Jon Walker brings up several important points about the focus being wrongly placed on the public option having higher premiums than private insurers, when the focus should be on the insufficient risk adjustment mechanisms in the House bill and in the Senate bill as well that allows private insurers to game the regulations, cherry-pick by focusing on healthier clients over sicker patients, and push customers off to other companies through denials of claims and other administrative hassles.
Here's the CBO below:
The rates the public plan pays to providers would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges. The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees. (The effects of that "adverse selection" on the public plan’s premiums would be only partially offset by the "risk adjustment" procedures that would apply to all plans operating in the exchanges.)
And the CMS on this issue as well:
We estimate that the public plan would have costs that were 5 percent below the average level for private plans but that the public plan premiums would be roughly 4 percent higher than private as a result of antiselection by enrollees.
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The impact of antiselection is estimated as the amount remaining after risk adjustment is applied.
There's more from Jon below on why private insurers will still be able to cherry-pick and game the regulations since they're likely not to be honest players and the public option will be societally responsible by taking on all comers with no profit incentive to deny care or to push people off onto other plans:
The weaker negotiated rates public option would still have the tools to keep cost down. It would need to charge higher premiums because every other part of the reform plan is broken. The whole goal of reform was to prevent private insurance companies from cherry picking only healthy people and dropping their sick customers. That will only happen if there is a stronger risk adjustment mechanism. It is critical for a managed competition health care system.
A well designed risk adjustment mechanism makes sure there is no profit in trying to only sign up healthy people and taking steps to drop sick customers. Since it redistributes money based on the cost of covering each person with a set of conditions, an insurance company has equal reason to sign up a healthy thirty-year-old or a fifty-five-year-old with diabetes.
Unfortunately, the risk adjustment mechanism in all the bills is too weak. Even after reform, it will still be more profitable to only sign up healthy people and avoid the sick. Instead of competing on quality or efficiency, the private insurance companies will compete on risk selection. They will game the system and skirt the regulations. They will design plans to only attach young healthy people and hassle their unprofitable sick customers until they switch to another company. These are the "tools" to keep the down premiums that the Washington Post is referring to, and it is a good thing the public option would not be using these "tools."
The public option will attract these sicker people treated poorly by the insurance companies because it is trying to be socially responsible and play by the rules. The risk adjuster will not probably redistribute funds on the exchange, so the public option will need to charge slightly higher premiums.
As I've pointed out before in prior comments, the Senate reinsurance program in the bill is a part of the risk adjustment mechanism, but the reinsurance program itself is temporary, and needs to be buttressed by stronger permanent risk adjustment mechanisms. Countries like Switzerland have a very strong risk adjustment mechanism with their health insurance system, but private insurers still try to game the system there, which we'd likely see here as well. Here are the examples of such gaming of the system in Switzerland as written about by Jon:
Swiss insurers have become exquisitely adept at risk selection, even though it is technically illegal and to some extent disincentivized by a risk pooling program. Insurers, for example, offer multiple policies and steer high cost insureds to higher cost policies and low cost insureds to lower-cost policies. Insurers commonly offer attractive deals on supplemental health coverage, life insurance, or other forms of insurance which they can risk underwrite to attract lower risk insureds. Insurers use high deductible policies and policies for which no-claims rebates are available to woo low risk insureds. There are reports of insurers closing offices in high-claims areas and of using software to identify unprofitable insureds or applicants so that they can ignore inquiries and contacts from them. There is considerable evidence that virtually all of the competition among Swiss health insurers to date has been based on risk selection. Premiums in the Switzerland vary dramatically from one policy to another, yet switching of insurers is relatively uncommon, often because insureds have other forms of insurance with insurers and are reluctant to switch.
And for a stronger risk adjustment mechanism, we can look to the Dutch as an example:
To give you an idea of how robust the Dutch risk adjustment mechanisms are, just over half of all money spent on health insurance goes toward the risk adjustment health insurance fund. That is substantially more than what is proposed in any of the bills in Congress. The Dutch have a long history of using risk adjustment mechanisms in their health insurance and understand how critical the issue of adverse selection is to a working health care system.
The recent CBO report and the CMS report should be a powerful wake up call. The CMS concluded that a robust public option tied to Medicare rates would be so much cheaper that it could afford to absorb the 7% increase in cost due to adverse selection, and still provide high-quality, lower-cost health insurance. The weaker, negotiated rates public option would be only somewhat cheaper and be less able to easily absorb the flood of sick people who would be treated badly by for-profit insurance. Without much stronger risk adjustment mechanisms like the Dutch implemented in their system, no socially responsible insurance plan (be it public, private, or non-profit co-op) can survive with this problem of adverse selection.
The Washington Post has weighed in on this issue as well, with several health policy experts quoted about how private insurers would still cherry-pick and game the system:
But simply banning medical discrimination would not necessarily remove it from the equation, economists and health-care analysts say.
If insurers are prohibited from openly rejecting people with preexisting conditions, they could try to cherry-pick through more subtle means. For example, offering free health club memberships tends to attract people who can use the equipment, says Paul Precht, director of policy at the Medicare Rights Center.
Being uncooperative on insurance claims can chase away the chronically ill. For people who have few medical bills, it is less of a factor, said Karen Pollitz, research professor at the Georgetown University Health Policy Institute.
And to avoid patients with costly, complicated medical conditions, health plans could include in their networks relatively few doctors who specialize in treating those conditions, said Mark V. Pauly, professor of health-care management at the University of Pennsylvania's Wharton School.
So, the reforms of the weak risk adjustment mechanisms in the House and Senate bill, rather than being a part of this present health "insurance reform" bill, would likely come after the fact once this bill has been passed. People should be aware that their claims will still be denied, and that they'll face administrative hassles, and likely disincentivized from staying with a certain insurer by being pushed off onto the public option.
It's been an interesting slog this far, watching this bill get weakened and watered down further at the behest of private insurers and their corporate lackeys in the House and in the Senate. Will this insurance reform produce benefits? Likely yes. Will people get angry and blame the government if the benefits aren't produced sooner than 2014, which is about four years away? Likely, yes, and that onus is on the Democrats for adhering to a budgetary cap of $900 billion, which resulted in weaker subsidies for the middle class, and delay of benefits such as the exchange, public option, and other reforms.