EOB (Explanation of Blog)
This blog consists of three procedures, each billed separately. Procedure I palpates some thoughts about insurance in general. Procedure II diagnoses my situation with respect to ObamaCare and how various factors impact the insurance premiums I pay. Procedure III examines the cost of health care and the premise of ObamaCare. Procedure IV is the first thing they do in the ambulance but, as I said, that procedure is not part of this blog.¹
I. About Insurance
There are a few different ways to look at the elephant we call health insurance.
The first and original view of health insurance is as a prepayment for care one expects to receive or contracts to receive. “In 1929, a group of schoolteachers arranged for Baylor University to provide hospital benefits on a prepaid basis. This plan is considered the forerunner of Blue Cross plans, which were organized by a group of hospitals to permit and encourage prepayment of hospital expenses.” [Vaughn & Vaughn, “Fundamentals of Risk and Insurance”, Ninth Edition, 2003.] Think of the extended warranty or service contract we are usually pestered to buy along with our televisions and tablets. You are buying the right to have one’s equipment (or one’s body) repaired sometime in the future at little or no additional cost.
The second and more general way to view insurance is as a payment to another to absorb a financial risk you are unwilling or unable to absorb yourself. There does not need to be a pool of people taking risks similar to yours — any risk can be evaluated on its own merits. Think Lloyd’s of London. On its website today, Lloyd’s claims it has “issued a £1m policy to the National Sea Life Centre against attack by their giant Japanese crab.” Obviously, marine life facilities that harbor killer crabs do not comprise a statistical risk pool, yet such uncommon risks are commonly insured.
Lloyd’s is able to insure these one-of-a-kind risks by virtue of its deep pockets and its ability to price its premiums in line with its risk, so that Lloyd’s will come out ahead in the long run. Historically, private health insurers used a similar model: your premium was individually determined, based on your age, sex, weight, health history and pre-existing conditions.
Since I do not have employer-based group coverage, this is how I have insured myself the last few years. Luckily, my risk profile has been reasonably low.
The third way to look at health insurance, and the way Americans are now encouraged to view it, is as a mutual loss-sharing enterprise administered by a neutral third party, i.e., the insurance company. In this scenario, the insurance company charges just enough to cover its own costs and make a profit, while the cost structure of medical care is spread among the insured. Everyone pays a little more (either directly via premiums or indirectly via taxes) so that no member of the group has to experience personal financial ruin from health-related problems.
This is ObamaCare, in essence, a mutual loss-sharing enterprise. It distributes its losses (i.e., medical costs) among the insured based on age, income, zip code and tobacco use. What it does not do is deliver care per se — it is an insurance program. A better name for it would have been ObamaShield.
II. Why Did My Rate Go Up (? and !)
I am an economic calculator. I am fortunate to have enough financial leeway to weather short-term upsets and make buying decisions that are good in the long run. For example, I do not buy extended warranties, ever. My reasoning is this: no company would sell such a warranty if it expected to lose money on it. It sells the warranty at a price low enough to attract worried buyers but high enough to guarantee a profit. Like a casino, the insurer has a good idea what the odds are and what its take will be. It is not logical to think that the average consumer will come out ahead on a deal that has been structured in favor of the insurer. As I am just an average consumer, no less lucky than the next, I abide by logic and I stay away.
I do similar calculations when buying health insurance. My main goal is to cap my total possible out-of-pocket cost to something financially manageable. I want insurance for the big ones: heart attacks, strokes, cancer, car accidents, disabling diseases. Misfortunes or diagnoses that can cripple financially as well as physically. That is why a high-deductible policy worked for me. I paid for the lower-cost expenses myself so that I would pay less over the long term.
My current policy has a $10,000 per person deductible and $10,000 out-of-pocket max. That means that I pay all of my expenses (after the usual insurance company adjustment) up to $10,000 — after that, BCBS of North Carolina pays 100%. This policy costs me $156 per person per month and it expires (or will it?) at the end of 2013. Doing the math, I find that the minimum I will have to pay for my health care this year is 12 x $156 = $1,872 and the maximum I will have to pay is $10,000 more than that, or $11,872. (As it happened, I did have to pay the maximum this year, thanks to my left eye.)
I now compare this to the “closest equivalent” coverage for 2014 proposed by my insurer. This is the “Bronze 5500” plan with a $5,500 deductible and $5,500 out-of-pocket max. (High-deductible policies like what I have now can no longer be offered to people over 30. The Affordable Care Act sets a $6,350 cap on the maximum individual out-of-pocket cost.) Since I am not eligible for a subsidy, the BCBS Bronze 5500 policy will cost me $511 per person per month, or 327% of what I am paying now.
