The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

AHIP Report Puts Health Care Reform Surcharge In Spotlight

Posted by Alan on October 13, 2009

America’s Health Insurance Plans have struck a nerve. The carrier’s industry association issued a report warning  that Congress is heading for a set reforms that could dramatically increase the cost of health insurance coverage for American consumers. The study, prepared by PriceWaterhouseCoopers warns that various taxes and fees, combined with a weakening of provisions requiring all Americans to purchase coverage, will raise premiums paid by a family in 2013 by $1,700 more than they would pay without the reform. Premiums for a single person would go up by $600 more than would otherwise be the case.

The AHIP report examined the impact of four provisions of the Senate Finance Committee bill. These are:

  • Requirements on carriers to sell coverage coupled with “weak coverage requirements” on consumers along with rating reforms
  • Taxes on so-called “Cadillac plans”
  • Cost-shifting resulting from $400 billion in cuts to Medicare
  • Taxes on insurance companies, medical device manufacturers and other health care sectors

Significantly, the study did not consider other proposals in the reform legislation that might reduce the cost of medical coverage. Even so, what the report has to say about current medical cost trends and these four elements of the reform package is important to understand.

According to PriceWaterhouseCooper, health care costs in America are expected 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.” This means the cost of private health insurance coverage is expected to increase by 26 percent between 2009 and 2013 and 50 percent between 2009 and 2016. If the four provisions it reviewed are implemented, however, health insurance premiums would increase by 40 percent between 2009 and 2013 and by 73 percent between now and 2016. Meaning the average cost for single coverage, $4,800 today is expected to increase to $5,800 in 2013 under current law, but to $6,400 in 2013 given these reforms. And instead of costing $6,900 in 2016, the average single policy would cost $7,900. These are average increases. The impact by market segment is even greater:

  • 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
  • 9% increase for self-insured employers.

Again, the impact of other provisions of the Senate Finance Committee’s proposal might reduce this trend, but there’s two conclusions that can be drawn from the report:

First, the status quo is unsustainable. Any system in which the cost of a service increases year-over-year-over-year by more than twice general inflation will eventually become unaffordable. Change is needed.

Second, key elements of the reform package expected to be passed by the Senate Finance Committee today will increase costs significantly beyond the already unacceptable trends.

Not surprisingly, proponents of reform have vociferously attacked the AHIP study. The White House described the report as “Distorted and flawed.” An AARP spokesman called it “Fundamentally dishonest.” Senator Jay Rockefeller described AHIP’s publication of the study as “The misleading and harmful claims made by the profit-driven insurance companies are politicking for corporate gain at its worst.” (That AHIP also represents numerous non-profit health plans has apparently escaped the Senator’s notice).

The harsh tone of the attacks on AHIP and its report reveals correlates with the significance of the study’s conclusions. Supporters of reform had long claimed it would reduce the cost of health care for most Americans or, at the very least “bend the cost curve.” For voters happy with their current coverage this is a critical message. They generally support health care reform, but that support could waiver if the cost to them personally is too high. And AHIP is now demonstrating what the cost to these individuals is in dollars and sense. That could undermine support for reform just as the legislation heads for a crucial stage: consideration and a vote in the next few weeks by the Senate and the House of Representatives.

In the next few days, critics will undermine points in the study. The tax on high-end plans may drive consumers to less rich benefit packages, reducing their premiums. The Medicare cuts could eliminate waste and, consequently, avoid shifting additional costs to individuals with private insurance. The taxes on medical suppliers will be passed through to consumers, but spread over a broader population as more Americans obtain health insurance coverage.

But if nothing else the study will bring highlight an important reality: a requirement on carriers to sell coverage that is not tied to a strong, enforced requirement for consumers to buy coverage will dramatically increase insurance premiums. The Congressional Budget Office concludes the Senate Finance Bill will increase the number of Americans with insurance from 83 percent today to approximately 94 percent. Karen Ignagni, AHIP’s president, says “You really have to have a coverage level in the high 90s to make this work.”

You don’t need high priced analysts to recognize that mandates to buy and to sell coverage need to be balanced. New York and New Jersey currently require health plans to guarantee issue coverage, but has no requirement that their citizens purchase insurance. Not surprisingly, premiums for individual health insurance coverage is two-to-three times what it is in California. The difference is a health reform surcharge paid for by the residents of those states.

But the example of New York and New Jersey isn’t even necessary: common sense shows the impracticality of an unbalanced approach. Imagine if consumers could put off buying auto insurance until the tow truck arrives at the scene of their accident. Auto insurance costs would skyrocket. What would fire insurance cost if it could be purchased after the flames are extinguished?

