Why Health Insurance is About to Become More Costly

The ObamaCare law requires the Department of Health and Human Services to establish “essential health benefits” by looking at “typical” employer plans.

Unfortunately, the plans HHS intends to use as a guide are anything but typical. In its Essential Health Benefits Bulletin, the Department of Health and Human Services envisions a regulatory approach that will end up defining essential benefits as those that are “substantially equal” to large employer plans. The proposed regulatory scheme requires that essential health benefits plans be modeled after state benchmark plans, but those benchmarks are created by choosing from the following menu, where largest equals highest enrollment:

  • The largest plan in any of the three largest small group insurance products.
  • Any of the largest three State employee health benefit plans.
  • Any of the largest three national FEHBP plan options.
  • The largest insured commercial non-Medicaid HMO operating in the state.

Those are generally the plans favored by large employers offering rich pre-tax benefits or, in the case of small group plans, by the fraction of small employers who offer health insurance.

People spending their own money on essential coverage seldom choose plans that mimic big employer plans. In many cases, using insurance to buy medical care costs more than paying cash for care. People spending their own money on health insurance substitute cash payment for insurance coverage, in part because they generally weigh their options more carefully than employers spending employee and shareholder money on plans for employees.

Although HHS writes that that “permitting flexibility would provide greater choice to consumers, promoting plan innovation through coverage and design options,” its determination to write regulations favoring plans structured like costly employer group coverage has the practical effect of eliminating people’s ability to lower their costs by substituting the direct cash purchase of care for more generous insurance coverage. It does this by eliminating the less expensive policies favored by people spending their own money in the individual insurance market.

Those who built ObamaCare have historically viewed individually owned health insurance as a dangerous anomaly. By forcing everyone to purchase the bulk of his medical care through health plans with ridiculously extensive coverage of relatively inexpensive routine items, ObamaCare replaces less expensive cash purchase with more expensive purchase via an insurer. This will increase overall health care costs.

Even Jonathan Gruber seems to have belatedly realized this. His firm estimates that ObamaCare will increase individual premiums by 19 percent or more in Wisconsin, Minnesota, and Colorado. Unfortunately, this is likely a lower bound estimate. As Avik Roy has pointed out, Gruber’s report to Colorado¬†officials states that his model does not account for the premium increases that will result from the ban on pre-existing condition exclusions. It also does not account for upward effects of the new premium taxes on insurers.

Comments (14)

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  1. Roget says:

    With the exception of Korean and Japanese steel industries, government fails at innovation and efficiency. It’s a rule.

  2. Alex says:

    This is more evidence that the lawmakers have no idea what they are doing.

    Thanks Linda!

  3. Don Levit says:

    What if a plan offered those rich benefits, even from the first dollar of coverage, yet premiums could still be reduced 60-80%?
    This can be accomplished by having 2 plans, the regular rich benefits plan, and an increasingly paid-up benefits plan. For $300 per month, one can build $25,000 of paid-up benefits over 36 months.
    While still offering coverage from the first dollar, people voluntarily refuse the benefits, thus cutting their premiums by 60% (in effect, having the premiums of a $25,000 deductible plan).
    Don Levit

  4. Nichole says:

    This is going to just put more stress on Americans.

  5. Buster says:

    Essential health benefits are defined as those benefits that match the largest employer plans? Those benefits aren’t essential. Rather, they represent what unions view as essential in collective bargaining agreements. Basically, fringe benefits just reduce take home pay. Yet, labor unions want to be able to point to benefits they negotiated for. This essentially forces workers to forgo cash wages for something they may not want.

  6. August says:

    Don, interesting idea.

    However this would be little different from a high deductible plan. Only this way the insurance company holds the cash instead of the consumer (inefficient). If there was a demand for this plan a freer market would offer it.

  7. Sammy Christianson says:

    Great post! Im glad I found this blog!

  8. Don Levit says:

    August:
    You are correct that the insurer holds all the cash. The insured must use the cash for medical benefits, and surrenders any “medical cash available,” if he discontinues the plan.
    For those “disincentives,” the insurer provides a paid-up policy. If the participant later uses benefits, his paid-up portion would be reduced.
    Don Levit

  9. Robert says:

    I agree, I see this causing more harm than good.

  10. Chris says:

    This is the biggest untold story with Obamacare. The creeping advance of “essential health benefits” has been one of the largest drivers of medical insurance cost inflation, even before Obamacare… and Obamacare makes it worse.

    This is also what comes of a top down approach.

    We don’t need one sized fits all insurance coverage. The role of the government is not to define what insurance must cover, but merely to educate consumers on insurance choices (and even then, private companies could do a better job on education).