Out of Pocket Costs - Current Policy vs Bronze 5500
So the amount I am 100% certain to pay for health care goes up from $1,872 in 2013 to $6,132 in 2014. The most I will have to pay stays the same, $11,872 now vs. $11,632 next year. The chart at left (click to zoom) shows what I would pay for various levels of billed expenses. The bottom line is that I am sure to pay a lot more in 2014 than in 2013, unless my billed expenses reach $10,000 or more. What explains this?
Highmark Bronze Plans - Premium vs Deductible
One possibility is that the low deductible is driving up the premium. To see how deductibles affect premiums, I looked at the rate guide published by Highmark of West Virginia for its 2014 Bronze Plans. The chart at right (click to zoom) shows the monthly premium for the average 60-year-old for Highmark Bronze Plans with various deductibles. Note that the monthly premium actually goes up with the higher-deductible plans!
In the past, the deductible amount had a strong effect on the premium one paid. With the plans offered under the Affordable Care Act, things are a bit more complicated. The Bronze Plans in the chart above not only have different deductibles but different coverage levels and co-pay amounts for selected services. All Bronze Plans are designed to cover 60% of one’s expected medical expenses, and while different plans go about this in different ways, on average they all provide about the same economic benefit. That is why the premiums for the plans in the chart above are all in the same range.
Just for comparison’s sake, I went to the BCBS of North Carolina site and looked for the 2013 policy that is closest to the Bronze 5500 plan they are suggesting for 2014. The best match is the 2013 Blue Advantage Saver with a $3500 deductible, $7,000 out-of-pocket maximum, and 60% coverage on services. If I were to sign up today, this plan would cost $187 a month. The Bronze 5500 policy BCBS is offering me for 2014 costs 2.7 times that. So the deductible is not the issue here.
Highmark Bronze 5000 Plan - Cost by Age
What about age? I’m now 60 — is that the reason my rates suddenly shot up? Not really. This chart shows how the cost of a Highmark Bronze 5000 plan increases with age. Yes, a 60-year-old pays more than a 28-year-old, but not much more than a 59-year-old pays.
The 2013 BCBS Blue Advantage Saver plan I mentioned above would cost me the same as what a 28-year-old will pay for a 2014 Bronze plan next year.
If it’s not about age and it’s not about the deductible, then what? Could it be where I live? Does it have anything to do with whether my state uses federal funds to expand Medicaid? First, to get some idea of local and statewide variation in premiums, I again consulted the 2014 rate tables published by Highmark of West Virginia.
Highmark Bronze 5000 Plan - Cost by County Group
Highmark has divided West Virginia into five rate groups. The group you belong to and the rate you pay depends on the county you live in (see chart). This effect is larger than I had imagined. Example: a 60-year-old man living in Circleville, WV, will pay $5,304 for the Bronze 5000 plan next year. If he lived in Hillsboro, 67 miles to the south, his total would be $5,880. If he lived in Renick, another 15 miles down US 219, his annual cost would jump to $6,468.
Cost of Bronze 5000 Plans - Various States
There is also wide variation in premiums on a nationwide basis. I selected several cities at random, three from states that rejected Medicaid expansion, three from states that accepted Medicaid expansion and one (from Arkansas) that developed its own plan (see chart). It doesn’t look like a state’s participation (or lack of it) in Medicaid expansion can explain a 300% increase in insurance premiums.
As Sherlock Holmes said, “…when you have eliminated the impossible, whatever remains, however improbable, must be the truth.” In this case, what remains is not so improbable. What remains is that the increase in my premium reflects the true cost of insuring anyone and everyone for various essential services without regard to pre-existing conditions.
In my case, I will be moving from an individually-rated policy to a group-rated policy with no restrictions (other than age, residence and tobacco use) as to who is part of that group. My 2013 premium is 3x less than my 2014 premium will be, because in 2013 I was rated less likely than average to incur large medical costs, and because in 2014 that no longer matters. So that explains that. I will pay 3x more for health insurance than I do now, for the sake of no longer being concerned about my pre-existing conditions, for the sake of ensuring that others in my community have access to care regardless of their income or health status, and for the possible intangible benefit of living in a more healthy society.
This is a kind of social tax and, even considering changes in coverage, my share of this tax is on the order of $3,000 a year. This is rather more than I had been led to believe.
III. What Was the Premise (and Promise) of ObamaCare?
The main goals of the Affordable Care Act (as reported by the HHS website) include:
• Prohibit insurance companies from rescinding coverage
• Eliminate annual and lifetime limits on benefits
• Prohibit discrimination due to pre-existing conditions or gender
• Free preventive services such as colonoscopies and mammograms
• Extend dependent coverage up to age 26
• Close the Medicare prescription drug “donut hole”
I endorse every one of these goals. I have complained for years about how reluctance to report pre-existing conditions to your health provider (lest it poison your medical record) undermines effective care and long-term health; how high-deductible policies encourage the cost-conscious (like me) to put money ahead of their own health; and how unfair it is for one to seek to be healthier only to be punished for it later through higher premiums. (Prior to ObamaCare, you should never, ever have told your insurer you saw a physical therapist. Your visits may have been covered, but you would be put in a higher risk pool in following years, quickly clawing back any benefit you received.)
