockefeller wasn't even trying to cut costs! He did it, he said, "to make sure children have all the safeguards they need and deserve." The government, it turns out, is better at that, too.

Creating a public option wouldn't save as much money as moving to single-payer, but it's still a good idea. Does AHIP have any better ideas? If it did, wouldn't we'd have heard them by now?

Update, Oct. 14: On the New America Foundation's New Health Dialogue Blog Len Nichols says that health insurance premiums have for the past ten years been rising faster than the rate of medical inflation. Not general inflation, mind you, but medical inflation. It's true! According to one Commonwealth Foundation study, the increase in premiums exceeded 150 percent of the increase in actual health care costs (hospital fees, doctor fees, pharmaceuticals, medical devices). The Price Waterhouse Coopers study, however, assumes that in the absence of health reform health insurance premiums will merely keep pace with the increase in health care costs. Inescapable conclusion: Price Waterhouse Coopers' stunning admission that without health reform premiums will rise 79 percent during the next decade seriously understates the likely increase.

Update, Oct. 16: Princeton economist Uwe Reinhardt, in his online New York Times Economix column, explains why we should be skeptical about insurers' claim that cuts in government payments to hospitals automatically translate into increases in private insurance payments to hospitals ("cost-shifting"). Reinhardt says it's a "tall tale" that a hospital's costs cannot be controlled by the hospital's management, "but are somehow God-given." Hospitals, he writes, have sold us on this idea in part by calling insurance payments "reimbursements." Reinhardt elaborates on the latter point here.

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