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What Do the Insurers Want?

The "analysis" the insurance industry commissioned should not be treated as a policy document. It's a political document. In it, the insurers assail policies they don't like (though under the guise of concerning themselves with consumer premiums) and pump up policies they do like. There's no real "prescriptions" section to the paper, but it's easy enough to discern what the insurers do, and don't, want.

1) A Stronger Individual Mandate: This is the point of the first section, which argues that the regulations forcing insurers to offer coverage to all people at similar prices will lead to a death spiral in the absence of a stronger individual mandate. They worry that the absence of a strong individual mandate will mean that healthy, young people who don't want to pay for insurance will simply pay the penalty instead. At the same time, sicker, older people who've been priced out of the market, or denied care outright, sign up for insurance. This makes the "risk pool" -- which is to say, the population being served by the insurer -- a bit older and a bit more expensive, which means premiums go up for everyone.

Insurers want a stronger individual mandate to ensure that everyone enters the system and the risk pool doesn't tilt away from the healthy and towards the sick. That's good policy, but it would also require more subsidies to make the mandate affordable. The problem? The rest of the report is dedicated to attacking every single way that health-care reform can pay for itself.

2) Eliminate the Excise Tax: When your employer pays you a dollar in wages, that dollar is really only worth whatever is left after you pay taxes. When your employer pays you a dollar in health-care insurance, that dollar is never taxed, so it's worth a full dollar. A dollar in health care, in other words, is more valuable to a worker than a dollar in wages.

This tax exemption does two things: it costs the government a huge amount of money, and it makes the health-care system much more expensive by routing everything through employers (more on that here). Originally, reformers wanted to cap the exemption for employer-provided health care. That would raise money, and create an incentive for employers and workers to choose less costly plans. Unions and employers were furious, and all was gridlock. It was John Kerry's office that hit upon the solution: an "excise tax" on insurers who offer high-cost plans.

Under this proposal, insurance plans over $21,000 would see the excess spending subject to a 35 percent tax. A $23,000 plan, for instance, would see the final $2,000 taxed. This does exactly the same thing as capping the employer deduction, but because it's taxing "insurers" rather than "businesses," the politics are better. In either case, though, the increase would be passed onto workers, and economists expect workers to gravitate towards cheaper plans as a result of it. Insurers don't like this tax, much as Lexus wouldn't like a tax on luxury cars. But then, the income that goes to purchase luxury cars isn't currently sheltered from taxation, so Lexus would have a better case.

3) No Medicare Payment Cuts: Insurers don't want the government to negotiate lower prices with hospitals, because they fear that the hospitals will roll over for the government and seek to recoup costs by charging insurers more. Insurers, who are fractured and weak compared with the hospital industry, say they won't have the strength or leverage to resist. Properly understood, this is an argument for a single-payer system, or for Medicare-for-All.

4) No New Taxes: The final section is straightforward enough. To help pay for health-care reform, the bills impose small taxes on the insurance, pharmaceutical and medical device industries. The insurers don't want to pay those taxes.

In other words, the insurers want health-care reform to have a stronger mandate, which will require substantially more spending, which means we'll need more revenue. But they oppose all the new revenue streams that help pay for the bill, and they oppose the major sources of savings that help offset the remaining cost of the bill. And they say the Finance Committee's numbers don't add up? That's some chutzpah, as my grandmother would say.

By Ezra Klein  |  October 12, 2009; 4:27 PM ET
Categories:  Health Reform  
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Comments

Thanks!

Posted by: umesh409 | October 12, 2009 4:30 PM | Report abuse

Good post. Two thoughts:

1) "This does exactly the same thing as capping the employer deduction, but because it's taxing "insurers" rather than "businesses," the politics are better."

I don't think this is the same thing, which is why unions and employers support this. The big difference is that the $2,000 tax (in your example) that insurers will receive can be spread across their whole business, rather than be limited to the high-cost plans.

