Path to health reform paved with trade-offs
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.