Potential Impact of Health Reform on the Cost of Private Health Insurance
Potential Impact of Health Reform on the
Cost of Private Health Insurance Coverage
October 2009
This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP
and its Client. As to all other parties, it is for general information purposes only, and should not be used
as a substitute for consultation with professional advisors.
This document is not intended or written to be used, and it cannot be used, for the purpose of avoiding
U.S. federal, state or local tax penalties.
Potential Impact of Health Reform on the
Cost of Private Health Insurance Coverage
Table of Contents
Executive Summary ............................................................................................................................................E-1
Introduction ..............................................................................................................................................................1
Private Health Insurance Coverage ........................................................................................................................2
Issue A - Insurance Market Reforms Without a Strong, Workable Coverage Requirement................................2
Issue B - Excise Tax on "Cadillac Plans"................................................................................................................5
Issue C - Increased Cost Shifting.........................................................................................................................10
Issue D - Assessments on Health Sector Entities................................................................................................12
Interaction of the Issues........................................................................................................................................12
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
E - 1
Key Findings
Health reform could have a significant impact on the cost of private health insurance
coverage.
There are four provisions included in the Senate Finance Committee proposal that could
increase private health insurance premiums above the levels projected under current law:
o Insurance market reforms coupled with a weak coverage requirement,
o A new tax on high-cost health care plans,
o Cost-shifting as a result of cuts to Medicare, and
o New taxes on several health care sectors.
The overall impact of these provisions will be to increase the cost of private insurance
coverage for individuals, families, and businesses above what these costs would be in
the absence of reform.
On average, the cost of private health insurance coverage will increase:
o 26 percent between 2009 and 2013 under the current system and by 40 percent
during this same period if these four provisions are implemented.
o 50 percent between 2009 and 2016 under the current system and by 73 percent
during this same period if these four provisions are implemented.
o 79 percent between 2009 and 2019 under the current system and by 111 percent
during this same period if these four provisions are implemented.
Executive Summary
Private healthcare costs are anticipated to grow over the next decade by approximately 6 percent per
year under current law, which is more than double the expected growth in the Consumer Price Index of
approximately 2.5 percent per year.1 Controlling the growth in these costs will require restructuring and
realigning the incentives in the system.2 While the healthcare reform packages take steps in this
direction, a major focus of the current legislation is on expanding insurance coverage. These reforms
propose to make insurance more widespread by providing new subsidies for the uninsured and those with
lower incomes by reforming the health insurance market.
America's Health Insurance Plans engaged PricewaterhouseCoopers (PwC) to examine the impact of
four components of the health reform bill being proposed by the Senate Finance Committee as
1 The 6 percent increase is consistent with the per capita growth rate in total health expenditures as detailed in the
National Health Expenditure Accounts, Projected total health expenditures 2010 to 2018. The Blue Chip Consensus
expects inflation to average 2.5 percent over the same period.
2 PwC has previously estimated that structural reforms, such as improved wellness and prevention, disease
management, value based payment reform, improvements in health information technology, comparative
effectiveness and malpractice reform, could mitigate growth in healthcare costs by between 0.5 and 1.0 percent per
year after an initial investment period. See PricewaterhouseCoopers "A Review of AHIP Savings Estimates" in
Appendix to AHIP, "A Shared Responsibility," 2008.
.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
E - 2
introduced. These include:
Insurance market reforms and consumer protections that would raise health insurance
premiums for individuals and families if the reforms are not coupled with an effective coverage
requirement.
An excise tax on employer-sponsored high value health plans (or "Cadillac plans") that in a few
years could also raise premiums for some moderate value plans.
Cuts in payment rates in public programs that could increase cost shifting to private sector
businesses and consumers. These changes are expected to more than offset the potential
reduction in cost shifting resulting from providing coverage to the uninsured.
New taxes on health sector entities that are likely to be passed through to consumers.
The increases in private health insurance coverage described above would be on top of the underlying
growth in medical costs over the coming period.
This analysis shows that the cost of the average family coverage is approximately ,300 today and
could be expected to increase to approximately:
,500 in 2013 under current law and to ,200 if these provisions are implemented.
,400 in 2016 under current law and to ,300 if these provisions are implemented.
,900 in 2019 under current law and to ,900 if these provisions are implemented.