2) "In other words, the insurers want health-care reform to have a stronger mandate, which will require substantially more spending, which means we'll need more revenue."

This is only true because larger cost-savings aren't on the table. Greater subsidies would be affordable if greater cost-savings could be extracted. They wouldn't be opposing reforms that cut waste out of the system, which incidentally is the largest cost issue, not insurers' profits.

Posted by: wisewon | October 12, 2009 4:45 PM | Report abuse

It's Big Health. What should we expect out of their mouths other than lies. Your drawing the line to Big Tobacco was spot on.

Jon

Posted by: toshiaki | October 12, 2009 4:45 PM | Report abuse

"A Stronger Individual Mandate: This is the point of the first section, which argues that the regulations forcing insurers to offer coverage to all people at similar prices will lead to a death spiral in the absence of a stronger individual mandate. They worry that the absence of a strong individual mandate will mean that healthy, young people who don't want to pay for insurance will simply pay the penalty instead. At the same time, sicker, older people who've been priced out of the market, or denied care outright, sign up for insurance. This makes the "risk pool" -- which is to say, the population being served by the insurer -- a bit older and a bit more expensive, which means premiums go up for everyone."

It'd be nice to see you actually acknowledge that you've made this same argument yourself, many times. You subtly acknowledge later that stronger mandates are "good policy"-- but it'd be a lot more direct and transparent if you told your readers that you have argued the same thing.

Posted by: wisewon | October 12, 2009 4:50 PM | Report abuse

1) Don't know where you got the idea unions support the excise tax. The AFL-CIO strongly opposes it.

2) I don't know that there's a less subtle way of indicating I think something good policy than writing "that's good policy."

Posted by: Ezra Klein | October 12, 2009 5:04 PM | Report abuse

"small" is in the eye of the beholder. A $6.7 B annual tax on insurers would be more 30% of the industry's total profit. Is that small?


Posted by: mbp3 | October 12, 2009 5:15 PM | Report abuse

"They wouldn't be opposing reforms that cut waste out of the system, which incidentally is the largest cost issue, not insurers' profits."

In fact, the insurance industry analysis specifically seems to suggest that they have no role and no power in eliminating waste -- obviously not true; and private insurance companies have so far been reluctant to support the argument that public payers should eliminate waste as well. The report actually suggests that eliminating waste would not reduce net spending, but would just cause cost shifting to the apparently helpless private insurance industry.

I will be the first to admit that private insurers took it on the chin trying to cut waste in the 90's, but it is time they re-grew a spine.

I also continue to be amazed that conservative politicians and analysts who have made a career denouncing waste in Medicare now have reversed field and decry attempts to eliminate waste as "rationing." It seems that no political principle and no public benefit is worth the risk of supporting even a part of the Obama health reform efforts.

Posted by: PatS2 | October 12, 2009 5:42 PM | Report abuse

On 1) Stand corrected on unions, but they still aren't the same exact thing.

On 2) I think the point is that "good policy" means that you think its is possible that without stronger mandates than currently planned, the current proposal may very well lead to higher premiums for people than would otherwise be the case. That's really the whole point of this current debate. You've spent a lot of time deriding AHIP's motives, PWC's incentives, but I don't think most readers think that you agree with the overall point. That's what's subtle-- and the much more important contribution to the discussion.

Posted by: wisewon | October 12, 2009 5:58 PM | Report abuse

That's a fair analysis of the Insurance industry's interests, motives and positioning. The obvious remedy of course is to do away with HC insurance exemptions entirely but offset them with tax deductions. Never happen but in combination with exchanges and rate settings we'd get a powerful system.
The key here (to an earlier point) is that people don't understand, either the impact on their employer's viability, on their own insurance charges and (particularly) their own compensation and well-being. The Admin. has a major communications problem.
A friend of mine recently compared wages and total benefits cost changes and the results are stunning indeed:
http://econompicdata.blogspot.com/2009/10/costs-of-employment-up-just-not-in-wage.html
If people understood they'd be all for "even" radical changes.

