OK

I had an actuarial exam this past Thursday, so I haven't had much time to look at the bill until this weekend.  Now that I've looked at the bill, I'd like to offer my analysis of the Pelosi bill (H.R. 3962).  This diary analyzes the strengths and weaknesses of H.R. 3962, and and compares the bill to H.R. 3200, the House Tri-Committee bill.

Obviously, the strengths and weaknesses of any health care reform bill depend upon what you see as its central purpose.  To me, that central purpose is to create a sustainable health care system that protects every American from having large medical expenses for essential care, and shield them from its consequences (i.e., bankruptcy, death).  This, I believe, is what Democrats have aspired for the last 60 years.  What matters most in this bill is what percentage of a person's income someone will have to spend on health care.  The provisions most affecting this include the following:

  • The quasi-community rating
  • The individual mandate
  • The minimum benefits package
  • The subsidies
  • The Exchange
  • The employer mandate

The remainder of this diary analyzes each of these provisions.  We begin with the quasi-community rating.

Quasi-community rating
The insurance rating rules in Speaker Pelosi's bill (Sec. 213) and the Tri-Committee bill (Sec. 113) are the same.  Insurance companies will only be allowed to vary premiums by three factors:

  • Geographic region
  • Family structure
  • Age -- so long as the ratio of the highest premium and the lowest premium does not exceed 2:1 (also called a 2:1 community rating)

These are the same rating rules we have here in Massachusetts.  Insurance companies are not allowed to charge smokers more than non-smokers.  I know both the Finance Committee and HELP Committee bills allow insurers to charge more for smokers, and even as someone who has never smoked, I hope the House gets its way on the rating rules.  I believe allowing insurers to vary premiums by lifestyle choices leads to a slippery slope.

Individual mandate penalty
For insurance to be affordable, those who don't use health insurance have to subsidize those who have the misfortune of having to use it.  If insurance companies are required to cover everyone, and are forbidden to vary premiums by health status, then there has to be a meaningful penalty to discourage young, healthy people from waiting until they get sick to purchase health insurance.  That is what the individual mandate penalty does.

Like the quasi-community rating, the individual mandate penalty is the same in both H.R. 3962 and H.R. 3200.  Those who choose not to purchase health insurance will owe the Internal Revenue Service the lesser of the two:
(a) 2.5 percent of income
(b) The cost of a health plan.

Minimum benefits package
If you have an individual mandate, you have to mandate some minimum level of coverage for Americans to buy.  You also need to mandate some minimum level of coverage so that insurance companies don't trick people into buying less coverage than they think the policy has and to prevent Americans from buying less protection than they actually need so they can save a few hundred bucks a month.  This minimum level of coverage is measured in actuarial value, which is the percentage of the medical expenses paid by the insurance company for all the people in the plan.  Actuarial value is the apples-to-apples comparison of a plan's generosity.

Both the Pelosi and Tri-Committee bills set the minimum actuarial value at 70 percent.  This is not a good number.  Kenneth Sperling, in his testimony to the House Ways & Means Committee, gives us an idea of what a policy having a 70 percent actuarial value looks like:


Plan ProvisionHMO Design -- Actuarial Value:  95%PPO Design -- Actuarial Value: 85%PPO Design -- Actuarial Value: 70%
Copayment:  Primary Care Physician$15N/AN/A
Copayment:  Specialty Care Physician$25N/AN/A
Copayment:  Hospital Admission$200N/AN/A
Annual DeductibleNone$300 per individual$2,000 per individual
CoinsuranceNone20% for in-network20% for in-network
Out-of-Pocket MaximumN/A$2,000 per individual$4,000 per individual
Co-payment: Generic Drugs$2$5subject to co-insurance and deductible
Co-payment: Preferred Brand Drugs$8$16subject to co-insurance and deductible
Co-payment: Non-Preferred Brand Drugs$16$30Subject to co-insurance and deductible

As you can see from this example, 70 percent minimum actuarial value is not a good figure.  This figure is a foundation, and will have to be revisited in future years.  I think 75-80 percent is what is necessary as only 30 percent of large employer plans, the Hewitt study shows, have actuarial values below 80 percent.

