In an Alliance for Health Reform webinar, "Rate Shock or Not?" on August 13, Tom Miller explains how proponents and opponents of the ACA are setting expectations for the law’s health exchanges too high and low, respectively. Forecasts of the success or failure of the new coverage mechanisms are based on subjective assumptions that vary across studies, meaning that projected outcomes are largely dependent on who is doing the projecting.
ED HOWARD: Tom Miller, you’ve been looking at all of these rate predictions and the projections and, as Linda Blumberg mentioned, we’ve seen headlines about 30- and 40-percent increases in the individual market. We’ve seen headlines in New York that the rates are going to be half as much as they have been. What do we really know now about what the rates are going to be, and when are we going to really know what they are?
TOM MILLER: Well, the short answer to “Rate Shock, or Not" is “Yes, both.” First off, I have to say I am a conscientious objector to the use of the Orwellian term “marketplaces” for exchanges without real markets. I use the old term, which we used to know in the pre-Obama redefinition, as the phrase “exchanges.” In powering up the Affordable Care Act’s exchange grid. I’ll give you a little bit of a wiring schematic, as to the question whether or not the grid is going to have the current flow, like a conductor, in which charges are free to move from place to place—we can call that a market—or perhaps instead an insulator, where the charges are fixed in one place and can’t move. We call those subsidies, regulations, and mandates. The question is what kind of railroad are the conductors running? Well, we may have some brownouts, or blackouts.
A lot of this, of course, depends upon who’s doing the viewing. You may think of the description of exchange effects as depending on who’s narrating the story. Like the Rashomon effect, as in the classic 1950 Japanese film, in which it turned out you could have four different individuals describing a crime incident in four mutually contradictory ways; a problem arises in the process of discovering the truth.
A different way of thinking about this in the political context is as a bit of a political Rorschach test, in which we see different worlds. This slide depiction was one I used before, to indicate whether you’re seeing incentives or compulsion, depending upon how you want view the inkblot: Is this a fair and less costly mechanism, or a more expensive and bureaucratic one?
Let’s talk about how we got here, and what originally set the expectations, for the context of what we thought was going to happen in 2014. It probably goes back to the 2009 CBO projections, artificial in their own ways, which came to the conclusion, when the law was being considered by Congress, that the individual market would see an increase, above what otherwise would have happened to individuals premiums, of about 10 to 13-percent. A lot of assumptions were embedded in that, such as that there would be offsets to the larger expense of the greater amounts of coverage, in terms of benefits provided. There would be lower administrative costs, with perhaps some heroic assumptions on CBO’s part, plus a healthier population mix. All of that also was embedded with assumptions of a full scale Medicaid expansion, pre-Supreme Court decision, and an individual mandate of greater strength than later appears to be the case – all supposedly producing less adverse selection.
Now, that was somewhat challenged, not very successfully at the time, by various private actuaries for hire. PriceWaterhouseCoopers got hammered a little bit for saying that individual market premiums would go up more significantly, based upon a limited set of assumptions. There also was another similar-leaning study by Oliver Wyman. These actuarial studies were somewhat sponsored by the insurance industry, so there were some questions as to exactly how well they would hold up beyond their own artificial assumptions.
Later on, we’ve had some other actuarial studies. The Society of Actuaries has tended to suggest that the per-member, per-month cost in the individual market may go up; one figure was 32-percent, but there are a lot of artificial assumptions, fairly complexly embedded within that finding. You can spin them around however you want to and get somewhat different numbers along the way, and it also depends on which cohort you are looking at. If you focus on younger people, you get higher increases, say, below age 30, or even ages 30 to 39.
The House Energy and Commerce Committee did a survey of about 17 of the largest health insurers. Again, you can go and get them all over the lot, but basically, the takeaway point with a lot of embedded assumptions is that individual market premiums could go up as much as 96 percent for newer business, whereas people who were keeping their current insurance in the individual market would see rate increases of about 73 percent. Again, you can challenge all the assumptions embedded in this, but basically, it is the argument that increased benefits; higher actuarial value; assumptions of a less healthy population, rather than a more healthy population, going into the exchanges; and tighter rating restrictions – all of those factors will drive those costs higher.
