Today in the Wall Street Journal an article explores the issue of ‘rate shock’ under the Affordable Care Act (aka ‘Obamacare’). Louise Radnofsky reports:
Healthy consumers could see insurance rates double or even triple when they look for individual coverage under the federal health law later this year, while the premiums paid by sicker people are set to become more affordable, according to a Wall Street Journal analysis of coverage to be sold on the law’s new exchanges.
The exchanges, the centerpiece of President Barack Obama’s health-care law, look likely to offer few if any of the cut-rate policies that healthy people can now buy, according to the Journal’s analysis. At the same time, the top prices look to be within reach for many people who previously faced sky-high premiums because of chronic illnesses or who couldn’t buy insurance at all…
A review of rates proposed by carriers in eight states shows the likely boundaries for the least-expensive and most costly plans on the exchanges. The lower boundary is particularly important because the government wants to attract healthy people to the exchanges, and they may choose to pay a penalty and take the risk of going without coverage if they believe they can’t get an acceptable deal.
The whole article is worth the read (“Health-Insurance Costs Set for a Jolt,” subscription required), but one thing in particular jumped out at me – a comment about the “Chevy vs. Cadillac” comparison that has been used frequently in debates over Obamacare (Google “Chevy” “Cadillac” and “Affordable Care Act” and you’ll get 31 million hits on a wide variety of issues, such as minimum benefits, taxes on generous plans, and other health care topics) and the requirements for more generous benefits in all health insurance policies:
Bob Laszewski, a Virginia health-care consultant and former insurance executive, said the new offerings were likely to anger people who had preferred lower-cost products that were no longer available.
“If a person in 2013 has a choice of buying a Chevrolet or a Cadillac health plan, and in 2014, they can only buy a Cadillac…are they going to be upset? I think the answer is, yes,” he said.
This “Chevy vs. Cadillac” comparison has been used recently by defenders of Obamacare to suggest that, while premiums are in fact rising, it’s because the insurance is better and therefore people won’t mind paying higher premiums because more services will be covered, maximum out-of-pocket costs will be capped, there won’t be any annual or lifetime limits on benefits, and so forth.
This was the line taken by Jonathan Cohn of New Republic in a recent blog post on rate shock in Ohio:
Then there is the matter of the benefits… Next year, when you go to buy coverage in an Obamacare exchange, you will know that your plan will include a set of “essential health benefits.” …the law will limit what you pay in out-of-pocket expenses to $6,350 for an individual…
A $6,350 deductible is still quite big… But compare that to one of the policies available in Ohio today—the Saver 80, from UnitedHealth. The Saver 80 will pay for periodic preventative visits and childhood immunizations, all without co-pays. But if you need any of the other services included in the policy, you’ll pay for them out-of-pocket until you’ve reached a $10,000 deductible. At that point, you’ll generally pay 20 percent of your bills until you’ve spent another $3,000, at which point full insurance coverage will finally kick in. Yes, that’s maximum out-of-pocket spending of $13,000.
And that’s just for the “covered services.” The insurance does not include office visits, aside from the periodic exam. So if you go to your primary care doctor for a sore throat or a rash, or if you need to see a specialist for any reason, you’ll pay for the visit on your own—and the spending won’t even count toward your deductible…[and] there’s no real prescription drug coverage.
…Rate shock, which will ultimately affect only a small portion of the overall population, doesn’t simply reflect the extra premiums these people will pay while they are healthy. It also reflects the savings these people will realize while they are sick.
But there is one crucial flaw in this particular argument – even though they’re being forced to pay for a “Cadillac” insurance product, most people are still only going to get a “Chevy” ride.*
Automobiles generally provide a relatively similar experience for their owners. While there are a handful of people who might drive their Cadillac only a few thousand miles a year, and another handful that might drive it 25,000 or more miles a year, most Cadillac owners are going to fall somewhere in the middle, getting roughly the same level of use, comfort and satisfaction as every other Cadillac owner. Ditto for Chevy owners. In sum, Cadillac owners are getting a Cadillac experience for a Cadillac price, and Chevy owners are getting a Chevy experience for a Chevy price.
But in health insurance, relatively few people will actually receive most of the “better” benefits. This Kaiser Family Foundation report shows that nearly half the population have very few health care costs in any given year, and 85 percent of the population have health costs that are less than the maximum out-of-pocket cost allowed under Obamacare. It’s important to note that the distribution of health expenses in the Kaiser report includes Medicare recipients, who tend to be at the very high end of the health care cost distribution.
What this means is that, for all practical purposes, relatively few people who are under 65 will get to receive many of the new health benefits that come with the new, higher premium. Only those that incur major medical expenses, fortunately a small minority of the under-65 population, will get the new “Cadillac” benefits that come with their :Cadillac” priced plan. For the overwhelming majority of Americans forced to pay a “Cadillac” price for their insurance plan, they’ll still only get the same “Chevy” ride they had before.
Needless to say, this strongly suggests that efforts to get both the insured and the uninsured to buy more expensive insurance is likely to run into serious problems, dealing yet another setback to Obamacare.
* Please note, there is absolutely nothing wrong with a Chevy ride, it’s a fine vehicle, but I think even the Chevy marketing folks would agree it’s not quite as nice as a Cadillac!