Subsidies
With an individual mandate, you obviously need need substantial subsidies so Americans who aren't lucky enough to get their health insurance through their employer can afford health insurance.

The table below compares the subsidy levels of the Pelosi bill with that of the Tri-Committee bill.  The first column lists the income level.  The second column lists the maximum percentage of a person/family's income someone of that income level will have to spend on a policy having the stated actuarial value (column four) under the Pelosi bill.  The third column lists the maximum percentage of a person/family's income someone of that income level will have to spend on a policy having the stated actuarial value (column four) under the Tri-Committee bill.  The fourth column states the actuarial value -- which is the same for both bills.


Income LevelPercent of Income (Pelosi)Percent of Income (Tri-Committee)Actuarial Value (both)
133%-150% FPL3%3%97%
150%-200% FPL5.5%5%93%
200%-250% FPL8%7%85%
250%-300% FPL10%9%78%
300%-350% FPL11%10%72%
350%-400% FPL12%11%70%

This is another such area where I find the Pelosi bill (and the Tri-Committee bill) seriously wanting, and will have to be revisited before 2013, when the individual mandate and subsidies begin.  I have no clue, for example, how requiring a family of four earning $70,000/yr. (300-350 percent FPL) to pay $7,700/yr. (11 percent of the family's income) for a policy having over a $1,000 deductible (72% actuarial value) won't spark political backlash.

The Exchange
Because of the individual mandate, it is helpful to have a marketplace where people can comparison shop.  The Exchange is the national marketplace where those who aren't lucky enough to get their health insurance through their employer -- if they have one -- will be able to comparison shop for health insurance.  The more people in the Exchange -- the stronger the Exchange.  Unfortunately, the Pelosi bill, by dumping 7 million more Americans onto Medicaid in order to hold down the bill's overall costs (states pick up some of the tab with Medicaid -- not with the public plan or any private plan on the Exchange), significantly weakens the Exchange by having 25% fewer people (21 million) on the Exchange than the Tri-Committee bill (29 million), according to the CBO.

On the other hand, the rules preventing insurers from cherry-picking the healthy are the same as in both bills, and are impressive.  A healthy policyholder will have to purchase much, much more coverage than they would otherwise buy before they can purchase benefits attractive to healthier policyholders -- i.e., dental benefits, vision care, gym membership.  Also, insurance companies will have to offer a basic plan, an enhanced value plan, and a premium plan -- all which cannot have dental care, vision care, and gym membership -- before they can offer the plan with these benefits, and that plan will have to have the required benefits be equal in actuarial value to that of the premium plan.

I think the Federal Exchange speaks for itself.  It will have good bargaining power.

Employer mandate
With the attractiveness of the Exchange, you want some provision to prevent employers from dropping coverage.  The pay-or-play provision penalizes employers if they do not contribute 65% to their employees' health insurance plan.

Here the number of firms subject to the 8% payroll tax for not contributing at least 65% to their employees' health insurance has been substantially reduced.  The table below illustrates the change in the number of firms subject to payroll tax penalty under the two bills:


Employer Payroll (Pelosi)Employer Payroll (Tri-Committee)Payroll Tax
Does not exceed $500,000Does not exceed $250,0000%
$500,000-$585,000$250,000-$300,0002%
$585,000-$670,000$300,000-$350,0004%
$670,000-$750,000$350,000-$400,0006%
Greater than $750,000Greater than $400,0008%

Because of the less stringent pay-or-play provisions in the Pelosi bill, about $30 billion in revenue was lost, according to the CBO.  That's $30 billion less for subsidies.  Personally, I'd like to subject all firms to some penalty for not providing health insurance to their employees, but I realize how politically unpopular that would be.