A lot of this is not just a difference of opinion, but sometimes-partisan polarization. You can choose your state, you choose your sources, you can choose your assumptions, and you can get the results you want, just like watching cable news, or talk shows.
What are some early state returns around the horn? Linda mentioned the ASPE study; these were the early reporting states in the exchanges, mostly blue ones, I might add – a little bit of the eager beavers interested in presenting a better reporting number. There’s also a smaller set of states reporting early for the small-group employer market, and, basically, they were saying their premiums will be about 18 percent lower. But they all were using a very artificial, CBO-extrapolated baseline, where you first take the average premiums projected for 2016, roll them back to 2014, and then compare them to the lowest silver plan premium. It’s not really a fair comparison, but it makes the ACA exchange premiums look better. Everybody gooses this a little bit, to make it look like it’s somewhat of a better result, depending upon the source of it.
Avalere Health did a little bit more of a balanced survey from 9 states, using the second-lowest-cost silver plan. They found that the expected rates were below the old CBO estimates, but were still higher than the current individual market.
Let’s take a look at some individual states on this front, the Blues, and the Reds. California was an early reporter. Its exchange administrator had a big press release – “Terrific, we’re getting rates that are as much as 29-percent lower in the individual market.” This was an artificial baseline comparison. Everybody plays games like this. What California did was they compared the individual rates to what the rates were in the small-group employer market. I’d like to be able to make those comparisons as well, but it’s not the same thing as apples to apples. Avik Roy, at the Manhattan Institute, did a pretty good job of taking that apart. When you actually look at a more balanced comparison and use, say, the five-lowest premiums in the private market outside of the exchanges, you get very different figures. It shows substantial increases in individual-market premiums for the exchange plans, compared to what was before in the private “outside” market. More interesting is a subsidy cutoff point where you get to about maybe 160- to 180-percent of the federal poverty level, where even with subsidies, you still pay more if you are a younger male, a non-smoker, and below age 30; and even if below age 40, in some cases.
We also had the New York Times editorial page, spreading the news, in New York, New York. “If the ACA can make it anywhere, it will make there.” The Times said how great it was that the premiums were going to come down in New York. Of course, that’s an interesting biased sample. In NY, we have had a very tiny individual market post-community-rating-reforms of the mid-1990s. It’s not hard to improve New York’s individual market, as they did in this case, by assuming that the mandate would hold up, and you bring more people into a pretty dysfunctional individual market.
Maryland just reported some success in its individual market exchange premiums. In this, they did a lot of rate suppression and rate squeezing, with more active rate review and rolling back some initial premium bids. Some insurers dropped out. Maryland has a much more regulated market, and so they’ve got some numbers that look good.
Vermont is pretty much a wash, because there are only two insurers there anyway, so it’s pretty much same-old, same-old story, regarding what they wanted to do politically. In Washington state, if you actually massage the numbers, it turns out their rates were going up.
Now we’ve got some other states where they’re not playing ball with the ACA’s exchange plan, but they still look at the rates as state regulators. These are the soon-to-drop federally facilitated exchanges, or “marketplaces,” -- whatever you want to call them. These are not the formal, final rates, but the state insurance commissioners have begun to say here’s what we are looking at, and we’re passing through. Ohio, which Uwe probably will say is a biased description of this, came up with – well, they brought it down from an initial higher number, and now they’re at 41-percent-higher premiums than without the ACA. In Indiana, the state estimates 72-percent-higher premiums —these are in the individual market, basically, depending on what cohorts you examine. In Florida, 30- to 40-percent higher in the individual market. In Georgia, more interestingly, in terms of spikes, premiums are as much as three times as large, and I think the state insurance commissioner did a fair job on that front, from what I have seen. The Georgia commissioner actually asked for a 30-day delay, saying we really can’t approve these rates, even though they’re justified in an actuarial sense; he’d rather that the feds take it back to the shop.
