I'm confused. McArdle says the CBO says that premiums are going up for those in the individual market. Krugman and Yglesias say the CBO says premiums are going down for the same market (and Krugman also makes a snide comment that Republicans will misunderstand the numbers and claim the CBO says premiums are going up.)
Well I'm a lawyer, so I sure don't understand math, and I most definitely don't understand this mean, modal, median stuff. So can some explain to me in layperson's terms (1) why Yglesias/Krugman and McArdle are reading the CBO differently and (2) who is right (or are both right, but from different perspectives, i.e., mean v. modal v. median)? Many thanks.
Krugman and Yglesias are referring to this report from Jonathan Gruber. I am referring to the CBO report. Here is what the CBOsays:
CBO and JCT estimate that the average premium per person covered (including dependents) for new nongroup policies would be about 10 percent to 13 percent higher in 2016 than the average premium for nongroup coverage in that same year under current law. About half of those enrollees would receive government subsidies that would reduce their costs well below the premiums that would be charged for such policies under current law. . . .
Average premiums per policy in the nongroup market in 2016 would be roughly $5,800 for single policies and $15,200 for family policies under the proposal, compared with roughly $5,500 for single policies and $13,100 for family policies under current law.4 The weighted average of the differences in those amounts equals the change of 10 percent to 13 percent in the average premium per person summarized above, but the percentage increase in the average premium per policy for family policies is larger and that for single policies is smaller because the average number of people covered per family policy is estimated to increase under the proposal. The effects on the premiums paid by some individuals and families could vary significantly from the average effects on premiums.
The CBO arrives at this result by assuming that people greatly expand their coverage, but that the cost of delivering that coverage falls due to the efficiencies/rules of the exchange, and the mix of people insured by the exchange gets somewhat healthier.
Jonathan Gruber has a different methodology. He looks at the projected premiums for the "Silver Plan" (70% of actuarial value), and projects them to a plan that covers 60% of actuarial value using simple arithmetic. (The "Gruber Microsimulation Model" cited in his charts seems to be a slight misnomer; I can reproduce it in excel in about a minute flat.) A 70% of actuarial value plan costs $5200, so Gruber assumes that 100% of actuarial value costs $7,425 and that 60% of that would cost $4460. Since the plan that the CBO assumes people will buy under current law covers 60% of actuarial value, he views this as a cost decrease.
That methodology seems a little off to me. Either price of a plan with a higher actuarial value should be lower per percent of actuarial value, since providing insurance has some fixed costs; or that ratio should rise, because lowering cost sharing often increases utilization. Either way, even with a mix of the two effects, it seems unlikely to stay exactly flat. But I will defer to Professor Gruber on this question.
Which is right? As I said in the comments, one way to think about it is to compare it with catalytic converters, airbags, anti-lock brakes, and so forth. If we mandate that everyone get them, the cost of new cars will rise. But because of economies of scale, the price of new cars might rise by less than it would cost to add these things as options on an individual car.
So did the price of new cars go up? I'd say it did. But you can also correctly point out that now everyone has antilock brakes and airbags, which are valuable things; it's not as if the price of the new car just went up with no added benefit. Even so, I'm not sure how much sense it makes to do a straight extrapolation back to the old price of cars pre-mandate, and thereby claim that you have actually made cars cheaper.
Obviously, the question gets further complicated if you subsidize 10% of new cars.
To some extent, I'm not sure how much the distinction matters, because this is all absurdly precise. The CBO is a very valuable institution, but its strength is consistency, not accuracy--it allows you to compare policies, but it does not allow you to see the future. These are rough estimates, and the true numbers could be either higher or lower. This is not to slam the CBO, of which I am inordinately fond--they are the first to state all the uncertainties surrounding their estimates.
I think maybe it's more useful to pull away from the numbers a little bit, and look at the various upward and downward pressures that the CBO discusses.
Expanding coverage doesn't just raise premiums because the insurance company is paying for more services, and/or paying a higher percentage of the cost of those services. It also increases utilization, and not necessarily in ways that increase health. The CBO expects most of the change in coverage to come from lowering copayments and deductibles, not extra services, so this is a real concern.
Is that expectation valid? I am not sure that this was the case in Massachussetts, which is our closest model--but we don't have the same demographic mix as Massachussetts, and our legislation is different in some respects. With no real way to assess this, I'm going to defer to the CBO and assume arguendo that they are right about decreased cost-sharing.