Posted by: dblwyo | October 12, 2009 6:11 PM | Report abuse

i love the epiphany throughout the day you've made Ezra although you couldn't help get one last shot in could you?

"though under the guise of concerning themselves with consumer premiums"

sure they're concerned about premiums. If people can't afford to buy their product then they'll have no consumers. We'll be forced to a single payer system without them having a stake. So yes their survival depends on concerns about costs. That's what they've said all along.

And FINALLY you've again realized the biggest and most crucial part of the reform for insurers. The individual mandate. Remember they only spoke up when the finance committee watered down the mandate. The biggest question of the finance committee's final product for the insurance industry:

Of the 25 million still to be uninsured how are they broken up, ie "healthy vs unhealthy" "costly vs inexpensive" Because as the model goes if the healthy are given a modest reprieve (small tax) vs paying premiums, the unhealthy will overburden the system even further although that may be what some want to destroy the current model so they can start over. The question is how much damange is done to get their way? I don't think Obama thinks like this. I don't think most democrats think like this, but if there is no true accountability in the system then this could be the end result and I think that's the fear of the insurance industry.

I think of the above, the industry would settle for #1 and let the chips fall where they may on the rest.

Posted by: visionbrkr | October 12, 2009 7:05 PM | Report abuse

Ezra, we know what the insurance companies want. For them it makes good business sense because they are profit oriented, and they don't want their bottom line shorted. But for the average citizen they are parasites who do not belong in the middle between you and your provider, charging 30% or more in the process.

As an advocate of single payer systems I would like to see insurance eliminated and the savings passed on to consumers, businesses, and health providers. This is the right thing to do for society, and most of the developed world does it.

But if we have to grapple with insurance for political reasons (i.e. our politicians are in their pockets) then they should at least play nice and adapt to the massive change needed by cooperating to make it happen.

Posted by: Single_Payer | October 12, 2009 9:00 PM | Report abuse

BigInsurance won't just settle for #1. #2 is just as important. If you elimimnate the employer deduction and replace it with individual deductions leading to employers dropping coverage, the BigInsurance is all but extinct. BigInsurance makes FAR larger profit margins from employers buying insurance than individuals. That's why they lobby to keep the employer tax advantage. No matter what the product is: computers or insurance plans, employers will always be more inclined to buy the higher quality more expensive product, because it's not THEIR money, and if they go BK, they escape most of the debt. Thanks to the GOP BK bill, individuals must pay UNTIL THEY DIE. Therefore the highschool dropout is far more responsible with his/her money than a Harvard MBA CEO is with the companies(Jeff Skilling).

Posted by: jeffwtux | October 12, 2009 9:15 PM | Report abuse

What do insurers want? In a word - MONEY! Karen Ignagni and the AHIP care about one thing and one thing only - profits - your health matters nothing to them just as long as they make money.

Posted by: laSerenissima2003 | October 12, 2009 9:16 PM | Report abuse

"Insurers, who are fractured and weak compared with the hospital industry"

Are insurers really fractured and weak compared to hospitals? We hear often about the strength of insurers (at least in lobby power and dominance in a particular market). Like to find out more about how the hospital industry is organized. Or how about a flow chart of who has power over whom? pharma, docs, devices, hosp, ins, legislators,etc... whee!

Posted by: Hazelite | October 12, 2009 9:16 PM | Report abuse

Thank you Ezra. You are, without a doubt, the source for the clearest coverage of the health care reform process. Keep up the extraordinary work.