What we will have to do is wait to see what the real rates are, but the early indications are that advance estimates will depend upon what your assumptions are. Some of those assumptions involve take-up and risk distribution. Does the mandate really have an effect? Who actually goes in to the exchanges -- are they healthy or not healthy? There are difference of opinion on this. The Medicaid expansion -- whether that’s going to be full or partial? Where we are going to be on that front makes an important difference in how much of the bottom part of the health risk and cost tails you might cut off. Pre- and post-subsidy premiums depend upon whether you’re counting all-in costs, or just what the sticker price is to people. Regardless of who pays, there is a crossover point, though, at which even those subsidies, if you go further up above the federal poverty level for income, are not all that generous to the folks. When you get above 200-percent, 250-percent of federal poverty; it does not make enough of a difference.
Other differences involve take-up estimates. Just because subsidized exchange coverage is offered, who is going to buy it? The distribution on the ground could be very different in what’s assumed beforehand.
Let’s take a look at some other variable variables. Pre- ACA, Linda already indicated that basically the more regulation you had in the state, the more likelihood you have a chance to not go any higher in premiums and could have them drop lower. More competition opens up different possibilities to change premiums. Insurer dropout’s are another factor. The effect of low-bid winners in determining subsidy levels, as we saw in Oregon, indicate that what might have been more generous subsidies will turn out to amount to a lot less, if the two low Silver plan bids turn out to be much lower than everybody else.
As each more extreme side of this ACA exchange debate tries to make the worst and best political cases in its messaging, they may be setting expectations either too high or too low. Consider initial snapshots versus future factors: Projecting a static estimate of the first year – 2014 is one thing; the second and third years after that are very different. Uncertain factors include the mix of business strategies of the insurers -- whether they don’t want to run the risks of the “winner’s curse,” or instead believe that by getting greater market share, they will capture loyal customers and expand business later on while adjusting their premiums and products. Will private insurers adopt low-ball bidding strategies, or only selectively engage in exchange participation?
While we’re shuffling subsidies for insurance coverage back and forth, one thing we forget about is that all these subsidies produce other costs. Every time you route dollars through the tax system, you end up having dead-weight losses and negative incentives for economic growth. That’s the political/regulatory version of “administrative costs.”
Finally, are the exchange premium projections benefiting from the recent overall health care cost slowdown? Will that continue and how much does that change some of these projections?
Highlights (lightly edited) from the Question and Answer portion of the Alliance for Health Reform's briefing transcript
ED HOWARD: One thing that hasn’t, I think, been emphasized that I want to make sure that people understand and, for that matter, I want to make sure I understand it, all of the data we’ve been seeing so far on premiums has to do with premiums in states where the states are running their own exchange, is that correct?
TOM MILLER: Well, there’ve been some, really, glimpses, which aren’t official, because the feds, when they finally say what they are going to do in your exchanges, may end up not approving some rates. It’s not the final word, but from some of the states in federally facilitated exchanges, they’ve indicated, at least the ones who are sounding off, are saying the rates look higher to them.
UWE E. REINHARDT, PH.D.: I think the ASPE study had four state and 12 federal exchanges, didn’t it, or three?
LINDA J. BLUMBERG, PH.D.: Yes, they had Ohio in there, Virginia in there. New Mexico is a partnership split, because they’re running the shop exchange. The rest of them, I think, were state-based exchanges. Most of what we’re seeing is that there are differences in state law about when the departments of insurance have to reveal the premiums that have been submitted for approval. Some states say you have to release these right away, and others states can hold them in reserve; that’s why we are seeing different ones come out at different times.
UWE E. REINHARDT, PH.D.: The answer is this should have been active exchanges and passive. An active exchange actually gets premium bids from the insurer and then makes judgments on the, and renegotiates those rates with the insurers. Maryland, for example, did that. A passive exchange will just be like ehealthinsurance.com, a broker that just lists whatever rates they were given, but they themselves, the exchange, won’t actively negotiate the rates. That ultimately drives some differences in the premiums you ultimately see, because I remember Maryland actually, for some bidders, reduced the rates in the end.
TOM MILLER: They also lost a couple of bidders.
UWE E. REINHARDT, PH.D.: They lost to some, yes.
TOM MILLER: One of the effects— as we saw in California with other types of insurance – is that you can suppress rates for a year or two, but if you look at the long-run equilibrium, they end up having to restore them later on, based upon the economics. You can do that for a period of time, and that is something. We need to look at this over several years, rather than what the first squeeze might be, where you say you’re either in or out, and you’re going to take this rate. Insurers with some strategies will say we can take the loss for a year, because we think if we can get loyal customers, then in the later years, they won’t move, and we can move it back up.
