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Path to health reform paved with trade-offs

By Steven Pearlstein
Wednesday, October 28, 2009

It's not exactly clear who started the political mud fight between the White House and the insurance industry over health reform. What's clear is that it is in nobody's interest.

Until a few weeks ago, the outlines of the grand bargain were obvious: Insurers would accept the idea that they would have to offer insurance to everyone who wanted it at roughly the same rate, irrespective of health status. They'd also have to accept what amounts to a cap on the tax-free status of health benefits.

In exchange, insurers would preserve the current private insurance system and win a mandate that all Americans be required to buy their product, most often with some help from their employers.

At some point, the deal began to unravel. To hold down the bill's overall cost, negotiators cut premium subsidies to the point that it was unfair to require all households to buy insurance. As insurers saw it, the likely result of these accommodations was that they would be stuck with lots of unhealthy new customers, whom they could charge significantly less than they do now, while forgoing the offsetting benefits of getting all those new young and healthy customers who would be required to buy insurance.

Moreover, despite months of winking and nodding from the White House, insurers began to suspect the final bill would include a "public option," requiring them to unfairly compete with a government-run plan.

The industry response came in a study and in accompanying ads warning that average premiums would skyrocket under the plan. The White House responded by pointing out the shoddy methodology underlying the study and by attacking insurers as greedy enemies of reform.

The truth, as you may suspect, lies somewhere in between.

First, it's important to remember that this argument involves only a small portion of the health insurance market: people who are not on Medicare or Medicaid and who are not employees of medium to large companies. In the early years of reform, this amounts to about 10 percent of the market.

Second, outlawing the current industry practice of charging much higher premiums to people who are old and sick will tend to drive up premiums for those who are younger and healthier. It also drives up premiums if, as the Democrats propose, the minimum benefit levels are more generous than many of the plans now sold to first-time customers.

On the plus side

At the same time, there are aspects of reform that would tend to bring down average premiums.

Without the need to price each policy according to risk, administrative costs would decline, as would marketing expenses, because of the greater efficiency of selling through new government-sponsored insurance exchanges. And because the exchanges would probably draw national companies into regional markets that are now dominated by one or two carriers, savings from increased competition would be likely.

Meanwhile, a new tax on gold-plated policies would almost surely encourage insurers and employees to reduce benefits packages to avoid having to pay the tax, most likely by increasing co-payments and deductibles. That would have the effect of lowering average premiums, even as out-of-pocket costs rose.

Some give-and-take

Add up the pluses and minuses and where it comes out is that premiums in the small-group and individual markets, on average, would probably wind up where they are now or slightly higher.

But looking at the average is probably not all that useful. The changes would vary widely depending on your income (low-income people will get subsidies), where you live (state insurance rules differ greatly) and your age and health.

And while it is true that, in most places, people who are young and healthy would initially pay more, things should pretty much even out over a lifetime as they, too, grow older and sicker.

For two years, the health insurance industry has generally made good on its promise to be a supporter of health reform rather than an obstacle. Not surprisingly, there are still aspects of the House and Senate bills it finds objectionable. But rather than resort to scare tactics that threaten to derail the whole reform process, the industry could have continued to work behind the scenes to address its concerns by offering to trim benefit packages, strengthen the individual mandate and allow slightly greater variations in premiums -- details that most people, and most members of Congress, barely notice.

Likewise, it's time for the White House to stop pretending that health reform will be a winning proposition for everyone, keeping everything about the current system people like while getting rid of all the things they don't. Getting a fairer deal for those who are old and sick has inevitable consequences for those who aren't, while the flip side of slowing the growth in health spending is slowing the growth in the incomes of doctors, hospitals and drug companies. A White House that aims for a new kind of politics ought to be able to acknowledge and defend such trade-offs rather than demonizing anyone who dares to point them out.

Steven Pearlstein will host a Web discussion Wednesday at 11 a.m. at washingtonpost.com.

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