Politics, Math and Premiums

Math. Can’t live with it. Can’t live without it. We all like things to “add up.” We want ledgers to balance. And some folks even believe numbers don’t lie.

But when politics joins the equation the math gets a bit slippery. OK, they get a lot slippery. One accepts that politicians and pundits will perceive the same event quite differently (if only to have something to argue about). But math is pure, right? 2+2=4 and if it doesn’t somebody is selling something – or Congress is in session. (Both cheap shots, but you get the idea).

Which brings us to an interesting Politico story in which David Nather does some fact checking concerning claims being bandied about concerning the impact of the Patient Protection and Affordable Care Act on premiums. Mr. Nather does an excellent job of showing how both Democratic and Republican are playing the numbers game.

President Barack Obama, for example, claims that the PPACA will lower premiums. Mr. Nather notes that while some supporters of the PPACA claim the law may reduce the rate of increase, no one is claiming premiums are going down any time soon. Mr. Nather cites an HHS report claiming annual premiums will fall by as much as $2,300 thanks to the PPACA, but that’s from where they would be without the reform bill in 2014, not from today.

Republicans fare no better (or worse, depending on your point of view) when it comes to juggling numbers. GOP lawmakers have cited the spate of recent rate hikes as evidence that the new health care reform law is already increasing premiums. However, even some of the carriers raising rates exonerate the PPACA. For example, Blue Shield of California has gotten a lot of attention for rate increases of as much as 59 percent on their individual policies (although it’s amazing how few stories mention that the average rate increase is dramatically less). Republicans blame health care reform for this hike. Unfortunately for their cause-and-effect claims, Mr. Nather reports that Blue Shield has said “the increases ‘have almost nothing to do with the federal health reform law. These rates reflect trends that were building long before health reform’ including higher prices demanded by health care providers, more use of health care, and healthy people dropping their coverage because of the bad economy.” How inconvenient.

Mr. Nather concludes his fact checking by citing a Hewitt Associates’ research indicates that “employers will see their premiums go up by about 8.8 percent in 2011 – and about 1 to 2 percent is because of the law.”

Maybe in 2011, but there’s a lot more to come from health care reform and the impact of the PPACA on premiums is only going to grow. Consider:

  1. The Patient Protection and Affordable Care Act imposes new taxes on insurers. Insurers, in turn, will do what companies always do: pass this additional cost of doing business onto their customers, in this case, through higher premiums.
  2. The PPACA also raises taxes on non-insurers such as makers of durable medical equipment. They will pass this cost along to their consumers and, to the extent these added costs are covered by insurance, the result will be higher premiums.
  3. Today it’s not uncommon for young people to pay 1/6th of the premium charged to older insureds. The PPACA reduces this ratio from 6-to-1 to 3-to-1. Let’s assume carriers will compress the premium spread by moving toward the average (as opposed to converging on the highest premiums). For 60 years olds the result would be a premium reduction; for 20 year olds the cost of insurance is going up.
  4. The new health care reform law requires carriers to offer “essential benefits” (yet to be defined) and offer plans with specified actuarial values. This will eliminate many lean, low-cost plans from the market, increasing the average premium of all plans offered.
  5. Many expect the PPACA’s medical loss ratio provisions to restrain future premium increases. However, as I’ve written before, because the MLR is stated as a percentage of premium dollars that must be spent on claims and health improvement, the result may be to encourage carriers to eliminate lean, low-cost plans and focus on more expensive offerings. After all, 20% of a $300 premium plan provides twice as many dollars that can go to administrative costs and profits as 20% of a $150 premium plan.
  6. Supporters also claim the exchanges will help drive down premiums. By driving a hard bargain with carriers the theory is that prices will come down. Maybe, but at least 80% of premiums are going to pay doctors, hospitals and other medical providers. Exchanges can be tough with carriers, but they’re addressing the smaller part of the premium dollar. Yes, the exchanges may wring some administrative expenses out of the system, but over time medical inflation will erase any of those savings.
  7. While there are provisions in the PPACA aimed at restraining medical costs (really, there are) most are pilot and demonstration projects or studies whose impact. Their impact, if any, will not be felt for many years.

In short: there’s a lot of factors in the PPACA which will tend to drive up premiums. There are far fewer that will tend to lower premiums. So even if the numbers take a vacation from reality, logic would lead one to conclude that the new health care reform law will drive up premiums.

At least that’s the way I add things up.