ED HOWARD: Which brings me to the first question submitted by one of our viewers, which is, what is a fair length of time to give this part of Obamacare, before judging it a success or a failure? Is there a projected equilibrium point, if not, a projected rate?
LINDA J. BLUMBERG, PH.D.: I don’t know that there’s a magic number. I think that we’re talking about two or three years, here. I don’t expect that the equilibrium is going to take that long to reach, but I don’t think it’s fair to look at the first year, and judge it wholly based on the first year, because there’s information that has to be dispersed, people have to understand how to enroll, all of the IT systems have to get their bugs worked out, et cetera, and the outreach systems have to be in place. I think the first year is going to be, potentially, a little bit rocky, and a lot of variables and things should improve as that year as goes on.
UWE E. REINHARDT, PH.D.: I think it might take even five. Look at when we changed just a rate, we switched from fee for service or usual customer in hospital reimbursement, under Ronald Reagan, to DRGs, and that was a four-year phasing of that. We did a similar thing for physicians; four years, so I don’t think you can fairly judge what really happens until four or five years out, because there’s learning by doing. People learn how to deal with this. People also will learn how to get in the system, and then the regulators will react. I think this is a living thing in progress. I don’t think—even Medicare; there were fixes and changes along. Medicare has never been totally not changed. You have to wait, certainly, until the soccer game is over to see who won. In this one, I say that game will take at least four years.
TOM MILLER: I think among the more active partisans, the conclusions will be in about a day after the exchanges open. There’ll be a rousing success out of the Obama White House, and the tea parties will be saying this is an unmitigated disaster, hell has arrived upon us, let’s scrap it entirely. A lot of built in conclusions are already there, as well as some of the folks who are analyzing this and saying look what it shows.
UWE E. REINHARDT, PH.D.: When you say analyze, these people work in a data-free environment basically.
TOM MILLER: You choose the data you like.
UWE E. REINHARDT, PH.D.: Oh, yes.
TOM MILLER: Then look underneath and look at the assumptions. If you really burrow through assumptions, you can find out what real people think should happen, as opposed to the one that necessarily is arriving.
ED HOWARD: One of the questions about data-free environments that arose for me is who is it who really sets these rates? Is it the companies themselves, is it at the state insurance commissioners; who has the final say, is it the exchanges?
LINDA J. BLUMBERG, PH.D.: No, the insurers set the premium rates. Now, as Uwe suggested, some states like Maryland can come in and they look at the data underlying the rationale for different premiums and they say listen, these assumptions that you’re making are not assumptions that we will accept and so, if you’re going to participate, you’re going to have to participate using this assumption instead, and that’s bringing the premium down. Then, insurers can decide whether or not they’re willing to accept that or not, so they have the final say, at the end of the day, and they are submitting the premiums, initially, based on their expectations of who’s going to come into the pool, and then they’ll have to adjust those in subsequent years, based on what they learn as they go along.
TOM MILLER: We’ve seen that the actuaries, in many cases in this unchartered environment, are guessing and they’re guessing all over the lot. You can see the variation of different plans in the same market, all over the lot, because we are doing things in unchartered territory, and the eye of the beholder says it’s reasonable or not reasonable.
ED HOWARD: I can’t remember which of you mentioned that it’s not just premiums that people have to worry about, with respect to expenses, it’s deductibles, it’s copayments, it’s services that you might need that aren’t covered, or vice versa. How should consumers try to compare health plans on those criteria?
UWE E. REINHARDT, PH.D.: One thing you left out—it’s also the network and insurers entering into deals with hospital and doctors and pharma companies and have a network. What you’re buying is actually access to that network, and if you care about who your doctor is, who your hospital, you do want to care about who’s in the network and not. That’s where I would start to say what are my options when I’m sick, for having a choice. Then, obviously, you do have to look—I would next ask, if worse came to worse, what would be my maximum hit, out-of-pocket, that I would have to take; that’s the second thing you would want to see, rather than deductible coinsurance, et cetera. Tell me my maximum hit, just in case I get hit by a bus. Now, this is unlikely to happen, but don’t let anyone ever feed you actuary averages. If so many people who jump off a building, three survive, that doesn’t mean anything to you, really. You really want to know at the extreme what would happen to me.
