CBO Releases Report On Private Health Insurance Premiums And Federal Policy

Implementing Health Reform. On February 11, 2016, the Congressional Budget Office (with the Joint Committee on Taxation) released a report on Private Health Insurance Premiums and Federal Policy. The report examines the effects of federal subsidies, fees, and taxes; federal regulations; and actions taken by insurers on health insurance premiums. In particular it considers how the Affordable Care Act (ACA) has affected health insurance premiums. The Congressional Budget Office (CBO) did not conduct any original research on these topics. Rather the report describes what economic theory would predict regarding these effects and the limited empirical work that has been done as to what has happened so far under the ACA.

Health Insurance Premiums

The great majority of privately insured Americans are insured in the group market. The CBO projects that by 2025, 180 million will have private coverage, and that 75 percent of these will be in the large group market, 10 percent in the small group market, and 15 percent in the nongroup market. Group health insurance premiums have grown at roughly 4 percent per year since 2012. These rates of growth are much lower than 9 percent growth rates experienced in the early 2000s. Indeed, group health insurance premium increases were close to per capita GDP growth rates between 2012 and 2014. Growth rates were higher in the nongroup market — about 6 percent between 2011 and 2012, but are still probably lower than growth rates before the ACA.

The CBO projects that premiums for private plans will increase at about a 4 percent rate for 2014-2018 and then between 5 and 6 percent from 2019 to 2025, but that if the Cadillac excise tax goes into effect, premiums for employment-based coverage will be 10 to 15 percent lower in 2025 than they would be otherwise. The CBO projects that the premiums for benchmark silver plans in the marketplace will grow 8 percent per year between 2016 and 2018 and thereafter at between 5 and 6 percent per year.

The major federal subsidies for health insurance are the tax exclusion for employer-sponsored coverage, which cost $250 billion in fiscal year 2013 (more now), and the ACA premium tax credits and cost-sharing reduction payments (costing $37 billion and $8 billion respectively in 2016). The employer coverage tax exclusion provides greater benefits for higher-income individuals in higher tax brackets while the ACA premium tax credits and cost-sharing reduction payments benefit lower-income individuals. The federal government also offers tax subsidies for contributions to flexible spending accounts and health savings accounts.

The employer-sponsored coverage tax exclusion attracts lower-risk individuals into the risk pool, driving premiums down, but also creates an incentive to purchase more costly coverage, driving premiums up. The CBO believes that the second effect is the stronger, but that it would be significantly offset by the Cadillac tax. The CBO projects that the primary effect of the tax credits will be to draw healthy people into insurance markets and thus to drive premiums down.

While employee benefits tax exclusion encourages employees who benefit from it to purchase more costly insurance coverage, the method by which premium tax credits are determined incentivizes beneficiaries to purchase less costly insurance. The CBO believes, however that the cost-sharing reductions draw less healthy people into the market and encourages consumption of health services, thus driving premiums up. Tax subsidies for FSAs and HSAs have complex effects, both restraining and stimulating premiums.

The transitional reinsurance program reduced premiums 10 percent in the individual market in 2014 but will have less of an effect as is phases out. The fee that financed it, however, raised premiums in the group markets. The health insurance tax, marketplace user fees, Patient-Centered Outcomes Research Institute fee, and risk-adjustment administrative fee increase premiums, probably by about 2 to 2.5 percent.

The Effect Of ACA Regulations

The CBO report examines the effect of 10 ACA regulations on insurance premiums. The CBO estimates that the individual mandate will have a significant effect on lowering premiums, by as much as 20 percent, because it drives healthy individuals into health insurance markets. The CBO believes that individuals will comply with the mandate even though the penalty amount is less than the cost of insurance because insurance is valuable in itself while an individual who pays the mandate penalty gets nothing in return. The CBO also believes that some will obey the mandate simply because it is a mandate. The CBO projects, on the other hand, that the employer mandate will not have a noticeable effect on premiums, as it will simply shift individuals from the non-group to the group market and does not increase the size of the pool.

The report considers together the effect on premiums of three of the major ACA insurance reforms — the requirements that nongroup and small group policies cover 10 essential health benefits and preexisting conditions and meet minimum actuarial value standards. The CBO had estimated in 2009 that a similar set of requirements would raise premiums 27 to 30 percent in the nongroup market, primarily because of the fact that nongroup policies had comparatively much higher cost sharing before 2014. The CBO had projected that the reforms would have little effect on the group market, where coverage was more generous. The CBO notes that average premiums have been lower than expected in the exchanges, possibly because the CBO had overestimated the effect of these reforms.

The CBO projects that guaranteed issue, guaranteed renewability, modified community rating, and the 3 to 1 ratio limit on age rating will increase premiums in the nongroup market although it does not predict by how much. Although there is some evidence that rate review reduces proposed premiums, the CBO is skeptical as to the extent to which it reduces premiums on net, since insurers can always ask for higher premiums than they need expecting reduction.

The risk adjustment program dampens variation in premiums among insurers but it is a zero-sum game– it does not reduce premiums overall. Finally, the minimum medical loss ratio requirement has probably reduced premiums in the short-term but will have a minimal impact in the long-term. The CBO notes that small groups can opt out of a number of the ACA regulations by self-insuring and that some plans continue to qualify as grandfathered or transitional.

Insurer Costs

The final section of the report describes the costs that insurers face (a topic covered in more depth in an appendix) and what insurers can do to control their costs. Those who follow health insurance issues will not be surprised to find that the vast majority of premium revenue is spent on claims, that administrative costs are much higher in the nongroup than in the group markets (and lowest in the large group market), and that profits in the 2011-2012 period were in the 2 to 3 percent range in the group markets and were negative (-1 percent) in the nongroup market.

Steps insurers can take to reduce premium growth include the use of provider networks, utilization management, increased cost-sharing, and price competition. The CBO observes, as have many others, that insurance markets in the United States tend to be highly concentrated, reducing the potential effect of competition.

There is plenty of ammunition for both supporters and opponents of the ACA in the CBO report. The CBO agrees with opponents that ACA regulations and taxes have increased premiums. The CBO is skeptical that provisions of the ACA intended to restrain premium growth, such as rate review and the medical loss ratio provisions, have had a significant effect on premiums. But the CBO sees some of the most often challenged provisions of the ACA, like the individual mandate and premium tax credits, as in fact bringing down premiums. And it does not believe that often-criticized regulatory requirements, such as the essential health benefit requirement, are major cost drivers.

In fact the one regulatory requirement that the CBO identifies as having the greatest effect on increasing premiums is the ACA’s increase in the minimum actuarial value of nongroup plans, which is ironic given the criticism that the ACA has received for increasing cost sharing. Most importantly, the premium increases that the CBO projects for the coming years under the ACA are modest, lower than premium increases in the early 2000s before the ACA. The report decisively rejects the predictions of some ACA opponents that the ACA is about to put insurance markets into a death spiral with steadily rising and unaffordable premiums.

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