This analysis shows that the cost of the average single coverage is ,600 today and could be expected
to increase to:
,800 in 2013 under current law and to ,400 if these provisions are implemented.
,900 in 2016 under current law and to ,900 if these provisions are implemented.
,200 in 2019 under current law and to ,700 if these provisions are implemented.
The charts below outline the impact of these provisions on premiums for both single coverage (chart 1)
and family coverage (chart 2). The bottom line illustrates the cost growth in premiums for the entire
private health insurance sector3 taking into account medical growth and inflation. The top line illustrates
the cost growth in premiums after adding the impact of these Senate Finance Committee provisions4.
3 This is a weighted average of the individual, small group, large group and self-funded markets.
4 Impact assumes payment of tax on high-value plans, full cost-shifting of cuts to public programs, and full passthrough
of new industry taxes.
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E - 3
Chart 1: Average premiums for single coverage are estimated to be about ,800 in 2010, will
increase to approximately ,200 in 2019 in the absence of reform and could increase to 00 if
these reforms become law.
Market Composite - Single
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Chart 2: Premiums for family coverage will increase from about ,000 in 2010 to
approximately ,900 in 2019 in the absence of reform and ,000 if these reforms become
law.
Market Composite - Family
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
E - 4
As the above charts illustrate, by 2019 the cost of single coverage is expected to increase by ,500
more than it would under the current system and the cost of family coverage is expected to increase by
,000 more than it would under the current system. This amounts to an additional 18 percent increase
in premiums by 2019. The overall 18 percent increase is a composite of increases by market segment as
follows:
49% increase for the non-group (individual) market;
28% increase for small employers (those firms with fewer than 50 employees);
11% increase for large employers with insured coverage; and,
9% increase for self-insured employers.
The overall impact of these provisions will be to increase the cost of private health insurance coverage for
individuals, families, and businesses. The net impact of these increases on households would include the
impact of these increases and the new subsidies provided under the bill.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 1 -
Introduction
The health care reform debate has focused on three main issues: providing affordable coverage to the
uninsured, promoting quality healthcare, and "bending the cost curve", or slowing the growth of
healthcare spending. While complementary in some cases, these goals can also conflict. Efforts to
increase coverage and promote quality could lead to a more efficient healthcare sector, but they could
also lead to increased growth in costs if implemented without a full appreciation of the downstream impact
on cost of health insurance coverage. Analyzing the overall impact of these reform efforts requires an
evaluation from all perspectives. America's Health Insurance Plans engaged PricewaterhouseCoopers
(PwC) to examine the potential impact of certain provisions of health reform bills on the cost of private
health insurance coverage.
Private healthcare costs are anticipated to grow over the next decade by approximately 6 percent per
year under current law, which is more than double the expected growth in the Consumer Price Index of
approximately 2.5 percent per year.5 Controlling the growth in these costs will require restructuring and
realigning the incentives in the system.6 While the healthcare reform packages take steps in this
direction, a major focus of the current legislation is on expanding insurance coverage. These reforms
propose to make insurance more widespread by providing new subsidies for the uninsured and those with
lower incomes.
This report focuses on several key provisions that are part of current health reform proposals that would
have a significant impact on the premiums for private health insurance coverage, including:
Insurance market reforms and consumer protections that would raise health insurance
premiums for individuals and families if the reforms are not coupled with an effective coverage
requirement.
An excise tax on employer-sponsored high value health plans (or "Cadillac plans") that could
raise premiums for many private consumers.
Cuts in payment rates in public programs that could increase cost shifting to private sector
businesses and consumers. These changes are expected to more than offset the potential
reduction in cost shifting resulting from providing coverage to the uninsured.
New taxes on health sector entities that are likely to be passed through to consumers.
Collectively these provisions would raise the premiums for private health insurance coverage.
The reform packages under consideration have other provisions that we have not included in this
analysis. We have not estimated the impact of the new subsidies on the net insurance cost to
households. Also, if other provisions in health care reform are successful in lowering costs over the long
term, those improvements would offset some of the impacts we have estimated.
5 The 6 percent increase is consistent with the per capita growth rate in total health expenditures as detailed in the
National Health Expenditure Accounts, Projected total health expenditures 2010 to 2018. The Blue Chip Consensus
expects inflation to average 2.5 percent over the same period.