TOM MILLER: Well, based on The New York Times today, we don’t even know what the maximum is, because the administration has delayed that for a year.
ED HOWARD: Do you want to say a few more words about that, how important is that?
TOM MILLER: This is because of different deductibles and out of pockets, and about pharmaceutical as well as regular medical spending. There was a little tucked away, because it’s difficult to get computer systems to match. What was supposed to be the maximum ceiling on out-of-pocket costs, starting at 2014, is delayed at least a year, like the employer mandate has been delayed, like a lot of other things have been delayed.
UWE E. REINHARDT, PH.D.: Yes, but we should just expect delays. You have that in business; you build a new plant, you think it’s always done on time? There’s always delays. Think of weapon system, are they ever—
TOM MILLER: This is resembling a weapons system.
UWE E. REINHARDT, PH.D.: Yes, well, is stuff ever delivered on time? Things happen, things are complicated, and a slippage of year, to me, is nothing when you did this. Normandy Invasion probably slipped too, a few days or a month; these things happen but, as you say, Tom, somebody there will then declare failure or not, over something that’s really rather trivial.
ED HOWARD: We’ve talked almost exclusively about individual markets. There’s another exchange that is going to be operating, come October 1st, and that’s the so-called shop exchange, the small business exchange in each state. Is there as much controversy about what’s going on on that end, or that much visibility? I haven’t heard a whole lot about what the small business exchanges are going to look like, and what they’re going to be charging, and what their anticipated enrollment is.
UWE E. REINHARDT, PH.D.: Are they going to be ready October 1st? I thought that was—
TOM MILLER: It depends on the states. The feds say they’ll have it, but a lot of the states have been rolling it back; Connecticut is one example.
UWE E. REINHARDT, PH.D.: If they can, I think.
TOM MILLER: Well, you can roll anything back under this law.
LINDA J. BLUMBERG, PH.D.: Well, what’s interesting is that the federal government decided that the employee choice, the component of the law that is going to allow workers whose employers participate in the small business exchange to make choices around an assortment of plans. They are delaying that in all the exchanges run by the federal government. The states that are running their own also have the opportunity to delay for a year, if they want. However, all the ones that we’ve spoken to are moving forward with it, because they see that choice as the way to attract more small employers to participating in the shop. It’s one of the value-addeds of it. I think we’re going to see some very interesting kinds of dynamics in some states, whereas as I think the fact that there’s a delay in choice for workers in the federally run exchanges, until 2015, is going to make them somewhat less of a draw in those states.
TOM MILLER: You’ve got two other facts. It seems like there’s less demand for the shop exchanges. Unless you’ve got very attractive subsidies—we even saw in Massachusetts, an unsubsidized exchange, or connector, for the small business market doesn’t draw many people. There aren’t that many efficiencies in it. We’ve also got the one-year delay in the employer mandate, so the folks who are on the fence and haven’t offered can be on the fence for another year. ….
ED HOWARD: I wanted to ask our panelists what their estimate is of the impact of something that was just mentioned in passing, and that is we have a Supreme Court decision that limits the ability of the federal government to impose Medicaid expansion on the states, some states refusing to do it; some states are not. To what extent will the impact on the exchange reflect the fact that there are reluctant states, both in expanding and in extolling the virtues of the Affordable Care Act?
LINDA J. BLUMBERG, PH.D.: Well, I think there’s going to be some significant differences, in terms of the impact on coverage across states. When you’ve got a very active state that is invested in their exchange and having it running, or even in a partnership where they are running a piece of the exchange, or taking on some responsibilities, then there’s a very different investment of the state in following through and making sure people enroll and participate. We have a very uneven distribution of funds under the law. For states that are running their own exchanges or taking responsibility for consumer outreach and enrollment, they’ve a lot more funds for bringing people in, and providing assistance, and educating them about the law, than in states that are not taking that role. There is discontinuity in the states that are not expanding their Medicaid programs, while a little slice of those folks will end up being eligible for the exchanges, and we’re going to have this very strange, really perverse situation, where somebody who is poor is going to come to the exchange, potentially looking for help, and they’re going to be told that they’re too low income, they’re too badly off in order to get help; we’re only helping people who are higher income.
