The Causes and Consequences of Rising Health Insurance Premiums

Mark Pauly, Ph.D.

Wharton School

University of Pennsylvania

Two Problematic and Puzzling Propositions

• 1. The bulk of the growth in health insurance premiums comes either from things that we do not want to control or from things we find very hard to control.• 40-70% of growth: costly but beneficial new

technology• Almost all of the rest: higher wages and profits,

increased incidence of some diseases.• Trivial: aging of the population (0.5%)

Two Problematic…

• 2. Workers almost always pay for almost all of their health insurance.• They pay part through explicit premiums• They pay the rest (the “employer contribution”)

through lower growth in money wages. So the share doesn’t matter.

• Mandating that employers pay is a disguised employee mandate that makes workers take lower raises.

• No need to thank the boss (or thank for wages)

The Question

• In the face of these facts, what is good public policy?

• Define “good.”• 1) not perfect; that is impossible and there are

inevitably going to be tradeoffs.• 2) any change should help to improve efficiency• 3) any change should help to improves equity.• 4) any change should be politically feasible.

Two Different Questions That Are Often Confused

• What causes health insurance premiums to be “high” (relative to income, GDP,etc)?

• What causes health insurance premiums to rise (faster than almost anything)?

• Focusing on the answers to the first question may not help with the second.

Why Are Premiums “High”?

• People get sick and want treatment.

• Some wages and profits are above average.

• “Inefficiency” (My guess: 15-20%)

• Administrative costs and insurer profit or surplus.

Why Are Premiums Rising (at 4-5% real rate per year, or more)?

• As noted, mostly because of beneficial but net costly new technology (including new ways to use old tech; also driven by quality effects on demand).

• Wages for non-doctors rising faster than average.

• Sometimes, increased incidence of some illnesses (more true now than in 1980).

The good news and the not-so-good news for Hawai’i

• Probably possible to close most of the gap with subsidies to basic insurance coverage for “tweeners” and expanding Medicaid to able-bodied adults.

• But the inexorable technology driven rise in premiums is going to offer stronger incentives to tweeners to avoid the mandate and will impoverish those who cannot avoid it.

• % uninsured in Hawai’i only slightly below PA.

Short run solutions

• Design a decent but basic policy for tweeners and Evel Knievels of health insurance.

• Subsidize fairly generously, thru vouchers• Do not raise the subsidy by taxing premiums—

shoots yourself in the foot.• Tax income, french fries, anything with an

inelastic demand or that you want people to do less of.

Short run solutions 2 (More tentative)

• Offer this policy in a well functioning individual market since self employed and part timers are not good group members.

• Permit choice but have a fallback insurer (state employee plan?)

Long run solutions

• Face facts: we are not going to IT or disease manage our way out of permanent premium growth. We will need to sacrifice.

• Try to develop a rational policy toward new technology and make sure the law does not inhibit.

• Would there be a market for a “prudent adoption” or “go slow” insurance policy?

Hope and Conclusions

• A few bittersweet hints that we may be coming in for a smooth landing in which premiums still grow but not as fast as income.

• Lower rate of introduction of new drugs.• Current on-trend spending growth seems recently

related more to the increased incidence of some disease than pure technology.

• We need to be able to have a civil conversation about hard things.