6 PwC has previously estimated that structural reforms, such as improved wellness and prevention, disease
management, value based payment reform, improvements in health information technology, comparative
effectiveness and malpractice reform, could mitigate growth in healthcare costs by between 0.5 and 1.0 percent per
year after an initial investment period. See PricewaterhouseCoopers "A Review of AHIP Savings Estimates" in
Appendix to AHIP, "A Shared Responsibility," 2008.
.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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Private Health Insurance Coverage
Private health insurance coverage is spread across several different segments. The majority of the U.S.
population receives coverage through employers. Large employers either purchase coverage on behalf
of employees at a regional or national level from health insurance companies, or self-insure, sometimes
using a health insurance company as a plan administrator. The small group market includes small
employers purchasing insurance in local markets. Individuals without employer-provided insurance
purchase plans obtained in local markets.
Health reform targets many of its insurance reforms to the small group and individually purchased
markets. These markets are expected to serve as the vehicle to provide new coverage to the previously
uninsured and replacement coverage to others interested in new plans. However, the market reforms
that are part of the current reform proposals could affect the ability of this market to provide attractive
insurance plans.
The large group market would also be impacted by health reform, as cost shifting, new health sector
taxes, and an excise tax on high value plans lead to higher costs.
Given that the majority of the US population is covered by some form of private insurance, the impact of
these health reform provisions could affect the health insurance of most Americans.
Issue A - Insurance Market Reforms Without a Strong, Workable Coverage Requirement
There are three major components to insurance market reforms and consumer protections – guaranteed
issue regardless of a pre-existing condition, rating reform and the individual coverage requirement. There
is also an array of benefit options intended to offer affordable choices to meet diverse consumer needs.
These elements interact to produce varying impacts on premium rates, depending on the segment of the
population being analyzed. Additionally, the strength of the individual coverage requirement is critical in
determining the impact of the other elements.
In this section of our report, we have reviewed and relied on extensive modeling by the Hay Group, an
actuarial and benefits consulting firm. The results highlight the potential impact of proposed health care
reform proposals on the non-group (individual) market. The Hay Group’s analysis shows major increases
in premium levels resulting from the proposed insurance reforms.
The root cause of the impact is the combination of several key factors:
A weak individual coverage requirement, coupled with a guarantee issue requirement, no preexisting
condition limits and no rating based on health status;
The impact of limiting the differential between age bands in rating, which can increase costs
substantially for younger individuals;
New minimum benefit requirements that may require people to buy coverage that is more
expensive than options to which they have current access7 ; and
Allowing more and more individuals to "opt-out" of coverage based on a standard that will be
increasingly difficult to meet as premiums increase due to the factors listed above.
7 Under the Senate Finance Committee proposal, benefit plans at the “Bronze” level (generally the lowest cost tier
available) must have an actuarial value of approximately 65%. In Massachusetts, benefit plans in the lowest cost
Bronze level must have an actuarial value of roughly 56%. Congressional Research Service, Setting and Valuing
Health Insurance Benefits, p. 1, April 6, 2009.
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The modeling results summarized in the table below show the impact of the guarantee issue requirement
coupled with a low, weak or no individual coverage requirement. In states that allow underwriting of
individuals (45 states plus the District of Columbia), premiums could increase by approximately 41% to
59% on average by 2016, depending on the strength of the individual coverage requirement8. These
increases would take several years to be fully realized, but would begin to rise as unhealthy or sick
individuals began to purchase coverage, while younger, healthier individuals decided it was less
expensive for them to forego coverage without consequence or consideration of the impact of the overall
pool.
Individual in Underwritten States
Estimated Change in Average Market Premium
With Low or Weak Mandate
41-54%
These figures assume the presence of temporary risk spreading mechanism or “reinsurance" to ensure
that the costs of high risk individuals are spread across plans in an equitable way. Without this
assumption, average premium increases listed above would range from 47-62%. The scenarios depicted
in the model all assume premium assistance that attempts to follow the structure set out in the Senate
Finance Committee's Mark called "America’s Healthy Future Act".
