How Obamacare Dramatically Increases the Cost of Insurance for Young Workers In 2009, during the height of the debate over Obamacare, the law’s architect, MIT economist Jonathan Gruber, was all over the op-ed pages, talking about how the bill would reduce the cost of health insurance. “What we know for sure,” he told Ezra Klein, “is that [the bill] will lower the cost of buying non-group health insurance.” His words were trumpeted by the law’s advocates, and were critical to persuading skittish Democrats to vote for the bill. But it turns out that “for sure” doesn’t mean what you thought it did.
Because, now, Gruber is quietly telling state governments that the law will significantly increase the cost of insurance. And it will especially do so for young Americans: the ones who most struggle to find affordable health coverage.Before the Patient Protection and Affordable Care Act became law, Gruber published a widely-cited analysis, using his Gruber Microsimulation Model, in which he asserted that in 2016, young people would save 13 percent, and older people 31 percent, on their insurance premiums. Gruber’s numbers were used to rebut an October 2009 analysis from PriceWaterhouseCoopers, which projected that non-group (a.k.a. individual-market) premiums would increase by 47 percent over the same period.
Ezra called the PwC report “deceptive.” Jonathan Cohn, noting that the report was commissioned by the insurer trade group, AHIP, described it as “the insurance industry declaring war.” After Obamacare was signed into law, Cohn described the Gruber-led counterattack against PwC as a turning point in the fight to get the bill passed:
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Consider what happened in September, when the insurance industry released a study purporting to show that reform would cause insurance premiums to skyrocket. The Senate Finance Committee—the logjam in the legislative process—was set to vote on its bill in less than 48 hours. The study, commissioned by the insurance lobby and conducted by a private accounting firm, represented a clear effort to undermine support. It was the kind of move that lobbying groups make all the time—and, in the old days, it might have worked, since nobody would have seen through the study’s tilted assumptions until…the damage had been done. But within hours of its publication, several blogs, including this one, had published critiques showing just how flawed the study was. The critiques circulated in Washington and provoked a backlash against the insurers. Wavering Democrats said they were offended by the effort at political sabotage; the Finance Committee went on to pass the bill, as it had originally planned.
President Obama, too, touted the bill’s ability to “bend the cost curve,” repeatedly promising that the law would “bring down premiums by $2,500 for the typical family.”
But that was then.
Gruber now: Obamacare will increase premiums by 19-30 percent
As states began the process of considering whether or not to set up the insurance exchanges mandated by the new health law, several retained Gruber as a consultant. In at least three cases—Wisconsin in August 2011, Minnesota in November 2011, and Colorado in January 2012—Gruber reported that premiums in the individual market would increase, not decrease, as a result of Obamacare.In Wisconsin, Gruber reported that people purchasing insurance for themselves on the individual market would see, on average, premium increases of 30 percent by 2016, relative to what would have happened in the absence of Obamacare. In Minnesota, the law would increase premiums by 29 percent over the same period. Colorado was the least worst off, with premiums under the law rising by only 19 percent.
Some low-income individuals would benefit from Obamacare’s subsidies; for those individuals, the impact of these premium increases would be blunted. But if premium costs go up at a rate faster than people expect, taxpayers will be on the hook for billions upon billions of extra subsidies.
“It is true that even after [subsidies] some individuals are ‘losers,’” Gruber told The Daily Caller, “in that they pay more than before reform.” But why did Gruber change his mind? A “discriminatory” market is to blame, he says, in which “the sick just stayed [uninsured].”
More on that in a bit.
There’s no such thing as a free lunch
Gruber’s Microsimulation Model, which he felicitously abbreviates as GMSIM, attempts to project how Obamacare will affect insurance premiums by taking into account certain provisions of the law. “GMSIM is able to carefully integrate all of the key features of enacted federal law,” Gruber promises in his report to Colorado.
Gruber’s model focuses on six specific aspects of the law:
1.The requirement that all insurance plans cover “certain essential benefits;”
2.The mandate that all plans meet a “minimum actuarial value” of 60 percent (i.e., that beneficiaries bear out-of-pocket responsibility for a maximum of 40 percent of their benefit costs);
3.The requirement that insurers spend 80 percent of individual-market premium costs on health expenses (medical loss ratio);
4.The law’s high-risk pools being folded into the exchanges;
5.Competitive efficiencies brought about by the exchanges; and
6.Requirements that insurers charge similar rates to the young and the old (community rating).
In the case of Colorado, as I noted above, Gruber now projects that Obamacare will increase individual-market premiums by 19 percent on average. The biggest drivers of the increase, according to Gruber, are the new insurance regulations (especially the ones forcing upward a plan’s minimum actuarial value and mandating minimum essential benefits), and also the law’s insurance subsidies, which will incentivize “individuals [to choose] richer insurance with their tax credits.”
That is to say, Obamacare forces insurers to offer more benefits, requires them to spend more money on health expenses, and subsidizes the consumption of richer insurance packages. The laws of economics dictate that these costs will get passed down to consumers. It shouldn’t take a microsimulation from MIT to know there’s no such thing as a free lunch—but now you have one for good measure.
