Wednesday, October 21, 2009

Insurance Industry SWAGs

The insurance industry added fuel to the health care debate with its recent publication of the Price Waterhouse Coopers study, “Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage” ( The study concludes, “by 2019 the cost of single coverage is expected to increase by $1,500 more than it would under the current system and the cost of family coverage is expected to increase by $4,000 more than it would under the current system.” Three drivers underlie these cost increases:

1. The Senate proposal requires insurance companies to cover pre-existing conditions. To prevent enormous increases in premiums, this requirement must be coupled with penalties for the uninsured – otherwise there is no reason to buy insurance until you get sick. Insurance companies would be unable to spread the costs of health care among both the sick and the healthy (which is kind of the raison d’etre for health insurers). However, according to the report, the penalties aren’t big enough: “Once the penalties for lack of coverage are fully phased in, they are estimated to be less than 10 percent of the average cost of coverage resulting in a relatively low incentive for individuals who are healthy to buy insurance.”

2. The Senate proposal places a tax on “Cadillac Plans”, i.e. expensive plans that provide top-drawer coverage. (An aside – during last year’s election, the Obama campaign aired commercials ridiculing John McCain for proposing this tax and promised no new taxes on anyone making less than $250,000 a year). Although the threshold for this tax is indexed for inflation, medical costs rise faster than inflation. Each year a growing fraction of the population will learn that last year’s Chevy is this year’s Cadillac; a higher tax bill will accompany the lesson.

3. The Senate proposal reduces payments by Medicare and Medicaid. Private insurers will have to take up the slack, raising premiums for their policyholders.

Basic economics tells us that the Price Waterhouse is correct in predicting these provisions will raise premiums. But knowing how much is trickier. There is nothing in the report describing how the authors came up with their $1,500/$4,000 estimates. Without knowing the method, there is no way to independently assess the accuracy of the claims. They are merely assertions. The Logic Critic gives Price Waterhouse Coopers…

Coherent structure, but relies on assertion, emotion, or faith rather than genuine argument.1 Blade - Not even an argument.


Anonymous Suzie said...

No matter what, private insurance premiums increase every year. My family plan (1 adult, 2 dependents)rose $150 (18%) from last year. So to lay increases on any proposal is just scare tactics and propaganda. The increases will be high even if nothing is done. They made the proposals sound frightening to the public at first blush, and that is all that mattered.
Not even an argument!

October 22, 2009 7:47 AM  
Blogger Li Kim Grebnesi said...

The Insurance Industry report actually addresses this. It estimates that without any changes in the law, individual insurance costs will rise an average of $3,400 by 2019, so that the total increase if the reform passes is $4,900. For families the increases are $8,900 without reform and $12,900 with reform. Of course, as I pointed out, the basis of these numbers is unknown.

October 22, 2009 7:24 PM  

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