Conclusion
So all in all, this bill lays a good foundation for health care.  No doubt the minimum actuarial value and the subsidies will have to be dramatically increased.  But that shouldn't be difficult as the subsidies and the taxes necessary affect both revenue and outlays, and should get through the reconcilliation process.  According to the Commonwealth Fund (page 64 of the report), a $2/pack excise tax on cigarettes raises $322 billion over 10 years, and a $0.05 excise tax on a 12 oz. beer raises another $62 billion over 10 years.  I doubt increasing the minimum actuarial value will have trouble getting 60 votes as lower cost-sharing is hard for any Senator to oppose politically.

But as wanting as I find many of these provisions, I simply cannot in good conscience deny help to millions of Americans who desperately are seeking help from their government and have waited far, far too long for it.  People like my 27-year-old sister, who spends $6,000/yr. in premiums alone for her individual health insurance policy.  Because of the guaranteed renewability provision, she will no longer be one illness from bankruptcy.  People like the hotel workers who cleaned our rooms at Netroots Nation -- who aren't lucky enough like you or me to get health insurance from their employer, and will remain one illness from bankruptcy if this bill does not pass.  People like the waitress with the diabetic child at the local diner where you and I ate brunch yesterday morning -- she, too, cannot wait wait for the perfect bill; she needs help now.  People who need relief from pain and suffering now, and whose failure to alleviate their pain will be our failure if we do not pass this bill.

As Clem Yeobright noted yesterday, this legislation is transformational.  The term pre-existing condition will be thrown to the dust-bin of history.  The quasi-community rating, the individual mandate, the minimum benefits package, the subsidies, the employer mandate, and the Exchange all are revolutionary items in their own right.  Many, many people who today are priced out of the individual insurance and small group insurance market, and have been desperately seeking help from their government for some time, will be able to afford health insurance because of this legislation.  Insurance companies will no longer compete on risk selection but on price and quality.  That, too, is revolutionary in its own right.

History will not be kind to us if this bill fails, for history will see us as failing to confront the moral challenge of our time.  This bill may not be perfect, but it lays a good foundation.  We may not get everything, but we will bend the moral arc of the universe a little bit more towards justice.

Update:  AZDem requested me elaborating on the minimum benefits package, and asked me to state the required benefits to be covered.  That is in Secs. 222 of H.R. 3962 and 122 if H.R. 3200.  Here is the list of required benefits an insurance company must cover:

  • Hospitalization
  • Outpatient hospital and outpatient clinic services, including emergency department services
  • Professional services of physicians and other health professionals
  • Such services, equipment, and supplies incident to the services of a physician's or a health professional's delivery of care in institutional settings, physician offices, patients' homes or place of residence, or other settings, as appropriate
  • Prescription drugs
  • Rehabilitative and habilitative services
  • Mental health and substance use disorder services
  • Preventive services, including those services recommended with a grade of A or B by the Task Force on Clinical Preventive Services and those vaccines recommended for use by the Director of the Centers for Disease Control and Prevention
  • Maternity care
  • Well baby and well child care and oral health, vision, and hearing services, equipment, and supplies at least for children under 21 years of age

According to the Kaiser Family Foundation, only 14 states -- including the Bay State -- require insurance companies to cover maternity benefits.  Jon Kyl would be proud that he didn't have to pay for such a benefit.

Anyhow, I think most people know I do not like the idea of free preventative care for items that don't save money -- i.e., colonoscopies.  I think this will increase the costs of a plan dramatically, and will make a 27-year-old bachelor (I'm 29) very unhappy to have to pay for a 51-year-old man's free colonoscopy in his policy.  I think a better way would be to say what insurance companies can charge on each tier (i.e., $50 for the Basic Tier, $25 for the Enhanced Value Tier, and $10 for the Premium and Premium Plus Tier).

Originally posted to jim bow on Mon Nov 02, 2009 at 10:31 AM PST.

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