In the Senate Finance proposal, the rate band restrictions9 would result in a maximum spread in rates by
age to a 4-to-1 ratio. This ratio would further increase costs for younger individuals while reducing costs
for older individuals. However, this reduction in costs for older individuals in underwritten states would be
more than offset by the 41% to 54% increase in average premiums mentioned above. In the underwritten
states, the combined impact of guarantee issue and rate band restrictions could be expected to result in
an increase in premiums of 59% to 63% for 18-24 year olds while older individuals aged 60-64 could be
expected to see increases in the 33% to 37% range assuming a low or weak mandate and a maximum 4-
to-1 rate band ratio.
Age 18-24
Age 40-44
Age 60-64
Estimated Change in Market Premium by Age Band in Underwritten States
Assuming Low or Weak Mandate and a Maximum 4-to-1 Rate Band Ratio
59-63%
48-52%
33-37%
In addition, there are several factors that could contribute further to the premium increases likely to result
from these reforms and potentially threaten to create premium spirals. These include:
A lack of coordination between the implementation of new market rules and the phase-in of the
individual coverage requirement. While the new market rules are implemented in full in Year 1,
the individual coverage requirement is delayed and then phased in gradually. Once the
8 5 states are guarantee issue states and they already have average premiums significantly in excess of those
available in underwritten states. Other states may offer a "carrier of last resort". In states that already require
guarantee issue, rates could actually be reduced by 16% to 22%, as more people enter those markets due to the
additional premium subsidies provided under reform. Nonetheless, since the majority of states are not guarantee
issue, the average increase across the entire individual market could still be more than 40 percent by 2016 under the
weak mandate.
9 A rate band restriction limits the difference in how much one person pays versus another person based on a set
factors including age.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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penalties for lack of coverage are fully phased in, they are estimated to be less than 10 percent
of the average cost of coverage resulting in a relatively low incentive for individuals who are
healthy to buy insurance.
Because there is no coverage requirement in Year 1, we would anticipate significant adverse
selection to occur in the existing market, increasing premiums for those who have coverage
today. Higher premiums will result in more individuals being exempted from the coverage
requirement. Once the requirement is implemented, the penalties will be phased in, so that they
will not reach full effectiveness for several years. This lack of coordination increases the
likelihood of a premium spiral that “gets ahead” of the coverage requirement which, with the
combination of an income-based opt-out and low penalties, may further reduce the incentive for
those who are healthy to buy coverage. This may then cause an increase in premiums for
those with coverage today.
Proposals to further compress age bands will likely increase the cost of coverage for younger
individuals and make it less likely that they will obtain coverage. As fewer and fewer young
people come into the system, overall premiums will increase for everyone.
New excise tax provisions on various industries that are likely to raise average premiums in the
market as discussed below. The non-deductibility of the excise tax further increases the
effective impact of the tax leading to further increases on health insurance premiums.
Small Group
Small group rates will also be impacted by these changes. Small employers face an affordability
challenge today in offering health care coverage to their employees. Virtually all of the bills being
considered by Congress would apply the same rating rules to small employers that would ultimately apply
to the non-group market, whether provided in or outside a health insurance exchange. Additionally, these
market reforms include minimum and tiered benefit requirements10.
All health reform bills pending before the Congress would create health insurance exchanges. Current
proposals appear to contemplate a structure whereby small employers could make a defined contribution
on behalf of their employees seeking coverage in the exchange. Those employees could then choose
between competing health plans offerings within a benefit tier. Given that the rating rules in the exchange
and benefit levels would ultimately be uniform, and that existing employer groups may be disaggregating
by requiring individuals to pick their own plan, it is unclear to what extent premiums in the exchange
would differ for individuals accessing the exchange on their own versus individuals accessing the
exchange through their employer11.
The proposed reforms applicable specifically to small group coverage are projected to lead to significant
increases in premiums for most small businesses. While the requirement to offer coverage on a
“guarantee issue” basis is already required under federal law in the group market the proposal to prohibit
any premium variation between groups based on claims experience or health status will likely impact
coverage in many states. This reflects the fact that most states (39) already limit by how much health
plans can vary premiums between different small businesses based on the claims experience or health
10 Unless subject to “grandfathering,” small businesses offering coverage not meeting the newly established
“minimum creditable coverage” would need to “buy up” their coverage. In addition to establishing a minimum
actuarial value of 65%, the proposal being considered by the Senate Finance Committee would require coverage of
all benefit mandates whether required at the state or federal level.
