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Life Health > Health Insurance > Health Insurance

Death by a Thousand Cuts

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The Congressional Budget Office (CBO) recently issued a report saying that if the Reid bill becomes law, the price of non-group policies would be about 10 to 13 percent higher in 2016 than it is under current law. The CBO projects that both small and large-group premiums would be about the same in 2016 as they would have been anyway, as the benefits of the bill would offset some of its new costs.

But what is likely to happen to health insurance rates in 2010, 2011, 2012, and 2013 before any of the bill’s benefits kick in for insurance markets and consumers? By delaying the start of most health insurance reform benefits — including insurance subsidies and underwriting reforms — until 2014, the Reid health care bill creates a real risk of unintended political consequences for the Democrats.

On the front end, it probably sounded good to bring in the bill for less than a trillion dollars by collecting 10 years of taxes and only providing six years of the most costly benefits. It may not sound so good, however, as the realization kicks in about what an agonizingly long time it seems to be until 2014 – more than two national election cycles, in fact.

Even before any health care bill, annual health insurance rate increases are back in the 8 to 10 percent range — and often even more for small businesses and individuals. That kind of rate increase has been the norm over the past 10 years and, particularly with health care providers facing cuts and under-reimbursement from government plans because of the pending legislation, there is no reason to see that abating.

To that 8 to 10 percent baseline, you can add a number of reasons to expect even higher health insurance rate increases each year between now and 2014:

  • All of the new taxes and fees the bill creates that begin in 2010. Most notably, a $6.7 billion annual tax on health insurance premiums and a 40 percent excise tax on “Cadillac” health plans are expected to hit almost 20 percent of consumers in group health plans right away. The $6.7 billion tax alone is likely to increase the baseline health insurance trend rate of 8 to 10 percent by an additional 1.5 percent. Additional taxes on medical devices and drugs will also just get added to those products’ costs and will eventually be passed along to consumers in the form of higher insurance premiums and out-of-pocket costs. While insurance companies are sure to eventually pass these annual taxes on to their customers, they will often not be able to do so upfront because most health insurance contracts renew early in the calendar year.
  • The Democratic health care bills also make huge cuts to the Medicare Advantage products–$118 billion in the Senate bill, of which $34 billion is reduced through 2014. Medicare Advantage is very profitable for insurers, particularly the publicly traded plans will need to prove to their investors that they can maintain their overall margins in the post-health-care legislation world. Those lost Medicare Advantage margins will have to be replaced by compensating from their mainstream business.
  • The proposed 2014 underwriting reforms are controversial. While the CBO downplays their impact, it is generally believed in the health insurance industry that there will be increased anti-selection as some consumers wait until they are sick before buying coverage. This means that no insurance executive will want to enter 2014 under-reserved, short on capital, or with thin pricing margins — which gives the industry every reason to get those rates up as high as the market allows before the new rules take effect.
  • Beginning in 2014, under the legislation there will be a three-year $25 billion reinsurance assessment that health insurers will be responsible for collecting from all customers and paying to the government. This assessment is designed to cushion the impact of millions of consumers being able to buy health insurance policies without having to face pre-existing condition and medical underwriting. Any prudent health plan manager will begin to put the money away for that monster hit sooner rather than later.

What is outlined here is not some draconian plot to just pump up health insurance rates. The fact is that every health plan manager — either publicly traded or not-for-profit — has a fiduciary responsibility to keep their health plan in the black and meet insurance department minimum capital requirements, not to mention shareholder expectations.

The Reid bill — as well as the House bill — treats the insurance industry like a piggy bank with one revenue cut, tax, assessment, or mandate directed at them after another. Insurance companies don’t pay premium taxes — they pass them along because they simply do not have the margins to absorb any of it.

So, when the day is done, come the 2010, 2011, 2012, 2013, and 2014 health insurance renewal cycles, there will be lots of bad news passed on to health insurance customers in the form of new assessments and taxes — not to mention as much risk margin as they can manage to offset the expected anti-selection under the new underwriting rules.

Some politicians might see this as a reason to control prices. But the fact is that these are just the consequences of these bills that someone is going to have to pay.

For the Democrats, waiting until 2014 to point to any real gains from their health insurance bill, it just might begin to seem like a “death by a thousand cuts” as every bit of this is passed on year after year.

Robert Laszewski is president of Health Policy and Strategy Associates. He can be reached at [email protected] or 703-727-9517.


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