American consumers will do the math. If the penalty for purchasing coverage is the equivalent of one month’s premium (which is roughly what the Senate Finance Committee is proposing) every month they go without coverage (minus the first month) is money saved. When they face medical charges greater than the penalty, they’ll buy it. Once they’re treated, they’ll drop the coverage. The result will be a surcharge on all those with health insurance coverage.

Passage of the Senate Finance Committee legislation is not the end of the health care reform debate. It’s merely a milestone – and important one, but in the end, just a milestone. As the reforms move forward, lawmakers will need to face up to the need for balanced reforms.  That will require making tough decisions, such as telling their constituents they must have coverage. But health care reform, if it’s to be done right, takes both common sense and political courage.


25 Responses to “AHIP Report Puts Health Care Reform Surcharge In Spotlight”

  1. Marly said

    I understand the need to contain costs of health care. That is an important topic. However, right now what we need to do is focus on the people in this country who do not have access to health care. It is unconscionable that a country such as ours has so many millions of its people without access to affordable health care coverage. People need a public option. This is not socialism. Doctors and hospitals are still privately owned. This is not a free government handout. People will have to buy their way. All we are asking for is a public option to buy into health care coverage.

    • Alison said

      It is my understanding that they are addressing that issue by mandating that insurance companies provide coverage to all applicants regardless of pre existing issues. It appears that one reason that someone, who is willilng to pay for health insurance, is not insured is because they cannot get health insurance because of their health problems. With this mandate they will be able to purchase health insurance from any carrier. With respect to your post, I realize it may be a problem for some to obtain coverage – I am just stating that a public goverment run option is not the only way to address this.

    • Dave Wood said

      Marly PLEEASE! Stop using the word ACCESS. I am a small business owner for the last 17 years and sadly have not been able to pay for health insurance for ANY of my employees. I can tell you from experience that NOT ONE of my employees or their familys EVER were denied ACCESS to health care…EVER>>>EVER

      What the uninsured do is they either go to a free clinic or emergency room, or they pay cash to see a Dr….GOT IT????

      ACCESS is the wrong word. WE ALL HAVE ACCESS to health care in America….OK. And by the way, your typical PPO policy does not give you access to any provider at any time, there are restrictions. In France they get any Dr. at any place at any time. TOTAL ACCESS

      As for this AHIP claim of higher premiums, you bet they will go up regardless of Obama care of not, public option or not, DOES NOT MATTER. The only question is HOW MUCH they are going up.

      Health care costs rise for two main reasons – 1. our inefficient, wasteful, and unfair system itself. and 2. the poor health status or the American people.

      So what does Obama care do for item one, aka the inefficient system? It not only does little to reform it, Obamacare EXPANDS it. In effect doubling down on a very poor bet.

      Providers will still be free to OVERUSE treatments, insurers will be free to make zillions in profits, drug companys will still get 40% higher prices compared to Europe for their products, middlemen brokers will still skim off 2% or so for doing very little, and ineptly managed- fraud riddled big govt. programs will get bigger, providers will still pay 6% of their revenues JUST TO COLLECT ie. billing. There may be some good ideas from Obamacare to reduce costs, but dont count on the Federal govt. to run these new programs with any efficiency, thus we probably will not see much savings from them.

      And item 2 above ie. health status. Obamacare does virtually nothing of significance to really slow down the obesity train, curtail smoking, reduce stress and anxiety, or reduce the toxic environment we live in. Thus ensuring that the diabetes explosion will continue to bleed the system as all these obese young folks slowly end up with diabetes or worse. All these inflammatory diseases like asthma, arthritis, excema, and crohns disease will also explode. Women in larger and larger numbers will suffer from depression and insomnia, leading to anti-depressants which have two main side effects 1. weight gain, and 2. loss of libido. Then the husband gets depressed because she gets fat and doenst want to have sex. So he gains weight and has higher anxiety and stress.

      Obamacare is a very small step in the right direction but costs and taxes are going up my friends.

  2. I think all arguments fall on deaf ears unless we are serious about cutting the costs of health care and tort reform has to figure in the equation. To ignore this is to undermine your own credibility.

  3. JimK said

    I just read the NY Times Editorial on this report and they dismiss the analysis of PriceWaterhouseCoopers because the audit only focused on the items you cite. I found your analysis of the audit more comprehensive and impartial than the opinion piece in the NY Times. Thanks for the analysis.

  4. Rick said

    Alan, this was mentioned before by me but I must say it again.

    You have a great blog!

  5. I think one of the biggest problems with this legislation is that it is not doing enough to control the cost of health care in this country. We do not hear about tort reform or controlling drug costs. Doctors now are ordering procedures that are not necessary to avoid lawsuits, this helps drive up the cost for everyone.