That is a situation that’s going to lead to more uncompensated care remaining in those states, which is a burden on hospital systems. It’s also going to be leading to more confusion about who’s going to be able to participate or not. I think that that’s going to play out in coverage effects, and it may also play out in terms of just making sure that all the people who know that they are eligible for assistance, really know what’s there and how to access it.
UWE E. REINHARDT, PH.D.: In terms of economics, it is surprising thought—there’s a lot of money on the table, sent to the feds, if they do the Medicaid expansion. Right now, for the first few years, it’s 100-percent financed by the feds, but then 90-percent financed. My hunch is that eventually, there will be local pressure from people, particularly the counties who are now picking up the tab for the uninsured, to bring this money to the state, because they say look, we’re sending money to Washington, but we’re not getting this money back. Ohio, I think Governor Kasich actually wanted to—
TOM MILLER: He wanted to do it and state legislature won’t let him.
UWE E. REINHARDT, PH.D.: Won’t let him, yes.
TOM MILLER: Which is what happens, a lot of these Republican governors leaning one way, and the state legislatures going the other way.
UWE E. REINHARDT, PH.D.: Because you’re basically saying good-bye to a lot of money, so I find—my betting would be five years from now, some of these governors who now resist it will cave, and take the money.
LINDA J. BLUMBERG, PH.D.: I think that’s right.
TOM MILLER: It’s bit more of a Rubik’s cube, because even in terms of—I’m going out on a limb here against my friends—if you look at the Republican governors who have opposed the Medicaid expansion, you get a creeping desire that maybe these exchanges aren’t that bad, because we can basically use federal money, rather than the state portion of the money, in order to pick up, at least that tier from 100- to 138-percent. We don’t know what the longer term dynamics on that aspect would be, but this Medicaid swing makes a big difference, because part of what is being assumed as the cross-subsidy by younger, poor, and healthier people paying -- if you have the Medicaid coverage taking that out of the exchange market, you’ve got a thinner tier for those people who are then, in fact, going to be paying higher rates as younger and healthier, in order to subsidize everyone else. It works in several different directions.
I’m just throwing a wild card into it, because I have some involvement in it. An Oklahoma lawsuit just got past a standing challenge, so that’s still moving, which would impair the potential of the federal exchanges and the federal tax subsidies, subject to what happens later on this year, in a motion for summary judgment.
ED HOWARD: Could the lack of enthusiasm on the part of the state governments for the exchanges limit enrollment in them to the extent that we see a death spiral in some of these places?
LINDA J. BLUMBERG, PH.D.: I don’t think you’re going to see a death spiral, because the subsidies help to counteract that, and so, even when you see, potentially, in the first year, higher average premiums in those states that aren’t being aggressive with their outreach and enrollment efforts, the subsidies offset those higher premiums to a significant degree. I think that it’s a longer-term issue though, in terms of the cost for the federal government, of those subsidies, and the fact that you want to push forward with getting people insured, and reducing on compensated care, and providing affordable access. I think it’s important to keep in mind too, as I think Uwe was alluding to, is that even in the long term, when the states have to pay up to 10-percent of the cost for the Medicaid expansion, this is an excellent financial deal for the states, and they put very little money in and get a huge amount of money back from the federal government. It is not a fiscally responsible step to take, to not do the Medicaid expansion for your state, although I do believe that, over time, those decisions will change. It’s just unfortunate that it’s such a politically charged, as opposed to economic rational decision-making.
TOM MILLER: It’s amazing that people who live in states don’t pay federal taxes; that’s always a one-way deal, that this money just comes from the federal government, and they haven’t actually paid for it as federal taxpayers. Leaving that aside, we’ve got a skewed sample, in terms of what will be the outreach in aggressiveness of pushing these exchanges, because in the state-based exchanges you’ve got a lot of funding, a lot of grants in order to do all this type of stuff. In the federal facilitated exchanges, they’re running on fumes, in terms of being able to do this. They’ve raided every other part within HHS in order to transfer funds over, but they really don’t have the power on the ground to get the people lined up on this. You can get a much slower take up in a lot of the federally run states than you will in the more enthusiastic and aggressive state-administered ones.
