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Insurance Cost Variation in Baucus's Bill

I'll be digging through the America’s Healthy Future Act today and blogging the parts that strike me as important. One of them comes right at the beginning: the rules for how much insurers can charge different kinds of applicants. Right now, insurers can jack up premiums based on preexisting conditions, or even refuse to offer insurance altogether. That practice will be outlawed altogether. Rescissions are eliminated, also. But there will be some allowable risk selection. This is expressed in ratios, so to understand the following numbers, remember that a 1.5:1 ratio, for instance, means premiums can be 150 percent as expensive in the presence of that factor.

  • Tobacco use – 1.5:1
  • Age – 5:1
  • Family composition:
    • Single – 1:1
    • Adult with child – 1.8:1
    • Two adults – 2:1
    • Family – 3:1

    Premiums can also vary among, but not within, different geographic areas (insurers can charge more in New York than they would in Wyoming, for instance, which makes sense). At the end of the day, the maximum variation, which is to say the plan for the most expensive risk as compared to the least expensive risk, is 7.5:1, which is quite high.

    By contrast, the House bill only allows premiums to vary 2:1 for age, and it doesn't define the allowable variation for geography or family size.

By Ezra Klein  |  September 16, 2009; 10:40 AM ET
Categories:  Health Reform  
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Next: The Baucus Plan and the Exchanges

Comments

Are you kidding me? Exactly how does this make healthcare affordable???

Posted by: JERiv | September 16, 2009 10:48 AM | Report abuse

I'd love to see the policy rationale for a 5:1 vs. 2:1 premium ratio for age. I'm actually curious how thoughtful the policy is for things like this-- you can imagine the numbers being chosen as a "negotiation" between lobbyists on different sides of the debate, AHIP, AARP, etc. I'd really hope that this isn't the case, and instead we've got some good health economic theory behind it. I fear and suspect that isn't the case, but would love to see some investigative work on what's actually behind the numbers.

Posted by: wisewon | September 16, 2009 10:48 AM | Report abuse

Is there anything to stop a company from raising rates across the board? From your post, it seems as if they can, so long as they maintain the right ratio of high to low charges.

Posted by: fuse | September 16, 2009 11:09 AM | Report abuse

fuse,

its called a medical loss ratio. Its set at 85% in every piece of legislation (although not sure what it is in Baucus' bill but i expect its at 85% too). That means that for every dollar taken in through premium collection 85 cents MUST go back out in claims otherwise policyholders must be refunded monies.

and 5-1 is fair as far as age goes. to me 1.5-1 is not high enough when it comes to tobacco use. I'd have gone with at least 2-1. and they're not taking obesity into account which theoretically they should although that would be difficult to determine and politically even moreso.

Posted by: visionbrkr | September 16, 2009 11:21 AM | Report abuse

Fuse,

In theory, if a company raises premium prices across the board, they'll lose the bids on the health exchange

Posted by: DavidShor | September 16, 2009 11:21 AM | Report abuse

@visionbrkr, 85% is much higher than current numbers, based on what I can find. Current levels seem to be in the 75%-80% range. Moving to 85% would be a huge change if I'm not missing something.

@DavidShor, I'd put the emphasis on "in theory."

Posted by: fuse | September 16, 2009 11:28 AM | Report abuse

So a current smoker who's healthy can be charged more than a former smoker who has lung cancer?

Posted by: tomtildrum | September 16, 2009 11:31 AM | Report abuse

Ezra- Just to be clear that, while your data is accurate, it only applies to the individual market. Insurers do not individually underwrite in the employer market (they charge employers a flat rate per employee). So these provisions would apply to the 25 million people who currently purchase individual insurance + however many people sign up for individual insurance after reform.

Posted by: mbp3 | September 16, 2009 11:42 AM | Report abuse

fuse,

yes you're correct. ALso many states don't have any loss ratio so what insurers can do and currently do is they actuarily figure out how to keep their costs at that loss ratio in one state while profiting in another one. Again the fact that some seem to think the insurance industry is making out like bandits in the legislation here is mind numbing. They're losing 170+ billion over 10 years in subsidies for Medicare Advantage (which they'll likely pass onto seniors to a point) and they're being forced to take all comers. Sure they'll get 45 million new customers but its not as if those new customers are all healthy either. Some are, some aren't.

Posted by: visionbrkr | September 16, 2009 11:48 AM | Report abuse


Yeah, obesity would be a nightmare. There's no industry-wide accepted BMI tool and, as anyone who's ever had to chase down HEDIS data knows, probably 50% of non-pediatric doctors don't bother getting a height (or the ones who do just ask, they don't measure).

Posted by: ThomasEN | September 16, 2009 11:58 AM | Report abuse

this doesnt reduce health care costs and the tobacco provision provides a massive slippery slope. there are tons of things we do and intake that are horrible for our health. we all have them. whether its mcdonalds, an all processed food diet, soda, tobacco, candy, saccarine, botox etc. we shouldnt get in the habit of saying one sin is worse than the others. i smoke and drink soda but otherwise eat zero processed food and have never been overweight. my health care costs on the system are not higher than my fat cow of a neighbor who doesnt smoke but eats nothing but processed food.