If we do go along with this assumption, that's certainly going to push costs up. I don't know if the CBO estimate of a roughly 30% increase in premiums due to expanded coverage is at all accurate, but I think we can safely say that decreasing cost sharing acts to increase premiums.
The CBO also estimates that there will be substantial savings because of enhanced efficiency in the individual market: about 7-10%. Again, the direction is almost undoubtedly correct, because administrative costs for providing individual policies are high, and in many states the market is rife with inefficiencies. The amount? I think hard to say, but their guess is better than mine.
Finally, the CBO assumes that the mix of people in the individual market will get healthier. There are two effects here, working at cross purposes. First, young adults are more likely to be insured than any other age group, and they rarely have expensive chronic conditions. They make up about 30% of the pool, according to Kaiser. On the other hand, the uninsured are twice as likely to be in poor health as people with private insurance (11% vs. 5%). Given the percentages, the effect of the young adults should dominate, especially if a disproportionate number of the very ill get kicked into Medicaid. Unless the individual mandate fails--as it might, if the penalties are not high enough--this effect should be significant.
Though as a side note, talking about changing the pool mix is somewhat tricky. Many young adults are absolutely right that insurance is a bad deal for them, particularly in states with guaranteed issue and community rating; they are better off with catastrophic or high deductible coverage. Bringing those people into the pool lowers the cost for people who already have insurance, but it raises the expenditure of the newer, healthier people considerably. Measuring the change in the average premium is not the same thing as measuring the change in aggregate expenditure, but people often talk as if they were interchangeable. For a lot of people, this plan means adding a large new expense which delivers less value in benefits than they pay.
In the end, I'm probably predisposed to assume that premiums will go up. But the CBO's logic seems pretty sound. The pool change is significant, but the exchanges will also take on a lot of people who can't currently buy insurance because they have some expensive condition. The administrative efficiencies are undoubtedly real, but there is simply a limit to how much premium reduction even strong reform can deliver on this front. If the CBO is right that people significantly reduce their cost-sharing, I'd expect both price and utilization to rise pretty steeply. In the end, most health care costs are driven by utilization, not administrative costs or outrageous profiteering, so I'd expect that effect to dominate the other two.
But as to the size of the effect, I don't know. The CBO doesn't either. In the end, the only way to find out is by enacting this thing.
The only thing I can say with real confidence is that Paul Krugman's interpretation of the whole affair is very odd:
Republican politicians are saying this because this is, in fact, what the CBO report says: average premiums will be higher. People may be getting more value for their money. But there's still more money leaving their wallet every month. The CBO may be wrong in assuming coverage expansion, but if you go along with their assumption, you end up with higher premiums. And if you don't go along with their assumption, you have to explain why you reject this assumption, but not all the others. Neither Krugman nor Gruber really does so.But here's the thing: senior Republican politicians suffer from reading comprehension. (To be fair, the CBO report is written in a remarkably elliptical style). Several have already claimed that the report shows that premiums will rise.
And they probably won't get called on it.
A related issue is that under reform, individuals will be FORCED to buy more extensive coverage. They may get more benefits for the price but many will not be allowed to buy the same policy they could before reform. It's like increasing the minimum wage - it prices out some people who would work for less. The Senate bill will raise the cost of the minimum acceptable plan.
Gruber is wrong in the way that matters. The cost for the same set of benefits may go down. But the cost for the minimum set of benefits will go up.
Not a very clear response to a simple question.
Clear answer:
The CBO estimates that the cost of the same insurance policy you have today will be less in the future. But they also estimate that because insurance will be cheaper and acutely cheaper to many receiving subsidies, that many people will choose to purchase more expensive policies and end up spending more overall.
This is directly equivalent to Black Friday sales. I might buy one pair of jeans normally, but end up buying three pairs if they're 60% off. So I end up spending 120% of the amount I would have spent without the sale.
Megan, the fact that you can replicate a *result* in a spreadsheet is not anywhere near equivalent to the replication of the features of a model.
No, but if someone calls something a fancy "Gruber Microsimulation Model," but the numbers are exactly equal to assuming direct linear proportions between actuarial value and premiums, then it's reasonable to assume that she's replicated the model. Surely the probability that the naive arithmetic exactly matches a much more complicated model is low? (On another note, if you can replicate all possible results of a model for all inputs, you've replicated the model.)