ED HOWARD: We seem to have a predominance of questions concerning younger folks.
TOM MILLER: They’re the folks who are paying for all this.
ED HOWARD: How likely is it that younger consumers will be assisted by subsidies, and therefore, if it’s a high proportion, won’t younger consumers benefit from subsidies and cushion some of the sticker shock? We talked a little about this, but is that a substantial factor, or is that margin?
UWE E. REINHARDT, PH.D.: I think it would be a substantial, because a lot of younger people are also at the lower range of their lifetime income stream. I think it would be quite substantial, and given they have the subsidy, as Linda said; I think a lot of young people, when you talk to them actually do want to be insured. It’s just in that market that has existed so far, it was just forbidding to get insurance, or they sold you products that really aren’t insurance; sort of a car with three wheels. I think there’ll be a substantial number of young people who will get subsidies, who will join the pool, and probably, as Tom says, use the bronze plan, initially, and that, we should understand, will happen.
LINDA J. BLUMBERG, PH.D.: Those folks, the younger adults, are also eligible for purchasing catastrophic plans. They can’t use the subsidies to do that. Those are lower cost, plan options for them, as well. We estimated, of young adults in the 21 to 27 year-old range, that we estimate to enroll in the exchange, over 90-percent of them have incomes below 400-percent of the poverty level, so that they be eligible by income for financial assistance.
TOM MILLER: But only a smaller share, though, were getting substantial subsidies. You get in to the 300, 400-percent range; they’re not getting much of a subsidy, after all is said, and done.
LINDA J. BLUMBERG, PH.D.: Yes, but you’re well over—80-percent of them have incomes below 300-percent of poverty, where the larger subsidies are available, so it’ still very substantial.
TOM MILLER: There’s a built-in contradiction in this type of description though, because we start up by saying the way we’re going to make this work is we’re going to get all these deadbeat young kids to pay higher premiums, it’s good for them. They’re going to be able to pay for all the sick and the unhealthy, and that’s going to give you this surplus to do the cross-subsidy. Then we go ahead and say, oh, you’re all going to be subsidized anyway, so don’t have to pay anything more. Basically, it’s the taxpayers, if this all works out, who are taking it in the shorts and have to pay for it. The costs don’t go away. You can move them from under one rock to another, and think that someone else is coming out ahead, but when you add them all up, it’s a more expensive system, which is going to cost some more money and people are going to have to pay for it. Maybe there will be one step removed, but they will still be paying for it, even though they thought they were being subsidized.
UWE E. REINHARDT, PH.D.: Well, I wouldn’t call that a contradiction. I’d call that clever, because it isn’t necessarily clear to me that it’s fair that these young people who happen to join that insurance pool would have to subsidize older people. I think it’s actually very good that we’re saying, but we’re not asking you to do that all on your own. We, the general taxpayer, are going to contribute quite substantially, and this is just one vehicle to get general tax money to subsidize low-income people who should have insurance. I think, in fact, there, I would give the designers a good grace—
TOM MILLER: We’ve already given them more Medicare, Social Security, and student loan debt. Do we have to add more to it?
UWE E. REINHARDT, PH.D: A lot of them are pretty hard hit, believe me.
ED HOWARD: Let me move away from young people, specifically, to one question that looks to me, from a lawyer’s point of view, like it might be a good economist question. This person asserts that he believes the main determinant of consumer behavior in the exchange is going to be price, maybe even more so than today, and that that would tend to push costs down; competition. Do our economists on the panel agree?
UWE E. REINHARDT, PH.D.: Well, an insurance company has, really, two cost components. One is cost they themselves incur in their operations, and the other one is basically, what they have to pay for healthcare. What they have to pay for healthcare, it’s not clear to me, that having more insurers in a given market will lower the price of healthcare, because you have a given hospital now has a lot more insurers, each of them weak visiting that hospital. I would expect, for that price is to actually to go up, if anywhere. Where you could have some saving is in the individual market, the fraction of the premium that went for marketing, administration, and profit, was certainly north of 30-percent, but I know the Council of Affordable Health Insurance, which represents them, was claiming up to 45-percent should be allowed. Forty-five-percent; it’s almost half the premium.