11 This point is borne out by CBO estimates which project premiums for plans offered in the exchange, without
distinguishing between whether those premiums are for individuals accessing coverage through the exchange on
their own or through their employer.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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status of the group. They do not, however, prohibit rating based on the group’s experience altogether12.
In addition, prohibiting a small business’s own experience from being taken into account in establishing
premium rates will tend to raise rates significantly for the majority of small businesses.
In addition, the income based premium credits are only available to individuals and families purchasing
coverage through the new insurance exchanges – they are not available to employees (and their families)
receiving coverage through an employer except under limited circumstances13. The effect of this
structure might be to weaken incentives for maintaining small group coverage, leading to a shift towards
individual purchase through the new exchanges. The level of premiums for coverage offered through the
exchange for individuals (which under the Senate Finance Committee proposal would be the same as
outside the exchange) would likely impact the amount of take up expected in the exchange.
The combined impact on small group premiums, assuming employers did not reduce benefits to offset
increased costs is estimated at 13% to 15% on average or roughly ,200 per individual and ,200 per
family based on projected rates for 201314. It should be noted that the impact of proposed health care
reforms on small businesses assumes the retention of a distinct small group market. If certain policy
changes such as those discussed caused small firms to shift to individually purchased coverage through
the exchange, the results could be different then estimated.
Issue B - Excise Tax on "Cadillac Plans"
As one of the revenue enhancements to support health reform, the Senate Finance Committee is
considering an excise tax on employer-sponsored high-value health plans, or "Cadillac plans".15 Besides
raising revenue, this excise tax is intended to discourage the proliferation of plans with minimal cost
sharing. Many believe that if a plan were to be subject to the tax, efforts would be made to eliminate
benefits or increase cost sharing in order to avoid the 40 percent excise tax. The excise tax is based on a
flat dollar threshold of ,000 for individuals and ,000 for families. Healthcare costs and consequently
premiums tend to vary by many factors including geography, age, morbidity and whether additional health
benefits are offered (e.g. dental, vision, flexible spending accounts). In addition, since those thresholds
are intended to be indexed by CPI plus 1 percent, they are not expected to keep up with health care
costs, which are assumed to grow by 6 percent in the future.
12 The most common permitted level of variation between small businesses based on claims experience or health
status is +/- 25% on initial issue of the policy and +/-15% on policy renewal.
13 Under the Senate Finance Committee legislation, an employee who is offered coverage that does not have an
actuarial value of at least 65 percent or who is offered unaffordable coverage by their employer can be eligible for the
tax credit.
14 These estimates would also increase by approximately 7% if “groups of one” remained in the small group market.
In addition, these projections assume that small businesses that found these increases due to health reform too much
to bear would stop offering coverage. If this assumption proved wrong, the average increase for all small businesses
would be higher.
15 As recorded in the Senate Finance Committee's, "America's Healthy Future Act of 2009," as amended and
released on October 2, 2009. The Act imposes a 40 percent excise tax on insurers "if the aggregate value of
employer-sponsored health coverage for an employee exceeds a threshold amount." The threshold amounts will
start at ,000 for individual coverage and ,000 for family coverage in 2013, and will be grown each year at the
consumer price index for all urban consumers plus one percent. The thresholds are increased for employees in "high
risk professions," which include law enforcement officers, firefighters, members of rescue squads or ambulance crew,
and individuals engaged in the construction, mining, agriculture, forestry, and fishing industries.
PricewaterhouseCoopers did not consider the increased thresholds for high risk professions for the purposes of this
analysis. For the 17 highest healthcare costs states, the thresholds will be increased by 20 percent in 2013, 10
percent in 2014, and 5 percent in 2015 to provide transition relief.
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PwC performed two separate analyses of the impact of the excise tax on "Cadillac plans".
First, we looked at a distribution of COBRA rates16 for large employers to determine how many plans can
reasonably expect to be affected by the tax and when they would be affected. In addition, benefits such
as dental coverage and flexible account contributions made by enrollees would also be included in
determining the excise tax, as would any cost shifting or other health cost changes caused by reform.
