Friday, April 2, 2010

Health Reform: The Sequence of Events

It will take some time to understand what exactly the health reform legislation means for the average American. Major reforms do not take effect until 2014, and at least four Congressional sessions, each with the power to modify the law, and a Presidential election will occur before they happen.

That said, there are changes that go into effect immediately, and their impact may influence the law's ultimate success or failure. Some of these changes raise costs for those who are currently insured, some provide financial assistance, some provide access. The net impact of these changes will be a mixed bag, with winners and losers.

Among the changes that will immediately increase costs are a prohibition against lifetime or "unreasonable" (definition TBD) caps on coverage. Some existing products rely on these coverage caps to lower premium costs. Another change that will increase costs is a requirement for first-dollar coverage of preventive services. Many cost-sharing products will have higher premiums due to this change. A third change is a requirement that businesses provide equal coverage for all full-time employees. It is unlikely that this change will lower costs for employers, many of whom are already booking liabilities associated with tax law changes included in the final bill.

On the other hand there are changes that provide financial assistance or access to coverage, some of which may or may not raise costs. A temporary high-risk pool for those with pre-existing conditions who have been uninsured for six months or more will begin to address the adult pre-existing condition problem. Children with pre-existing conditions must be covered by insurers, and their inclusion in the risk pool will no doubt be a cost problem. Small business will be eligible for tax credits to offset the cost of providing insurance. Except in cases of fraud so-called "recissions" of coverage will be prohibited.

I am afraid that the net impact of all this may create more losers than winners, since most people are insured and will see their rates rise. Remember that everything mentioned above happens on top of an annual medical cost trend that is running at two to three times the rate of inflation.


  1. "I am afraid that the net impact of all this may create more losers than winners, since most people are insured and will see their rates rise."

    Bruce, what you say is true. But if we followed that logic, then we would have to conclude that the best policy would be to cancel all health insurance and return all premiums. Since most people are healthy, most people would be better off!

    People don't purchase health insurance (or any kind of insurance) expecting to better off. On average, they will lose money. What they gain is protection. The key question that should be asked is whether legal protection against potential rescission, pre-existing conditions, and other ways of falling through the cracks is worth an extra X% in premiums or not.

    I suspect that once people get used to these protections, few will want to give them up in exchange for slightly cheaper premiums.

  2. Paolo: I don't dispute the value of the reforms. The problem is that the law authorizes them without doing anything about underlying medical costs while in fact making the situation worse with new health care taxes. I thought the overriding problem was affordability. Apparently not.

    On the value of insurance, one of the frustrating aspects of the current debate is a misunderstanding of what insurance is and should be expected to do. People generally buy insurance to protect them from episodic, unknown events. The insurer charges a premium to assume the risk of the unknown. Known problems are not insurable. They are pay as you go. Many of the currently insured may not think the trade-off is worth when the risk pool worsens, especially given the President's assurances that rates would not rise for them.

  3. "People generally buy insurance to protect them from episodic, unknown events."

    That's exactly right. And some of the unknown events that many people would love to be protected from are unexpected rescissions, losing portability after getting sick, losing insurability due to temporary adversity, etc.

    Guaranteed issue provides you with an additional level of security. It's essentially long-term social insurance protecting your ability to purchase a health insurance product. There is some value to it. It polls consistently well and even the HCR repeal movement says that it will not change this part of reform. Of course, there are also costs and responsibilities that come with it. Voters will have to weigh the costs/benefits and make the final decision.

    As to affordability, it is extremely important, but it is not the only concern that people have. Lowering HC costs by 10%, 20%, or 30% is not going to help a family get insurance for a newborn who needs a liver transplant.

  4. Paolo: I think we are talking past each other a little. I don't disagree about recissions, portablity, affordability, etc. What I am trying to say is that we are being unrealistic if we think that reforming the insurance market to accept all comers does not have financial consequences. The only way to implement these changes without raising insurance costs (or the federal deficit) would be through cost savings that are sufficient to afford them. The bill has not done this.

  5. Bruce, I agree with almost everything you say. Adding sick children to insurance pools and banning lifetime caps certainly have financial consequences, and I couldn't agree more on the fact that the public is generally clueless about these financial impacts. An example is all the recent talk about repealing the mandates while retaining the ban on pre-existing conditions.

    I agree that health reform should attempt to make premiums more affordable. However, I also think that some changes that increase premiums by some amount may be appropriate when the benefits far exceed the additional cost. For example, the 2010 change to ban pre-existing conditions for children has obvious benefits and it's hard to see how adding a small fraction of sick kids (a population that is generally healthy and not self-selecting) could add significant costs to the overall system.

    For other items, a similar cost/benefit analysis should be done. Some will come ahead, some won't. Congress will surely be changing things over the next decade.

  6. Paolo: Yes. For instance, states like Massachusetts adopted market reforms some time ago, and health care costs are much higher than in many other states. With the passage of the Massachusetts health reform plan costs have become an even bigger problem, threatening to undermine the reforms. Like the federal bill there was no attempt to rein in medical costs as part of the health reform legislation. We have struggled to address costs, and the level of frustration is so high that the Governor is now imposing unilateral caps on insurance premiums.

  7. Bruce: Massachusetts had higher costs than most states (and higher medical inflation) even before the 2006 reform. I'm not sure there is much causation here.

    Regarding premium caps, I'm curious to know your take (perhaps in another post) on what insurance companies could do to restrain provider prices. Could they use the premium caps (assuming they stand in court) to renegotiate better terms? Could they coordinate with each other to extract better pricing from providers? Should prices be set by an independent board?

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