Posted by: PindarPushkin | September 16, 2009 12:10 PM | Report abuse

Excuse my ignorance, but isn't everyone covered by Medicare at age 65? Does this mean that the age differential is imposed on people between 0 and 65? Or maybe 25-65, because younger people are insured under parents or SCHIP or something?

5 times more for someone 60-65 vs 20 or 25? That sounds like a recipe for disaster.

Posted by: Mimikatz | September 16, 2009 12:17 PM | Report abuse

visionbrkr,

A mandated 5%-10% increase in payouts (cut in costs?) is huge, but we're currently paying about 2x world average without getting anything for it. Still a long way to go.

It may well be that insurance is so expensive because insurance companies spend a lot on things that don't bring any benefits to customers - administrative overhead, marketing, etc. It may be expensive to exclude the unhealthy and to deny claims. Whether money is going to these admin costs or to salaries or profit is irrelevant to me, all I see is a very expensive product.

Banning rescission, discrimination based on pre-existing condition, etc. may reduce insurance company costs, some of which may get passed along to consumers if there is competition.

Posted by: fuse | September 16, 2009 12:18 PM | Report abuse

visionbrkr, when we pay 30% of our costs for the administrative mechanism of healthcare (insurance), it doesn't matter if anyone is making out 'like bandits', we're still getting robbed. And if you look at the salaries for the executives in the insurance industry, yes, they are the modern equivalent of robber-barons.

I'd be interested in hearing what 'Age' means. The assumption seems to be Medicare "Age", but that's not clear in the post. Otherwise, it looks like we're considering a combination of ratios that would be just as obfuscated for purchasing insurance as the current system.

As a Californian, I've been on the ass-end of 'geographically-based' energy rates for long enough to know its got nothing to do with actual costs for the producer, but how much the business can get away with charging the customers, legally or not. Mix this business instinct/drive with a complicated pricing structure and the end result will be to ensure our country continues to pay extremely high costs for healthcare, regardless of who's covered.

Posted by: Jaycal | September 16, 2009 12:42 PM | Report abuse

fuse and Jaycal,

30% ISN'T being spent there. You really need to stop listeing to one party or another's talking points and look at facts. In my state of NJ for example we currently have an 80% loss ratio and in the most recent year on record (2007) the loss ratio was at 85% and the largest insurer, Horizon BCBS was at 88.2%

Here's a link to show proof although 2007 isn't up yet.

http://www.state.nj.us/dobi/lhactuar.htm

And insurance is so expensive becuase hospitals charge a lot, doctors charge a lot and prescriptions charge a lot. We should be able to bargain better for prescriptions for example but thanks to Obama's deal it wasn't an option. We should be able to ask why hospitals charge an insurer or Medicare one rate and the uninsured 20x that rate. Same goes for doctors on a smaller scale. But then again no one really knows what their doctors charge do they?

Posted by: visionbrkr | September 16, 2009 2:30 PM | Report abuse

Jaycal,

also the insurnace industry CEO's are overpaid until you look at CEO salaries of EVERY OTHER INDUSTRY. My God, the CEO that took over for the dreaded AIG was GIVEN by the government a salary of $7 million. That's probably the average of healthcare CEO's. Its all relative. ANd i love when people complain about insurance industry profits (at 15.3 billion for the top 12 insurers in 2006) but don't bother to mention that Exxon Mobil for example had profits in that time that were if i remember correctly 4 TIMES THAT FIGURE. I guess since they're not "profiting" off of healthcare then that's OK.

Posted by: visionbrkr | September 16, 2009 2:34 PM | Report abuse

The most fair way to solve the question of the premium age ratio is not to have one. Let the 25-35 yr-olds have their own group rates unconnected to the group rates of 55-65 yr-olds.

The young are already subsidizing baby boomers via federal debt. Enough.

Let the boomers pay their way.

Posted by: HalHorvath | September 16, 2009 3:23 PM | Report abuse

If your 64 years old and over the 400% of poverty cap you will need a dump truck to carry the premium dollars to the exchange.

Posted by: cautious | September 16, 2009 6:25 PM | Report abuse

I skimmed through the draft, and also used the "find" function with the search term "medical loss ratio", but came up empty-handed. Has anyone found it, or some facsimile, in the draft?

Posted by: fmoolten | September 16, 2009 9:49 PM | Report abuse

fmooten,

i did the same thing and found nothing. that needs to be addressed and fixed in committee which i'm sure it will. otherwise this WILL be a giveaway to insurers.

cautious,

that was hilarious! oh and they can keep that dump truck on the ready when they turn 65 because that Medicare Part B premium keeps going up and up. $315 a month and counting as the high threshold for part B premium alone.

Posted by: visionbrkr | September 16, 2009 9:53 PM | Report abuse

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