Posted by: lostinthemiddle | October 12, 2009 9:20 PM | Report abuse

The insurance industry makes a perfectly valid and supportable point. Healthy people will rationally choose NOT to buy insurance until they get sick. Those who eventually get sick and buy insurance will add disproportionately to the cost of care that will be borne by insurance companies and ultimately their customers. Thus health insurance will become more expensive for American families and employers. In the end, fewer families with coverage now will be able to afford, or will be offered insurance, and employers who do chose to pay these higher premiums will likely higher fewer workers. Perhaps only Congress is able to miss the irony of asking for HIGHER taxes and HIGHER health insurance premiums to fund a health care system they are argue is already OVERFUNDED!

The simple fact is that none of the plans put forth in congress make any honest effort to reduce health care cost in this country. Medicare and Medicaid offer clear evidence that the government is less efficient than private health insurers at reducing health care costs. Instead of reducing waste the government simply mandates that Medicare and Medicaid underpay providers for the treatment they provide, which of course is a very different thing than reducing health care costs. Currently under Medicare and Medicaid, when providers are underpaid, these cost are shifted to those with private insurance. In fact 35%, or roughly $5000, of the health insurance premiums paid by the average family goes to pay for underpayments by Medicare, Medicaid or the uninsured. The irresponsible proposals in congress will only accelerate this “cost shifting” and its burdon on the American Family.

Real health insurance reform would return health care premiums to the consumer. For example if all consumers, including the young and illegal immigrants, were required to save, perhaps 10% of their salary in their PERSONAL health savings account to fund basic health care, (with moderate subsidies for the needy). This would create a competitive health care market that would drive down costs, mitigate the free rider problem and provide incentive for individuals to find the most cost effective treatment. This is real reform that would improve the system.

Posted by: ELFopportunity | October 12, 2009 10:09 PM | Report abuse

The insurance industry's report basically warrants the need for the public option. It will be a way to keep these companies honest and to contain the growth in health care costs.

Posted by: ATLGuy | October 12, 2009 11:04 PM | Report abuse

Ezra,
How come there has been no talk about an all-payer system. It would seem that this gets at the goal of forcing cost-cutting on providers while taking away any government insurance monopsony power. Thus it would ensure equal footing between private and public plans.

Posted by: MyPostID24 | October 13, 2009 12:21 AM | Report abuse

What Do the Insurers Want? The rings from your fingers, the change from the back of your couch, and the kidney that's healthy to pay for the one that's diseased.

Posted by: pseudonymousinnc | October 13, 2009 12:38 AM | Report abuse

Insurers don't want the public to be under any illusions that premiums will come down in the short term unless they get millions of new healthy ponzi--err--customers, or in the long term unless providers control costs. The insurers are exactly right. We should scrap this "reform", and do Medicare for All.

Posted by: bmull | October 13, 2009 3:15 AM | Report abuse

Ezra,
I don't agree with your analysis in #3.
Hospitals don't roll over for the government. The government sets the rules of the game. Even now, a hospital has a risk that some patients - who can't be identified in advance - will not pay full price because the government sets the price by fiat. In the case of Medicaid this can be up to a 70% discount of cost.
Now hospitals that want to continue to operate, that often being their goal since many are nonprofits or community hospitals, must raise other prices to compensate for the care they provide for well under cost. This means hospitals charge insurance companies more. It has nothing to do with negotiating power on the part of insurance companies. Even if an insurance company covered 100% of the market, it wouldn't have the negotiating power to get a hospital to provide all services for less than cost.
Finally, if hospitals ONLY received below-cost reimbursements (single-payer or Medicare for all) they would either require donations simply to maintain operations or they would close.

Posted by: pracpol | October 13, 2009 8:16 AM | Report abuse

What Do the Insurers Want? They want affordable health insurance for everyone provided by private insurance industry, rather than a public option.

The current bill will most likely increase health insurance premiums. And when premiums increase Liberals will further demonize the "greedy" insurance industry and insist on a single payer system.

At least now the insurance industry, can say: "I told you so."

Posted by: NorthMan | October 13, 2009 2:48 PM | Report abuse

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