Projecting Premiums Under the New Health Care Program (Warning! Long, and Pretty Wonky)

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The Atlantic takes Columbus Day off, so I am late to the game on the dueling analyses of future health care premiums.  A PWC report commissioned by the health insurance industry says that premiums will skyrocket.  Meanwhile, Jonathan Gruber of MIT says no, they'll plummetEzra Klein says it's hard to say who's right.  I don't find it hard to say that both analyses have serious problems.

The liberal blogosphere has made much of the fact that the PriceWaterhouseCoopers report assumes that the excise tax is applied to plans, rather than estimating the change in behavior.  This is a completely defensible choice, because there is no good way to figure out how much behavior is going to change.  The CBO does the same thing when it refuses to score costs--or savings--it regards as sufficiently difficult to calculate.  Unless you have a good data set on the corporate income elasticity of healthcare benefits, any number that you assign to this change in behavior are simply a wild assed guess. 

But that's going to bias PWC's numbers upward, which they sort of forget to mention.  How much?  By much less than people may think just reading the complaints.  This quote from PWC has been extensively highlighted:

We have estimated the potential impact of the tax on premiums.  Although we expect employers to respond to the tax by restructuring their benefits to avoid it, we demonstrate the impact assuming it is applied.

Reading this, you might think that everyone is going to structure their benefits to get around this tax.  But the CBO expects us to collect quite a bit of money from this tax.  Interestingly, we have some insight into the thoughts of the CBO and Joint Committee on Taxation on the income elasticity, because the Baucus bill changed two things about the excise tax between proposal and final amendment:  it increased the excise tax from 35% to 40%, and it eased the threshold for retirees and workers in high risk professions.  The net change is less than $14 billion over the ten years.  By 2019, the tax is still supposed to be collecting over $45 billion a year. 

Even if you assume that all of the change between the original and the amended bill came from the increase in the excise tax--and it most definitely doesn't--this implies a relatively small change in behavior on the part of companies even for a sizeable increase in the excise tax.  If the change in behavior is big enough to actually invalidate the PWC analysis, then we're screwed, because we just opened up an annual hole in the program of $50 billion or so.  I'm more worried about the fact that they estimated the prevalence of "Cadillac plans" from COBRA data, since I can think of a bunch of ways in which the COBRA sample might not match the general population of people with employer insurance--but then, I don't know how the CBO or the JCT produce their estimates, so it's hard to complain too much.

(As an aside, wouldn't it be great if we made the CBO and the JCT show their work more?  An easily accessible trove of subtables would now be easy to post online, and it would be wonk heaven . . . )

PWC estimates that the Baucus bill will increase large employer health insurance costs by about 11%.   5% of that is supposed to come from the excise tax.  (Other employers also take a 5% hit).  How much should we shave from this to account for the change in employer behavior in response to the excise tax?  That is hard to say.  But here's one possible way you could calculate it.  The National Coalition on Healthcare cites the Robert Woods Johnson foundation as saying that under current law, total employer health care costs could reach $850 billion in 2019.  The $46.3 billion that we are expecting to raise that year from the excise tax is . . . 5.4% of that.

Of course, employers share costs with their employees; on average, they pay about 80% of the total premiums.  So bump that number up to $1.1 trillion, in order to account for the employee share.  It's still 4.3%.  This suggests that calculating dynamic effects for the excise tax would lower PWC's final estimates only slightly.

There are other complaints:  PWC anticipates that Medicare cuts will result in cost-shifting to the private sector, which is questionable, and impossible to estimate accurately.  But that's not the lion's share of the cost increase.  Most of the premium increase they estimate result from things that we pretty much all agree are going to happen:  taxes are going to be levied on insurance companies and various providers, and passed through to the customers; and there is going to be adverse selection in the insurance market without a strong enough mandate.  I think it's pretty hard to argue at this point that the mandate is strong enough--the Massachusetts penalty now is higher than the Baucus penalty will be in 2016.  But I'm sure there are plenty of people willing to tell me why I'm wrong.

So how does Gruber get such a different result?  For one thing, he looks at the cheapest possible plan under the new structure.  This is not unreasonable, because my understanding is that the uptake of the premium (silver and gold) packages in Massachusetts has been pretty limited; most people take the cheapest premiums.  These plans have high deductibles and co-pays and limited doctor networks, so of course they cost less.

This analysis is slightly problematic, because he uses the Baucus bill's target of a Bronze plan worth 65% of the actuarial value of the most expensive plan.  The problem is, there are hard limits on how much cost sharing these plans can engage in; they cannot have out-of-pocket expenditures higher than the HSA limits (plus a health care inflation index), and small employers, who are expected to purchase a number of these plans, cannot offer any plan with a deductible higher than $2,000 for individuals, $4,000 for families.  So these calculations do not necessarily represent the experience that most people will actually have in the health care market.  But I don't know how you model that.  Right now, it's my understanding that the average private policy has a deductible about $3,000 for individuals, so maybe it doesn't matter.  I just don't know.

The other problem is that he makes some strong assumptions.  For example, he assumes that the actuarial value of a "young invincible" plan is .5, versus .65 for the "Bronze" plan.  But as far as I can tell, the "Young Invincible" plan is the bronze plan, minus preventive care.  But catastrophic coverage insurers routinely throw in cheap preventive care visits as a freebie, on the grounds that an annual checkup may save them a pricey hospital visit later.  So it's not clear how much these policies will actually save.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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