Gruber neglects Obamacare’s pre-existing condition provision
The money paragraph in Gruber’s report to Colorado comes on page 14. It’s there that he admits that his model doesn’t take into account Obamacare’s biggest change to the insurance market: its requirement that insurers take on all comers irrespective of pre-existing conditions, a.k.a., “guaranteed issue.” Here’s what he has to say about that (emphasis added):
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It is important to recognize some limitations in our modeling of prices. In particular, given publicly available data we cannot incorporate the effects of the ban on pre-existing conditions exclusions. This ban will cause a rise in premiums as insurers are forced to cover conditions that they had previously excluded. In addition, there are new premium taxes on insurers that will raise premium rates…Overall, we cannot predict the net impacts of these factors on premiums without more analysis.
It is precisely this aspect of the law—its requirement that insurers cover those with pre-existing conditions—that is central to the analysis conducted by PriceWaterhouseCoopers, the analysis that Gruber and other PPACA advocates criticized back in 2009.
The whole reason that Obamacare includes an individual mandate—the controversial requirement that everyone buy health insurance—is that the law requires insurers to cover people with pre-existing conditions. Without an individual mandate, people could wait until they were sick to buy insurance, because their illness would now be a “pre-existing condition.” This, in turn, would drive up the cost of insurance, leading to the infamous adverse selection death spiral in which nobody bothers to buy insurance, except for the very ill, because it is too expensive.
The adverse selection death spiral
The problem, as PwC points out, is that the individual mandate is too weak. “While the new market rules [regarding pre-existing conditions] are implemented in full in [2014], the individual coverage requirement is…phased in gradually.”
The fine for not purchasing health insurance under PPACA is $95 per person in 2014 (or 1% of taxable income, whichever is greater), $325 in 2015 (or 2%), and $695 in 2016 (or 2.5%). Thereafter, the mandate is indexed to inflation.
In addition, many people are exempted from the mandate, such as those for whom premiums exceed 8 percent of household income. Hence, as premiums increase, more and more people will be exempted from the mandate.
The size of the mandate’s penalty is puny in comparison to the cost of health insurance. According to the government’s Medical Expenditure Panel Survey (MEPS), the average premium for an individual plan in 2010 was $4,940. If we assume that premiums increase by 6 percent a year—the historical rate—the maximum $695 mandate will account for only 10 percent of average premiums.
Because the mandate is weakly enforced, small in size, and gradually put into place, whereas the pre-existing condition mandate takes effect immediately, Obamacare creates the recipe for an adverse selection death spiral. “We would anticipate significant adverse selection to occur in the existing market,” reports PwC, “increasing premiums for those who have coverage today. Higher premiums will result in more individuals being exempted from the coverage requirement…the penalties will be phased in, so that they will not reach full effectiveness for several years. This lack of coordination increases the likelihood of a premium spiral that ‘gets ahead’ of the coverage requirement which…may further reduce the incentive for those who are healthy to buy coverage. This may then cause an increase in premiums for those with coverage today.”
Community rating increases insurance costs for the young
Many of the people who go uninsured are young people. The young are just entering the work force, and therefore typically have below-average incomes. In addition, the young are healthy, and have much less use for expensive health insurance.
Obamacare forces insurers to charge their eldest beneficiaries no more than 3 times what they charge their youngest ones: a policy known as “community rating.” This, despite the fact that these older beneficiaries typically have six times the health expenditures that younger people face. The net effect of this “community rating” provision is the redistribution of insurance costs from the old to the young.
According to my sources, this was a favor that Democrats did for the AARP, which was advocating for its older members. Democrats were happy to help out their ally, whose members are active at the voting booth, compared to younger Americans, who vote less often. The AARP actually wanted Obamacare to have a community rating ratio of 2:1—that is, insurers could charge their eldest beneficiaries only twice what they charged their youngest. But they had to settle for 3:1.
The real problem is how the community rating provision interacts with the individual mandate. As I described above, the individual mandate is too weak. Hence, the young—who will face the steepest increases in their health insurance premiums—will be further deterred from buying coverage, which will in turn enhance the adverse selection death spiral.
The danger of relying on one man’s estimates
The central policy argument for the Patient Protection and Affordable Care Act is that it would increase access to health care for those who are currently uninsured, while leaving the system intact for those who are already covered. “If you like your health care plan, you can keep your health care plan,” as President Obama has repeatedly said.
Indeed, Jonathan Gruber promised that, based on his microsimulation model, the law would “for sure” reduce insurance premiums. And Gruber’s numbers were relied on, almost exclusively, by the bill’s most prominent advocates.
But Gruber, in a span of two years, has gone from claiming that the law would reduce non-group premiums by 13 to 31 percent, to estimating that they will increase those premiums by 19 to 30 percent. Worse still, Gruber’s model doesn’t adequately account for the law’s central feature: its requirement that insurers take on all comers, regardless of pre-existing conditions, while only weakly enforcing a nominal fine on those individuals who try to game the system.
The only thing that seems “for sure” is that there are flaws in Gruber’s model.