    • The idea that doctors are ordering unnecessary medical tests is hardly new. However, the suggestion that this is being done primarily out of fears of being sued is debatable. I do not know the data on this myself, but wonder if Alan–who I think we all agree is as honest a broker of such info as can be found!–would comment on and perhaps prioritize and give some numbers to the following list of reasons for excess medical testing:

      * fear of malpractice lawsuits

      * patient demand for tests that the provider knows are unnecessary but agrees to do anyhow to keep his customer (i.e., patient) from leaving his practice to find a more accommodating doctor who will do the test.

      * a doctor’s ownership of or financial interest in the testing equipment and his subsequent economic incentive to use it as much as possible to pay for his investment and make money

      * poor coordination between different doctors–a patient comes in to a specialist after having seen, and been tested a month earlier, by another specialist or g.p. Rather than just asking to see the earlier (and still valid) test results, such an MRI, for example, the new doctor either never learns that the first test was even done, or is daunted by the amount of bureaucracy and paperwork necessary to obtain a copy of those results, and hence decides it’s just easier to have the test done over again.

      I am not saying that fear of lawsuits is not a factor in defensive medicine. It does, however, seem to me an awfully easy target by those on the right who are conditioned to believe that litigators (who contribute disproportionately to the Democratic Party) are huge players in this problem.

      I am sure they are players here, but I would like Alan’s opinion on what actual slice of the pie malpractice attorneys are carving up–and what role these other possibilities may be playing.

      My gut feeling is that tort reform would help a little but it’s hardly the end-all panacea that anti-reformists have convinced themselves of. Moreover, victims of truly negligent medical mistakes–botched surgeries, for example, done by drunken, drug-addicted, or incompetent doctors–would have virtually no recourse whatsoever.

      A friend of mine here in Allegheny County (Pittsburgh area) is a lawyer. He told me that he became interested in malpractice cases a decade ago and began tracking the results of such trials in our region. Not one time in all these years, he told me, has an injured party won when the case actually went to trial. I suspect truly egregious cases get settled before trial, but the fact that not one single case went against the doctor at trial makes me wonder how willing doctors are to testify against one another. Just as the police have the Blue Wall of Silence in brutality cases, so does there appear to be a White Wall of Silence in litigation.

      Is it possible that the malpractice insurance industry itself is just as greedy (and in need of reform) as private health insurance, eh?

      Again, Alan, thanks for whatever light you can shed on this.

  6. Cary White said

    Thank you for your thoughtful, cool headed and well documented posts on the healthcare debate. As property casualty insurance broker, I really appreciate what you are doing to raise the level of discourse on this topic. Keep up the terrific work!

  7. Thanks, Alan. If you hear of any new programs or innovative policies to help self-employed people in PA, please let me know!

  8. Nosedoc said

    It seems to me that a disinterested party is needed to review AHIP’s findings. AARP is anything but a non-partisan entity–I honestly don’t know who the administration represents, as they should be fighting any cuts to Medicare, and they should not be supporting any economic policies that in the end weaken the dollar and promote inflation (the bane to the existence of anyone living off a fixed income).

    I also don’t see a mechanism through which Medicare cuts could eliminate waste. Cuts only reduce profit margin, not utilization– unless providing the service comes at a loss, at which point the service is no longer made available or expanded to meet demand, as is the case with outpatient dialysis centers in NJ.

    • Rick said

      These were not AHIP’s findings, but rather PriceWaterhouseCoopers. I realize PriceWaterHouse was engaged by AHIP but do not feel they would risk their reputation on a false study. I think it’s obvious the findings are correct or you would have seen the Democrats come forth with their own independent study challenging PriceWater.

      The Dem’s are making the charge that the PWC study does not take into account that the industry will make more affordabole products available due to the “Cadilliac Tax”. However the Baucus bill does not take into consideration any reduction of that tax. See page 15 of the CBO.

      • Nosedoc said

        My response to the Dems would to question the value of the benefits being offered in these “more affordable products.” My suspicion is that out-of-network benefits would be the defining element of a “Cadillac Plan,” at least for individual policyholders and those in small businesses.

      • Thinking Cap On said

        Did you skip this part of Alan’s post?

        Significantly, the study did not consider other proposals in the reform legislation that might reduce the cost of medical coverage.

  9. Scott said

    Hi Alan, I’m not too sure how much the Ahip paper will sway anyone. I think, unfairly, the public will only see it as an attempt of the insurance comapnies to protect their profits. Most of the public, believe it or not, will agree with the comments of Mr Rockefeller and AARP.

    • Quote from article on DailyKos: “In 2005, William McGuire, as CEO of UnitedHealth Group, received compensation of $124.8 million, according to Forbes. In 2006, The Wharton School estimated the value of his options package at $1.6 billion.

      For $1.6 billion, he must have revolutionized health care, right?”

      I think that some of us in the public are a bit skeptical of apologists for the major health insurance companies if for no other reason than it’s awfully hard to comprehend this kind of Caligula-like greed. How do you guys who are against the public option justify salaries and bonuses like this? And why should we not believe that the McGuires of the world won’t do anything in their power to keep the money spigot flowing towards them forever?