Now, you would think that a good exchange, if it’s well run, should lower that cut, that haircut from 45-percent, to what is it, 80-percent, which is what, under the law, is all that can—or 20-percent is all they can take. In other words, they’re supposed to pay out 80-percent of the premium in the form of benefits, and can blow only 20-percent. That’s a cost saving, in my view, that should—in your—to the insured. I’m not sure that having more insurers in a given market would lower the cost of hospital care, physician care. I think you have to use other instruments to get that done.
LINDA J. BLUMBERG, PH.D.: The other thing I would add is that when you learn about what’s perfect competition, and competition in school, being taught economics, some of this, the cornerstones they tell you was that the product has be identical, and the information has to be perfect. One of the things that we know about the non-group marketplace is that the products are not even comparable, person by person, in the same plan, because they can vary the benefits and the cost sharing, et cetera, based on your own individual characteristic, and the information has been terrible. It’s been very difficult to get pricing information, and to get information on the description of the benefits before you buy the plan. What the new exchanges are going to do, that can promote greater competition among insurers that are out there, is it’s making the products more comparable, so people will know that they are not all perfectly identical, but they’re much more looking at apples to apples, when they’re comparing. They’ve got these much more easily accessible information.
No more is the insurer going to be able to say we’re not going to give you the plan document and the description of what’s in this plan that you’re buying until you actually enroll. I even had someone that I was helping the other day buy insurance where the insurer, a large one, not a small one, told her that they would not tell her the final price of what she was buying until she paid what she had been paying the year before, gave them her credit card. Once she was enrolled and had paid, they would tell her what the price was. That kind of stuff is not allowed under the Affordable Care Act, and you’ve got much more information to be comparing apples to apples, and people can compare on price better, and on the networks, and on the benefits, and then make the decisions about the tradeoffs they want. I do think, in some cases, that’s going to promote greater competition than what we’ve seen.
TOM MILLER: We’ve seen some improvements in the transparency situation with healthcare.gov, what GAO’s doing now, which is good to get the prices more widely available to people. The point of going beyond that, though, is where you begin to censor what that competition can really do, once you know what the prices are, where you say you can only operate within these certain bounds; only these products. We’re going to set a higher floor that you can’t go beyond, if you want to buy something less.
We don’t have perfect competition almost anywhere; that’s a mythical construct. We can have better competition, and it’s certainly true that, in this environment, people are going to be even more sensitive to price, because it’s going to be much more evident and available to them.
I would just like to take one distinction though, with what Uwe said. I’ve read some of your older pieces as well on this. These expense ratios, medical loss ratios, if you actually looked at the work in the field, among what the real costs were, even in the individual market they weren’t that high, in the small group market. Look at some of Doug Sherlock’s work. It turns out that older studies overstated what the amount of the expense ratios was. That’s why the MLR didn’t have that big an effect, even though it does some harm on the side. It was somewhat of a sideshow for window dressing.
ED HOWARD: We’re running out of time, unfortunately. I do want to, first of all, prepare our panelists, if you have the 30 seconds valedictory address, you can prepare it at this moment. I want to thank the panel, but not before I extract from them one last bon mot or here’s what to watch for in the coming weeks; seven weeks from today, train wrecks, on time arrivals, a base for a three-year or a four-year observation. What should we be looking for?
ED HOWARD: Tom, do you expect to be shocked or awed?
TOM MILLER: Both, as usual. I think the stuff that’s going to matter is whether the software works. You put a virus in the wrong place and you’ve got a big meltdown. Who enrolls in these exchanges and what the mix is. In this country, we can tolerate a lot of bad government, and we’ll continue to, so I think it will exist for a long period of time, in one form or another. The payments, the costs are going up. Just because the payments are reshuffled doesn’t mean they’ve been reduced. Now, if some other things happen, that might be good, but the exchanges by themselves aren’t really reducing any costs. Uwe talked about premium joy. I think more of Almond Joy; sometimes you feel like a nut, sometimes you don’t.