ObamaCare Has Already Driven Up Private Health Insurance Premiums

The Obama Administration has been attacking perfectly credible studies commissioned by AHIP, BCBSA, and WellPoint explaining why the proposed “reform” will drive up premiums for privately insured Americans. Yet, let’s not lose track of the fact that the Administration and the Congress have already taken steps to drive up the costs of private health care. The media have started to note that rate increases for 2010 will be higher than they need be, because of government intervention earlier this year.

The so-called stimulus bill, passed in February, significantly expanded the number of people dependent on Medicaid or State Children’s Health Insurance Programs (SCHIP) for access to medical services. It also introduced even more perverse incentives for COBRA, by which newly unemployed workers can still claim benefits from their former employers. Back in February, I wrote a short paper explaining that these steps would increase premiums for private health insurance. Those predictions are now being borne out.

With respect to Medicaid and SCHIP, the problem is the cost shift (or the hidden tax), which government payers impose on privately insured Americans. Because the government pays below-market rates, providers shift costs to private payers. Assuming a cost shift of 15 percent, I estimated that private insurance costs would go up by about $18 billion as a result of this expansion. The New York Times recently reported that small businesses are seeing rate hikes for next year of 15 percent. At the bottom of the article, it admits that government underpayment, and the cost shift, are a factor. (15 percent is on the high side. Towers Perrin recently announced that it expected premiums for all businesses to go up by 7 percent next year.)

COBRA allows former employees to continue on their former employer’s plan for up to one year by paying 102 percent of the premiums and another 6 months at premiums of 150 percent. It has always suffered from adverse selection since employees can wait for two months before deciding whether to exercise the option, for which they can get back. The rational choice is to remain uninsured until the end of the COBRA eligibility period. If you are sick, then sign up for COBRA. If you are healthy, buy a low-cost policy in the individual market. Unsurprisingly, the medical costs of those who elect COBRA are almost half again as much as those of remaining employees.

The stimulus bill made this worse by subsidizing COBRA coverage by 65 percent. Only an idiot would buy an individual policy if he can get COBRA for 1/3 of the price! Forbes reports that COBRA beneficiaries have doubled this year, from 1.5 million to 3 million persons, and they are incurring medical costs two times greater than their premiums, according to Citibank securities analyst Charles Boorady. WellPoint, Inc., a large insurer, reports that COBRA costs have gone up from 1.6 percent to 2.2 percent of medical costs, and it will pass those costs onto their group policyholders.

We don’t have to wait to see the costs of ObamaCare: They are already here.

Comments (3)

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  1. Bart Ingles says:

    I have a hard time attributing much of the higher cost of COBRA users to the 63-day waiting period. A small fraction, maybe.

    And I have a hard time believing a significant number of people actually attempt to game the system by waiting two months before choosing between individual coverage and COBRA. More likely, people are signing up for COBRA at the last minute after attempting to purchase cheaper coverage and having their applications rejected at the last minute.

    Traditionally, the high cost of COBRA is an obvious artifact of the guaranteed issue/community rating rules for employer-sponsored insurance (ESI), coupled with the loss of the tax exclusion for people who are no longer working. With no tax incentive to keep them on the company plan, people who can find cheaper private coverage will do so, leaving higher-cost people on the group plan.

    I would expect the number of COBRA beneficiaries to rise during a recession, so I don’t know how much of the rise to attribute to the tax credit. But I agree that a 65% credit was excessive (not to mention capriciously applied). A much smaller, more broadly applied credit would have made more sense to me; perhaps one that didn’t have all the ridiculous eligibility dates (I’d rather have seen a permanent 20% credit).

    The tax credit should have had the effect of reducing average per-person medical costs of beneficiaries, by inducing healthier people to remain in the group, who otherwise would have moved to private plans. If the opposite occurred, it could only have been because high-cost people stayed on the rolls who otherwise could not have afforded coverage at all.

  2. Bart Ingles says:

    P.S. The current tax exclusion is equivalent a tax credit of up to 43%. So, ironically, there should be more selection bias among current employees than among COBRA beneficiaries receiving the 65% credit.

  3. Larry C. says:

    This is a very good post. It’s a complicated subject. But Obama should have to take the rap for federal policies he’s supported that have driven up premiums.