Each of those goals has a cost, however. Each should be viewed as an additional piece of insurance that will now be included in our plans. Just as refundable airline tickets (a form of insured travel) are more expensive than the non-refundable variety, insurance that has no lifetime limits, cannot be cancelled, and does not consider health history is going to be a more expensive product, because it incorporates more risk to the insurer.
I get this. I understand that the health insurance structure needed to be overhauled for everyone’s sake. And I understand that if I can opt out, and millions of others can opt out, then reform will not be possible, because the numbers will not add up and the cost of these additional pieces of insurance cannot be covered. Still, I feel that I have only been fed the benefits of reform while the expenses, in my case, have been glossed over.
The White House has consistently touted the idea that Americans will be getting better insurance for less cost — I did not hear one instance when rate hikes of 200 to 300% were acknowledged by administration officials. It is as if people in my situation — relatively healthy people buying private insurance but not eligible for federal subsidies — did not fit the narrative and so did not exist. As one White House blog proclaimed, “… families who purchase private health insurance through state-based exchanges … could save up to $2,300 each year on their health care spending.” But factcheck.org says such assurances were “misleading” :
Families counting on a $2,300 savings thanks to the exchanges may be disappointed come 2014. First, some families who were paying sky-high rates may well see some level of savings, and others, who were buying bare-bones plans, will likely see a premium hike. Second, this figure touted by the White House is savings compared with what premiums would have cost otherwise — so it’s not $2,300 in savings from what families are spending now. And third, increased costs due to better benefits may or may not be offset by lower out-of-pocket health care costs, depending on the family. The White House, after all, did say “could.”
As the rate shock for people like me has been coming to light in recent days, it seems some are trying to shift the blame for higher rates to those who bought “low-quality” insurance in the first place and to the insurance companies that had the gall to offer such lousy plans. Rep. Frank Pallone (D) of New Jersey, for example, has objected to any continuation of the so-called “low-quality 2013 plans” into 2014. He may be right, but I will be one of those paying substantially higher costs. While a lower deductible policy may be for my own good, it is hard to fight off the feeling that I’m submitting to a “nanny state” provision.
The truth be told: though I am pleased that we finally have reforms such as no cancellations, no pre-existing conditions, and subsidies for those who can’t afford insurance, I would have preferred that those features were incorporated into a single-payer system like Medicare. With a single-payer system, we might have been able to do something about the overall cost of health care, not just the affordability of insurance. But guess what. That would have meant exposing two inconvenient truths: one, that doctors², hospitals, insurance companies, drug companies and the medical equipment industry will never agree to any reduction in their respective revenue streams, which is really the only way to reduce the overall cost; and two, that a government-run single-payer system would make it clear how much such a program really costs³ and what taxpayers can expect to pay for it. That would never fly in this political environment.
If a single-payer system had been presented to me, and if I were told how much my taxes would go up as a result of the social good to be delivered, the emotional half of my brain could have considered this and embraced it in the spirit of shared sacrifice. But with the Affordable Care Act, President Obama avoided any mention of sacrifice. With his emphasis on product features and how much we can expect to save, he aimed his arguments to the analytical half of my brain, where my internal economist resides. And so my calculations began. And so this blog came to be written.
I wish President Obama would have trusted the people enough to talk about the costs of the Affordable Care Act (and how those costs would be distributed) as much as he talked about its benefits. But that is the reality of politics. It reminds me again (as if I needed reminding) why I dislike politics. It always gets things backwards.
1: Yes, that was a Roman Numeral pun. When it comes to wit, I have no shame. (Or, perhaps, wit.)
2: From the September 8, 2011, New York Times: “Doctor Fees Major Factor in Health Costs, Study Says.” This is a surprise? The study found that “U.S. primary care physicians earn about one-third more than do their counterparts elsewhere … because a much larger share of their incomes is derived from private insurance.” Specifically, among primary care doctors, “those in the United States had the highest annual pretax earnings after expenses — an average of $186,582 in 2008.”
3: As Vaughn & Vaughn  said, “Insurance does not prevent losses [read: health care] nor does it reduce the cost of losses to the economy as a whole. As a matter of fact, it may … have the opposite effect of causing losses and increasing the cost of losses for the economy as a whole.” The Economix blog of the New York Times, in a post titled “How Wider Coverage Affects Health Spending“, cited a specific example: “The Oregon Health Study found that getting Medicaid significantly improved [the group’s] self-reported mental and physical health, as well as their finances. But the Medicaid-insured group on average accounted for $778 more in annual medical expenses than the uninsured, a 25 percent difference.”