As Megan notes, there are multiple possible effects in both directions, and it may even be reasonable to assume that they cancel out. It doesn't make for a very complicated model, though.
No.
#1 Megan's arithmetical fit lacks predictive generality. You might be able to do this if Gruber actually ran his simulation over the full range of possible inputs. She can replicate the subset of I/O shown, but the arithmetical fit may fail spectacularly on other inputs.
#2 Replicating the results with an arithmetical fit doesn't have explanatory power a good model does. If we didn't constraint models by B too, all models would be polynomial approximations with a sufficiently large number of terms, or even worse just replicate the data exactly.
In other words a good model tells us *how* something happens not just what happens. It might show us that inputs we think are significant actually aren't significant, or that factors cancel, or produce this data using empirically selected factors. This tells us more than any particular result.
Zosima, I should clarify that I have emailed with Jonathan Gruber in the past, and he has described his "model" to me. It is an arithmetic fit done in an excel spreadsheet, which can be replicated by anyone very little time.
You really don't get tired of being wrong, do you? I don't know if you are deliberately misleading or just a terrible communicator, but Gruber's own description of his model says quite a bit more than that.
http://gov.ca.gov/pdf/press/Gruber_Modeling_Health_Care_Reform_In_California_final_study_020207.pdf
Specifically, why his model is better than a basic arithmetical approach and why it has explanatory power. It may very well be done in excel, but you can do a lot in excel (ie the particular medium is irrelevant.) It may even be quite simple. Perhaps the distinction between a model and a fit is completely lost upon you? Beyond the criterion I mentioned, predictive generality, and explanatory power, this model has the additional property of validation.
From Gruber's paper:
Clearly not something anyone can easily do.
Gruber on the strengths of a model and superiority to simple arithmetic:
This is twice now that you've made a weak appeal to authority based upon secret communications that directly contradicts publications by said authorities. I honestly couldn't care that much that you choose to disparage Gruber's model. Your claims are unprofessional and clearly poorly researched, but not particularly harmful.
What I really want to hear is why your claims from your secret source about the CBO premium report are directly contradicted by the CBO's blog and the CBO report. Cause that has harm insofar as you are spreading falsehoods not just ill-advised opinions...apparently for the purpose of creating a false impression among your readers about a bill under consideration by the Senate.
"many people will choose to purchase more"
What makes you think it will be voluntary? The whole point of preventing cross-State competition is to prevent people from having a wider choice of policies and coverage.
Cross-state coverage is already illegal, thus generally the bill doesn't change this one way or another. The exception being the this bill does add an exchange which, depending on how it is formulated, may allow cross-state competition.
I would also say that isn't the point of preventing cross-state coverage, it is an effect of this policy. The point is to prevent a regulatory race to the bottom.
You're missing an important point (perhaps unintentionally). After reform is passed, the government will no longer allow many people to buy the same plan they had before. The Senate bill will raise the cost of the minimum acceptable plan by adding more mandates. So it doesn't matter if the same plan would cost less -- many will not be allowed to buy the same plan.
And again this only applies to the 32 million people purchasing insurance directly. The 160 million group purchasers will see no decrease in cost or increase in benefits at the same cost (per the CBO).
That's fair, the individual market regulations will force changes in insurance policies in that market. But you are assuming that the individual insurance market actually works. Simple Bayesian analysis based upon the numbers provided by insurance execs during congressional hearings indicate that the rescission rates for people who actually need expensive coverage is as high as 10%. The behavior of insurance in the individual market is outright fradulent. http://tauntermedia.com/2009/07/28/unconscionable-math/
On your second point, Megan makes a mistake in her summary of the CBO report. The 0-3% decrease number(which incidentally you are assuming is 0) excludes the effects of the excise tax which the CBO notes may result in significant reduction of costs.
A 9-12% reduction in 19% of the market will bring up the average decrease in premium for employer coverage.
Krugman is a hack for the Democrats. Nothing new there. Just move along and set phasers on stun.
Then why has he spent much of the last 8 months criticizing Obama?
You have no idea what you are talking about, probably because you never read what Krugman actually writes. His blog entries and columns are short, so it's not hard to read.
Oh, and since about 2007, he's been pretty much right about everything he's predicted. Some of that is undoubtedly luck (not even Einstein had 100% accuracy), but the guy clearly understands what is going on.
