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Is the Insurance Industry Declaring War?

Over the weekend, America's Health Insurance Plans circulated a study it commissioned from PriceWaterhouseCoopers. In a memo to AHIP members, reproduced here, president Karen Ignani explained its significance:

The report makes clear that several major provisions in the current legislative proposal will cause health care costs to increase far faster and higher than they would under the current system. The report finds that the proposal “will increase premiums above what they would increase under the current system for both individual and family coverage in all four market segments for every year from 2010-2019.

For example, the analysis shows that the cost of the average family policy is approximately $12,300 today and will rise to:
--$15,500 in 2013 under current law and to $17,200 if these provisions are implemented.
--$18,400 in 2016 under current law and to $21,300 if these provisions are implemented.
--$21,900 in 2019 under current law and to $25,900 if these provisions are implemented.
In fact, between 2010 and 2019 the cumulative increases in the cost of a typical family policy
under this reform proposal will be approximately $20,700 more than it would be under the
current system. 

That's pretty damning stuff. And Ignani's description of the report is absolutely correct, at least based on my reading of it.

But is the report itself correct? That's not so clear.

The 26-page paper, which you can read here, examines how four key elements of health reform will affect private premiums. The four elements are the absence of a strong individual mandate, the excise tax on high-cost insurance plans, the chain reaction effect of Medicare cuts, and taxes on various sectors in the health care industry.

But this accounting leaves out some pretty big things, starting with the subsidies that would help people buy insurance. The report itself makes that clear, right up front on page E-6:

The overall impact of these provisions will be to increase the cost of private health insurance coverage for individuals, families, and businesses.  The net impact of these increases on households would include the impact of these increases and the new subsidies provided under the bill. 

Now, the subsidies are not available to everybody, since they phase out with income and are only available through the insurance exchanges. As a result, people with higher incomes really would face higher premiums--if, again, the rest of the report is right. But there's more fishiness here, most clearly in the section about the excise tax on high-value insurance plans.

As you may recall, the idea of the excise tax is to end the tax subsidy for more expensive plans. The hope is that, once this subsidy is gone, employers and their employees will react by shopping around for cheaper plans--and that the resulting cost pressure will reduce health care spending overall, leading to lower prices down the line. Most economists seem to think this will be the case. So does the Congressional Budget Office, as best as I can tell. (They don't make pronouncements on how reform will affect private premiums, but they do believe it will lower health care spending overall.)

PriceWaterhouseCoopers acknowledges all of this. But they decide that, for the sake of illustration, they're going to pretend that the tax will have no effect except to raise prices. Once again, you don't have to take my word for it. The report says this explicitly, on page 6:

We have estimated the potential impact of the tax on premiums.  Although we expect employers to respond to the tax by restructuring their benefits to avoid it, we demonstrate the impact assuming it is applied.

And the list of strange assumptions goes on. Plenty of experts, including the CBO, don't think health care providers will simply charge private insurers more to make up for declining revenue from Medicare. The experts could all be wrong, but PriceWaterhouseCoopers doesn't even acknowledge this belief let alone explain why it might be wrong. Indeed, nowhere in the document does the firm reveal its methods, which is interesting since--unlike CBO or even, say, a private outfit like Lewin--PriceWaterhouseCoopers is not particularly known for this sort of modeling.

To be clear, I suspect PriceWaterhouseCoopers is right about a few things, such as the trouble with a weak individual mandate. AHIP has been raising a ruckus about this and, in my opinion, they are right to do so.

Also, it's hard to make a really definitive judgment about the report without more time to digest it and consult with experts.

But since the report is already circulating widely in Washington and will, I'm sure, be making headlines on Monday, it's worth keeping in mind that it comes with some pretty questionable assumptions--and that it comes from a group with its own ideas of what health reform should look like.

Update: A friend e-mails, asking if AHIP's motives are really as clear as they seem. As proof, the friend points to the passage in Ignani's cover letter calling for more system-wide cost control. AHIP didn't get a sweetheart side deal like the hospitals and drug industry did. And those sweetheart deals will almost surely mean less cost control. Maybe part of AHIP's agenda is simply to get more serious cost control, so they don't become scapegoats for high insurance premiums.