www.cbo.gov
CONGRESSIONAL BUDGET OFFICE
Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515
November 30, 2009Honorable Evan BayhUnited States SenateWashington, DC 20510Dear Senator:The attachment to this letter responds to your request—and the interest expressedby many other Members—for an analysis of how proposals being considered bythe Congress to change the health care and health insurance systems would affectpremiums paid for health insurance in various markets. Specifically, theCongressional Budget Office (CBO) and the staff of the Joint Committee onTaxation have analyzed how health insurance premiums might be affected byenactment of the Patient Protection and Affordable Care Act, as proposed bySenator Reid on November 18, 2009.I hope this information is helpful to you. If you have any further questions, pleasecontact me or the CBO staff. The primary staff contact for this analysis is PhilipEllis.Sincerely,Douglas W. Elmendorf Attachmentcc: Honorable Harry ReidMajority LeaderHonorable Mitch McConnellRepublican Leader
Congressional Budget Office
An Analysis of Health Insurance Premiums Under thePatient Protection and Affordable Care Act
November 30, 2009There is great interest in how proposals being considered by the Congress tochange the health care and health insurance systems would affect premiums paidfor health insurance in various markets. Consequently, the Congressional BudgetOffice (CBO) and the staff of the Joint Committee on Taxation (JCT) haveanalyzed how those premiums might be affected by the Patient Protection andAffordable Care Act, an amendment in the nature of a substitute to H.R. 3590, asproposed by Senator Reid on November 18, 2009. The analysis looks separatelyat the effects on premiums for coverage purchased individually, coveragepurchased by small employers, and coverage provided by large employers.
Key Elements of the Proposed Legislation
The proposal includes many provisions that would affect insurance premiums:
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New policies purchased from insurers individually (in the “nongroup”market) or purchased by small employers would have to meet several newrequirements starting in 2014. Policies would have to cover a specified setof services and to have an “actuarial value” of at least 60 percent (meaningthat the plan would, on average, pay that share of the costs of providingcovered services to a representative set of enrollees). In addition, insurerswould have to accept all applicants during an annual open-enrollmentperiod, and insurers could not limit coverage for preexisting medicalconditions. Moreover, premiums could not vary to reflect differences inenrollees’ health or use of services and could vary on the basis of anenrollee’s age only to a limited degree.
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A less extensive set of changes would be implemented more quickly andwould continue in effect after 2013. Among other changes, healthinsurance plans: could not impose lifetime limits on the total amount of services covered; could rescind coverage only for certain reasons; wouldhave to cover certain preventive services with no cost sharing; and wouldhave to allow unmarried dependents to be covered under their parents’policies up to age 26. Those changes would also apply to new coverageprovided by large employers, including firms that “self-insure”—meaningthat the firm, rather than an insurer, bears the financial risk of providingcoverage.
2However, current policies that had been purchased in any of those markets or thatwere offered by self-insured firms would be exempt from all of those changes if they were maintained continuously—that is, policies held since the date of enactment of the legislation would be “grandfathered.”In addition, the proposal would: establish a mandate for most legal residents of the United States to obtain health insurance; set up insurance “exchanges”through which certain individuals and families could receive federal subsidies tosubstantially reduce the amount they would pay to purchase that coverage; make apublic insurance plan available through those exchanges in certain states; penalizecertain individuals if they did not obtain insurance coverage and penalize certainemployers if their workers received subsidies through the exchanges; provide taxcredits to certain small employers that offer coverage to their workers;significantly expand eligibility for Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projectedunder current law); levy an excise tax on insurance plans with relatively highpremiums; impose fees on insurers and on manufacturers and importers of certaindrugs and medical devices; and make various other changes to the federal taxcode and to Medicare, Medicaid, and other federal programs. Each of thosecomponents of the legislation has the potential to affect the premiums that arecharged for insurance, directly or indirectly; some would increase premiums, andothers would decrease them.
Overview of the Analysis
In general, the premium for a health insurance policy equals the average amountthat an insurer expects to pay for services covered under the plan plus a loadingfactor that reflects the insurer’s administrative expenses and overhead (includingany taxes or fees paid to the government) and profits (for private plans). Aninsurer’s costs for covered services reflect the scope of benefits that are covered,the plan’s cost-sharing requirements, the enrollees’ health status and tendency touse medical services, the rates at which providers are paid, and the degree of benefit management the insurer uses to restrain spending. Although the factorsaffecting premiums are complex and interrelated—and thus can be difficult todisentangle—this analysis groups the effects of the proposal on premiums intothree broad categories:
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Differences in the amount of insurance coverage purchased,
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Differences in the price of a given amount of insurance coverage for agiven group of enrollees, and
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Differences in the types of people who obtain coverage in each insurancemarket.CBO and JCT estimated the effect of the legislation on premiums in three broadinsurance markets—nongroup, small group, and large group—as well as the