We have estimated the potential impact of the tax on premiums. Although we expect employers to
respond to the tax by restructuring their benefits to avoid it, we demonstrate the impact assuming it is
applied. As the threshold is indexed to CPI-U which has generally been lower than medical trend, it is
expected that many plans that currently have premium rates that are beneath the threshold will ultimately
reach it.
The tax on Cadillac plans will only apply to plans that exceed the thresholds in a given year. However, in
order to illustrate the impact of the tax on health plan expenditures as a whole, we have estimated that
the tax will add an average of 5% to Large and Small Group insurance premiums in 2016. The estimated
impact of the tax on Cadillac plans on premiums over time is shown in the following chart:
Tax on Cadillac Plans as a Percent of Overall Premium
0%
2%
4%
6%
8%
10%
12%
14%
16%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Percent Increase in Premium
PwC also examined the impact of the excise tax on the mandated plans expected to be offered under the
state health insurance exchanges detailed in the Senate Finance Committee Bill.17 We estimate that in
many metropolitan areas, which tend to have higher than average medical costs, the lowest option plan
(Bronze Plan) would be considered a "Cadillac plan" as early as 2016. By 2016 at least one of the
mandated plans will be considered a "Cadillac plan" and be subject to the 40 percent excise tax in 17 of
50 states. By 2019 at least one of the mandated plans will be considered a "Cadillac plan" and be subject
to the 40 percent excise tax in 24 of 50 states.
16 2009 COBRA rates for approximately 300 large companies were analyzed from the PwC Touchstone Survey and
evaluated against the parameters of the excise taxes. An adjustment was made to remove the 2% administrative
load. A copy of the results of the 2009 PwC Touchstone Survey can be obtained at:
http://www.pwc.com/us/en/healthcare/publications/pwc-health-and-well-being-touchstone-survey-results.jhtml
17 Based on "baseline" assumptions (6 percent annual trend; 15 percent supplemental load for additional benefits,
age, morbidity and other factors)
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Plans Exceeding "Cadillac Plan" Threshold in 2019 by State (@ 6% Trend)
Plan Design
Bronze Silver Gold Platinum None
Furthermore, if actual healthcare increases over the next several years average 8 percent, by 2019 at
least one of the mandated plans will be considered a "Cadillac plan" and be subject to the 40 percent
excise tax in 46 of 50 states. In California, New York, New Jersey, Florida, Pennsylvania, Massachusetts,
Maryland and Delaware, the Bronze Plan would be considered a "Cadillac plan".
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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Plans Exceeding "Cadillac Plan" Threshold in 2019 by State (@ 8% Trend)
Plan Design
Bronze Silver Gold Platinum None
In addition, even in the short run, state averages are not indicative of the magnitude of the impact. For
example, the following charts highlight the impact of the excise tax in 2016 and 2019 for several areas of
the country. The metropolitan areas are impacted much more quickly than the secondary areas.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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Plans Exceeding "Cadillac Plan" Threshold by Local Area (@ 6% Trend)
2016 2019
Plan Design
Bronze Silver Gold Platinum None
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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Issue C - Increased Cost Shifting
Today, certain costs (e.g., hospital expenses) are shifted to the private sector (employers and consumers)
as some participants in the system pay less than their share of the cost of their care. Public programs
such as Medicare and Medicaid reimburse less than the cost of care for hospitals services.18 In addition,
the uninsured or underinsured may not be able to cover the full cost of care, and this cost is then also
transferred to the private market.
The initial hope of health reform was that by improving coverage of the currently uninsured, a significant
percentage of uncompensated care would be eliminated. This is still anticipated to happen. However,
the cost shift "gains" from decreasing the numbers of uninsured now appear to be more than offset by the
losses from proposed cutbacks in Medicare and Medicaid spending allocated to the hospital sector.19
It should also be noted that the impact of covering the uninsured may be different in communities
constrained by limited hospital capacity. In those communities, covering the uninsured could actually
increase cost-shifting if the newly insured increase demand for healthcare services and the overall mix of
hospital patients migrates towards lower paying government programs.