In fairness, for some of these people less money leaves their wallet on net because of the subsidies from the federal government. But that money comes from someone's wallet too.
If these clowns are passing this off as reason we're all screwed.
How you can say 10-13% price increase overall for the individual market is actually a decrease because some individuals will pay less for the same coverage is either dishonest or foolish. There is no cherry picking here.
If costs stay the same (or even go down) for a small group of people, but increase for everyone else then costs have gone up.
It's like arguing that fuel prices have not gone up at all, because well look how cheap the Iraqis can buy gas for!
Hmmm, if you give me a subsidy, I will buy more of something than I normally would. Amazing.
And how does this bend the curve? It won't! If you're getting subsidized you might as well see the doctor more, not less.
Again, if the goal is to get more American covered, rather than income redistribution, why not a barebones catastrophic plan that is paid via vouchers?
I may be willing to make sure people have a safety net with regards to cancer treatment - but not so willing to pay for bells and whistles of 'expanded' coverage.
"And how does this bend the cost curve? It won't!"
Sure it will. It will bend the curve upwards!
The car analogy is illuminating. It would have been more effective in a pithier post.
The car analogy is completly inapt.
People are not cars, and health care plans are not manufactured. There are few (if any) economies of scale in health care plans. The arcturial tables are already there. It's not like the cancer rate for 1 million people is 2%, but it drops to 1% if you have 1 billion people.
This health care bill increases demand for health care without addressing supply. That alone will increase costs. Then there's the fact that the actual costs are not felt by the users, so there is no natural limit to the amount of health care they use.
Step 1: Enact a universal health care to reduce costs that is neither universal, nor reduces costs.
Step 2: ?
Setp 3: Cost-bending!
People are going to be pissed when they realize step 2 is "rationing."
Eh, there are administrative cost savings if you, for example, stop underwriting outside of the simple rules set down by the federal government. And the transaction costs of providing individual policies are high; larger pools really are more efficient. I don't think that this will swamp increasing utilization, but I'd expect them to save something.
When is the last time the US Government wrote a simple rule?
Welll . . . not simple, exactly, but if you're only allowed to age rate on a fixed scale, your underwriting overhead is pretty minimal. Obviously, compliance overhead matters, but insurance is already one of the most regulated businesses in America.
@Megan,
If that's what you meant, I guess I basically agree with you (which is why I said there are "few" economies of scale)...but I'm not sure how much I disagree on its effect.
You sound more grudging of the benefit in your response.
It seems to me that if vastly expanding the pool reduces administrative overhead slightly, why not just remove routine care from insurance plans entirely? That would reduce the administrative overhead significantly, far more significantly than Obama care.
Places like Wal-Mart are already doing that with non-urgent nurse/PA care. You come in, pay $60 and get your office visit where you are told to not worry about it and take 2 Tylenol. The exact same visit costs $120 under a health plan, largely because of all the insurance filing.
That would be the best reform, because then people would know the costs and be able to budget accordingly.
This all presupposes behavior changes in the uninsured. As you previously pointed out, even when offered, the poor avoid banks in droves. I would then find it reasonable to assume then that the uninsured who frequent emergency rooms in the same way as they avoid banks will not change their behavior significantly, thus maintaining those high costs essentially unchanged.
We would also see what I call the "last 10%" wherein the political drive to make an impression on the electorate will involve mandating coverage of 100% of the population, no matter how expensive or illconceived that will be. Generally, to attain 100% of anything usually costs well in excess of the 10% differential of covering just 90% of it.
If you realize that catalytic converters are very expensive and very unnecessary, what does that do to your entire article?
Last year my cable bill jumped 10%, but my cable company added Lifetime and Home and Garden Network to the basic package. Funny thing, they tried using the "more stuff for more money equals better value!" line as well. As a 24 year-old male, there's no way I would ever want to pay for those channels.
So basically, Krugman and the government are like Comcast, making me buy crap I don't want, but telling me I'm getting a good deal for it.
Thanks for the post and explanation. Is the 30% increase in benefits due to a government-mandated floor, or a projection that insureds will pick plans that have 30% more benefits? I've seen it phrased both ways. If the former, it seems to me that it's wrong to say that premiums will be lower. If the latter, I can understand an argument that premiums would be lower, but insureds will simply choose more benefits and so premiums increase, but only by choice.
It's both. there are more services covered, and the subsidies are pegged to a plan with less cost-sharing, which is expected to considerably change the market.