What happens if the Supremes intervene?
Next week, as you probably know, the Supreme Court will hear oral arguments in HHS v. Florida, the case that will determine the constitutionality of the individual mandate. Both sides in the case agree that, if the individual mandate is struck, the community rating and guaranteed-issue provisions should be struck as well.
If the Supremes do in fact overturn those three provisions of the law, you’ll still see an adverse selection death spiral. The law still drives up the cost of insurance through its “essential benefits” and “minimum actuarial value” provisions. Younger workers, who make less money, will be least able to afford such coverage, and will need to take advantage of the law’s taxpayer-funded insurance subsidies.
The bottom line is that there is no quick fix for the Affordable Care Act’s array of policy mistakes. We would be much better off repealing the law and starting over.
Follow Avik on Twitter at @aviksaroy.
UPDATE 1: Karl Rove highlights Gruber’s change of heart in the Wall Street Journal.
Also, Catherine Rampell of the New York Times runs a profile of Gruber, in which she describes him as having “nearly cornered the market on the technical science behind these sorts of predictions.” Other models used by RAND and Lewin “all use Mr. Gruber’s work as a benchmark.”
In addition, Rampell portrays Gruber as being emotionally invested in Obamacare, quoting him as saying “my stomach started churning” as he took in the news from the Supreme Court. “[Princeton sociologist Paul] Starr said he thought Mr. Gruber in particular was overstating the effectiveness of the mandate because ‘it’s his baby,’” she adds.
More from the piece about how Gruber’s model drove the estimates of the Congressional Budget Office:
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Along with these credentials, Mr. Gruber’s position as an adviser to the influential Congressional Budget Office also left him perfectly positioned to advise the White House on health reform.
“The most important arbiter of everything was the C.B.O.,” said Neera Tanden, who was a senior adviser for health reform at the Department of Health and Human Services.
The C.B.O.’s assessment of a bill’s efficacy and costs strongly influences political debate, but the office does not publicly reveal how it calculates those numbers.
“We knew the numbers he gave us would be close to where the C.B.O. was likely to come out,” Ms. Tanden said. She was right…
Even though he was brought in by the White House, Congressional staff members from both parties trusted him because he was seen as an econometric wonk, not a political agent. But soon his very involvement with the bill caused questions about his objectivity to be raised in the news media.
During and after the bill’s slog through Congress, he frequently spoke with reporters and wrote opinion pieces supporting the Affordable Care Act but did not always mention his role in helping to devise it.
He says he regrets not being more upfront about his involvement with the administration. But he does not apologize for publicly advocating the legislation, and continuing to do so — including through a comic book he wrote to explain the law.
“Yes, I want the public to be informed by an objective expert,” he says. “But the thing is, I know more about this law than any other economist.”
UPDATE 2: To review my extensive coverage of the individual mandate at the Supreme Court, go here.
UPDATE 3: On May 3, Jonathan Gruber and I appeared on the Patt Morrison show on Southern California Public Radio to discuss this issue among others, and the following exchange occurred (emphasis added):
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Gruber: What I’m saying is that the average price that individuals pay for health insurance will not change a whole lot [under the Affordable Care Act]. The difference is that the risk you face of facing a very high price will change. We’ll essentially move from a system that essentially is a lottery…to one in which you’re sure what you’ll pay just on your age. Certainty, I think, will bring a lot of security to individuals…
Morrison: Avik Roy, a lot of people really wonder whether insurance policies—individual policies—would get any cheaper on this new market at all, when there are exclusions, when there are deductibles, that seem impossible to reach.
Roy: Yeah. One of the big concerns with the Affordable Care Act, as Jonathan has actually described in some of his publications, is that, because the law requires the exchanges to offer insurance plans that are fairly generous, the law will actually drive up the cost of insurance purchased on those markets. And that’s going to create a problem where more and more people are priced out of the market…
Morrison: In the minute we have left, let me go back to Jonathan Gruber and ask, what happened in Massachusetts, and whether you really think that the cost of…these individual policies that many people may find themselves on the market for, if the health care overhaul law is upheld, if it’s going to get any cheaper than the kinds of horror stories we hear from listeners?
Gruber: Well, in Massachusetts, it got a ton cheaper. We actually cut the cost of the typical non-group policy in half. The typical individual policy cost half as much afterwards as before. But Massachusetts was in a relatively unique position. We had put into place a lot of regulations which had raised our prices beforehand. You know, different people get different estimates. I think our best guess is that, on average, prices will remain about the same. In these markets, if you average across the states, it will go up in some states. Some states I’ve looked at, it’s going to go up, in Massachusetts it went down. The big difference is going to be that the sick will pay less, and the healthy will pay somewhat more.
What Gruber doesn’t have time to explain is that if the healthy pay “somewhat more,” the healthy will have even less incentive to buy health insurance, which will lead to more adverse selection, leading to higher prices for the sick and others who buy insurance.
http://www.forbes.com/sites/aroy/2012/03/22/how-obamacare-dramatically-increases-the-cost-of-insurance-for-young-workers________________________
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