The net impact is likely to result in an increase in cost shifting which translates into a 0.8 percent average
annual increase in the private sector spending between 2010 and 2019, or 5 on average per year for
family coverage in a large group plan (and for single coverage). We note that this cost burden ramps
up over the projection period, with an average annual increase in health costs of 1.2 percent over the
second five-year period. We assume that this increased cost to the private sector will ultimately impact
the cost of coverage for individuals and businesses in both the insured and self-insured market. As a
result, premium costs for large group plans will be higher each year between 2010 and 2014 for
family coverage ( for single coverage), and 5 higher each year between 2015 and 2019 ( for
single coverage).
18 American Hospital Association, "Trend Watch Chartbook 2009."
19 This evaluation is based on the Medicare payment cuts as detailed in the Senate Finance Committee’s Chairman’s
mark (as amended) released on October 2, 2009. There are similar but not identical payment changes reflected in
the Senate Health Education Labor and Pension (HELP) Committee bill, the “Affordable Health Choices Act” dated
July 15, 2009 and the House Tri-Committee bill, “America’s Affordable Health Choices Act” (H.R. 3200) dated July
14, 2009.
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Average Impact of Cost Shift on Insurance Premiums *
2010-2014 2015-2019 2010-2019
Percent Impact on Premiums
Reductions in
Uncompensated Care -0.4% -1.4% -1.0%
Cuts in Medicare/Medicaid
Reimbursements________ 0.6% 2.6% 1.7%
Net Impact on Premium Spending 0.2% 1.2% 0.8%
Average Annual Impact on Group Premiums
Annual Impact on Individuals
Annual Impact on Families 5 5
* Note: assumes full cost-shifting over the period. If only a portion of costs are shifted
to private payers, the figures would be correspondingly smaller in absolute value.
Sources: PricewaterhouseCoopers' Touchstone Survey and calculations and CBO
analysis of Baucus Mark, September 22, 2009
.
The House Tri-Committee legislation and the Senate HELP bill include a government-sponsored
insurance option that would compete with private insurers in health insurance exchanges. Since
government-sponsored programs have traditionally paid providers less than the private sector, as
enrollment in a government-run plan increases, hospital revenue margins may decrease and
consequently accelerate further cost shift. This would likely lead to increasing payment differentials
between the public and private payers and the potential for further spiraling as private sector enrollees,
facing continuously higher premiums leave the market20.
20 According to an analysis by Dobson Davanzo, LLC, payment to cost ratio increases could more than double the
cost shift effect on premiums. They estimate the increase in the proportion of annual premiums that are due to costshift
to increase from ,512 to a range of , 375 to ,200.
(http://content.healthaffairs.org/cgi/reprint/hlthaff.28.w1013v1)
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
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Issue D - Assessments on Health Sector Entities
As Congress seeks to finance coverage subsidies for low income individuals and small business, some
bills are now targeting specific sectors of the health industry. The Senate Finance Committee legislation
imposes new fees on certain providers: a .7 billion annual fee on health insurance companies, a .3
billion annual fee on pharmaceutical manufacturers, and a billion annual fee on medical device
companies. All of these assessments would increase the underlying cost structure of each of these
segments in the health sector and, as CBO has indicated, will likely be passed back to enrollees in the
form of higher premiums.
We estimate that these fees will raise annual insurance premiums by 2.5 percent for individual, small
group, and large group plans over the 2010 to 2019 period, assuming they are fully passed through to
patients. Self-insured employers would avoid the tax on health insurers since it is based on insurance
premiums and thus self-insured plans would see a 0.3 percent increase in costs. As the fees are fixed in
nominal terms, the percentage impact would decline each year. The average cost of a family plan would
increase by almost 7 each year, while costs in the self-insured market would increase by per year
on average.
Average Impact of New Assessments
2010-2014 2015-2019 2010-2019
Percent Impact on Premiums
Insured 3.0% 2.2% 2.5%
Self-Insured 0.4% 0.3% 0.3%
Average Annual Impact on Group Family Premiums
Insured 7 7 7
Self-Insured
Note: Nondeductible taxes have been grossed up to cover the associated taxes on
the passed-through amounts assuming a 35 percent marginal federal tax rate and an
average insurance premium tax of 2 percent.
Sources: PricewaterhouseCoopers' Touchstone Survey and calculations and CBO
analysis of Baucus Mark, September 22, 2009.