  11. Bill Huber says:

    As a person who purchases their health insurance in the individual insurance market I look closely at health care costs. The best resource that I found is a Milliman report prepared for Ohio that estimates that my rate will go up 55% to 85% when the Affordable Care Act is implemented. The primary cost drivers for the individual market rate increases is paying for the health care costs for those people who have pre-existing conditions and community rating. The “Essential Benefits” approach will raise my rates more than a “cafeteria style” approach but the amount is pretty insignificant compared to the primary cost drivers.

    My best case scenario for bending the health care cost curve is for the individual mandate to be repealed/not implemented and for new cost sharing solutions for pre-existing conditions and community rating. As one of several approaches to fund the health care costs for pre-existing conditions the individual mandate was the dumbest idea of the group. The individual mandate plan is to spread the costs for pre-existing conditions over a much smaller group of people. Naturally this won’t work and the individual insurance market is expected to whither away as rates keep increasing to compensate for high health care costs. It makes more sense that we fix the cost sharing problem now rather than in three years when the individual insurance market ceases to exist.

    Although it is difficult for me to say but my next best scenario is for a 55% to 85% rate increase! Naturally this does not bend the cost curve or change the expected health care outcomes for people with pre-existing conditions. This rate increase would increase my annual premium by $2,300 to $3,660 per year. For my family I would be sacrificing my retirement savings to pay for more than my fair share of someone else’s health care. However, things could get much worse. My worst case scenario is for my annual rate to go up to the $15,745 rate reported by Kaiser. This is the rate that corporations and large organizations are supposed to be paying. I am suspicious that these organizations are paying this much since the difference between their rate and my rate is over $11,000. I am sure they noticed. I am sorry but paying $15,745 a year is not a solution and I do wonder why people continue to profess that this as acceptable. They are paying more in one year for health insurance than I paid for my last car. Sometimes I think that the only intelligent life forms in the health care debate are those paying cash for their health care. Regardless if I am forced to pay this amount, the decision is pretty simple. As a healthy person who has gone without health insurance in the past, the logical decision is to not buy health insurance and pay the penalty. I am not sure how this plan is supposed to work when you go out of your way to run off the healthy people.

  12. Bob Hertz says:

    Good ponts, Bill. but you imply that you are getting family coverage for $4,000 a year, which is $11,000 less than corporate plans.

    $4000 a year is awfully low, unless you are 30 years old and have a $10,000 deductible. And there is nothing wrong if you do, but let us know if you wish to.

    Many corporations do pay $15,000 a year for coverage, because they cover a lot of older workers, they offer maternity coverage, and they have lower deductibles.
    A corporation with 1000 workers is bound to get a horrible cancer victim or a premature baby. The huge claims that result will hang over and raise their premiums for years.

    One last point — I am no great fan of Obamacare, but it does have a subsidy program that not everyone is aware of. For example, if your family income was $50,000 and your health premium soared to $15,000 a year, you would pay about $4,000 out of pocket and the government would pay the rest. You would not be worse off.

    If your income was over $88,000 a year, you would have to pay the entire $15,000 premium and you would be a lot worse off.

    Comments welcome.

  13. Bill Huber says:

    Thanks for the comments Bob. My wife and I are 58 years old and our plan covers our 21 year old son. The plan which we purchase from Aetna-AARP costs $349 per month and has a $1500 to $6000 deductible depending on whether it is in or out of network. The lifetime maximum per individual is “unlimited”. Two years ago I compared this plan to the bronze plan offered via the Massachusetts Health Exchange and could not find any significant benefit differences other than maternity coverage. My plan even offers oral contraceptive coverage. Heh, heh!

    So here is my problem. If we decide that $15,375 is our goal we will surely get there. Any idiot can raise prices. However, if we want to bend the cost curve then the goal has to be close to the low cost provider for that state, we need a viable individual insurance market in place to help set prices, we need to compare plan prices across state borders, and we need a workable plan on controlling cost for the high cost patients. My gut feeling is that a single payer solution would work for the high cost patients.

  14. Bob Hertz says:

    To my understanding, the Aetna AARP plan has rates that are graded by state, and you do have be in very good health to get the best rates.

    Also, tbere is a tendency for Aetna to raise rates substantially the longer you keep their plan, so be watchful.

    Overall, I guess that your case shows what will happen when all insurers have to offer guaranteed issue and sll insurers must cover everything.

    It would be cheaper for the nation to let you keep your inexpensive plan, but to tax all of us so that unhealthy people can have affordable policies too.

    If your taxes went up by 1% and you could keep your plan, would that be OK to you?