This cost differential between group plans and self-insured plans is a key factor in the movement of many
employers to self-insurance. Any increase in the differential, such as the proposed new tax on insurers
would be expected to further increase this movement. The calculations above assume that 25 percent of
the Large Group category switches to the Self-Insured category.
Interaction of the Issues
The interaction of all of these issues accelerates the impact on individuals and businesses. For example,
the cost shifting and assessments described above will accelerate the application of the tax on high value
plans.
We have allocated these spending increases to the different segments of the health insurance market.
Reform could increase premium costs by significant amounts. Premiums for plans purchased in the
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 13 -
individual market in 2016 could rise in cost by 47 percent on average over premiums projected in 2016 in
the absence of health reform. Other segments would also see significant increases.
Cumulative Impact of Health Reform on Health Insurance Premiums by 2016
0
5
10
15
20
25
30
35
40
45
50
Individual Small Group Large Group Self-Insured
% Increase in Premiums
Ins Reform Tax on "Cadillac Plans" Cost Shift Assessments
+47%
+23%
+6%
+8%
These increases are on top of normal healthcare trend and further serve to increase the cost of private
health insurance coverage.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 14 -
The charts that follow reflect the impact of reforms by market over time21.
Individual Market:
Single - Premiums for an individual purchasing insurance in the non-group market that are estimated to
average about ,000 in 2010, will increase to approximately ,200 in 2019 in the absence of reform
and will increase to ,800 if these reforms become law.
Individual - Single
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Family - Premiums for a family purchasing insurance in the non-group market will increase from
about ,900 in 2010, will increase to approximately ,400 in 2019 in the absence of reform and
,000 if these reforms become law.
Individual - Family
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
21 Impacts assume payment of tax on high-value plans, cost-shifting of cuts to public programs, and full pass-through
of industry taxes
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 15 -
Small Group:
Single - Premiums in the small group market for employee coverage that are estimated to be about
,400 in 2010, will increase to approximately ,400 in 2019 in the absence of reform and will increase
to ,500 if these reforms become law.
Small Group - Employee
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Family - Premiums in the small group market for family coverage will increase from an average of about
,600 in 2010 to approximately ,600 in 2019 in the absence of reform and to approximately ,000
if these reforms become law.
Small Group - Family
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 16 -
Large Group:
Single - Premiums in the large group insurance market for employee coverage that are estimated to be
about ,200 in 2010, will increase to approximately ,700 in 2019 in the absence of reform and will
increase to ,700 if these reforms become law.
Large Group - Employee
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Family - Premiums in the large group market for family coverage will increase from average of about
,900 in 2010 to approximately ,500 in 2019 in the absence of reform and ,200 if these reforms
become law.
Large Group - Family
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 17 -
Self-Insured:
Single - Premiums22 in the large group self-insured market for employee coverage that are estimated to
be about ,200 in 2010, will increase to approximately ,700 in 2019 in the absence of reform and will
increase to ,500 if the reforms are passed.
Self-Insured - Employee
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Family - Premiums in the large group market for family coverage will increase from average of about
,900 in 2010 to approximately ,500 in 2019 in the absence of reform and ,700 if these reforms
become law.
Self-Insured - Family
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
22 For self-insured employers, "premiums" refers to "premium equivalents" composed of incurred benefits plus related
administrative expenses.
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 18 -
Market Composite:
Single -- Average premiums for an individual that are estimated to be about ,800 in 2010, will increase
to approximately ,200 in 2019 in the absence of reform and will increase to 00 in 2019 if these
reforms become law.
Market Composite - Single
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Family -- Premiums for a family purchasing insurance in the private market will increase from about
,000 in 2010 to approximately ,000 in 2019 in the absence of reform and to approximately ,000
in 2019 if these reforms become law.
Market Composite - Family
Estimated Average Premium
A_RTICLE
,000
,000
,000
,000
,000
,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Premium
Baseline After Reform
Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage
- 19 -
As the above charts illustrate, by 2019 the cost of single coverage is expected to increase by
,500 more than it would under the current system and the cost of family coverage is expected to
increase by ,000 more than it would under the current system. This amounts to an additional 18
percent increase in the cost of health insurance coverage by 2019.
* * * *
Original: Potential Impact of Health Reform on the