      • Rick said

        If someone finds it unseemly to purchase insurance from a for-profit insurer like UnitedHealth Group, then that person is free to purchase insurance from a non-profit company. I don’t think we object to a public option as long as it does not cheat when it competes. The Baucus bill now includes a public option in the form of non-profit co-ops and I don’t think the insurance industry is oppossed to this type.

        The article from DailyKos could be true, but this site is not trustworthy.

        PS: A reminder to you Jim, 60% of the health insurance market is now controlled by non-profits and the for-profits have the second lowest return on equity of any American industry.

        • Rick, with the CEO getting a salary of $400 million, and stock options worth $1.4 billion, it’s amazing that United HealthCare had any return on equity whatsover–unless, that is, your name is McGuire.

          Actually, my health insurer is a non-profit, and I don’t think it makes a huge amount of difference by the time it filters down to lowlifes like me. The way I look at it, and I concede there may be some paranoia here, but I think those of us in the individual health insurance market have, in effect, been subsidizing both the very well to do and the indigent through our absurdly high premiums.

          Insurers must negotiate with large corporations, who are able to use their bulk purchasing power to keep prices down.

          Indigents pay nothing, get subsidized by hospitals, which cost-shift to people with insurance.

          Self employed types like me have no negotiating clout, so we A) pay much higher rates than people with much worse health histories than us, but who happen to work for large corporations, B) we bear the burden of more of the cost-shifting by hospitals as well, because our deductibles tend to be high, and for this part of our medical bills, providers are not forced to take whatever rates they have agreed to take from insurers–they charge us full price.

          I know I am being selfish here, but I do think a system that has first, second, and third-class citizens based on employment is going to end up screwing somebody, and I feel I am that somebody.

          I don’t think the co-ops are going to do a damn thing–as evidenced by the fact that the health insurance industry has not spoken so much as a negative word about the concept. These are straw men they will burn for fuel.

        • Rick said

          Jim old buddy, do you feel it would be proper for the government option to cheat when they compete against guys like me?

  10. Alan, help!

    You wrote: 49% increase for the non-group (individual) market\

    As readers of your blog (and my occasional comments) might recall, I am self-employed and currently pay $20,538 per year in insurance premiums for a family of four. This gets me $500 deductible per family member, and 80-20 coverage up to $5,000 per person once the deductible is met.

    I can’t afford this amount now, and because of statin and antidepressant use, I am locked into it (would almost certainly be denied for pre-existing conditions if I tried to switch.)

    If the premiums rise by 49 percent, we are looking at $30,601 in health insurance premiums per year, or $2550 a month.

    What do I do? What can I do?

    Yikes! This whole thing is strangling me.

    • Alan said

      Jim, first thing is — don’t panic. For several reasons:

      1. Health care reform is far from a done deal. There’ll be a lot more to be played out in this drama. Don’t assume the latest development (whatever it might be is lasting).

      2. As I noted in the post, the AHIP study didn’t take into account other parts of the bill that will tend to reduce costs. It should be viewed as: a) a worst case scenario; and b) a wake-up call to folks who think that there is such a thing as easy, cost-free health care reform.

      3. You’re already paying far higher than the average premium. Odds are your premiums will go down even under the scenarios used in the AHIP study. (Can’t say for sure because there aren’t enough details, but the most likely outcome is that the most expensive plans get cheaper and the least expensive plans get significantly more expensive).

      So take a deep breath. Keep your eyes out for anything new or innovative the carriers in your state are offering, and hang in there.

      • Rick said

        Jim, I posted at the wrong place – please see above question. Sorry.

        • Rick, by the government “cheating”, what exactly do you mean?

          Actually, regardless of what it means, my answer is probably yes.

          A quick question: do you know if the CBO has factored in the savings to the insurance industry when the costs of A) cherry picking, and B) recision bonuses to staffers who manage to successfully weasel out of paying claims and C) protracted litigation trying to delay things till the customer dies and there’s no need to pay for more care–

          do you know if these savings have been factored in?

          Believe me, I do have sympathy for anyone who has spent his or her life becoming an expert in his or her occupation, and then changes threaten their career. But when the old Mafia families got busted up, there were a lot of fellows who were superb “muscle
          “, who could kneecap deadbeats with the best of them, who could keep working girls in line with the threat of a vial of facial acid and the like–they’re were a LOT of such guys who had to get retrained when their jobs were no longer necessary.

          So, I pray, will be the case for the cherry pickers, recisioners, and various other thugs of the health insurance industry!

        • Rick said


          The government plan would underpay the providers approx 20-30% and this underpayment would be cost shifted to the companies I represent so my customers would then have to pay more. This of course would make me less competitive. When the government plan loses money they will tax you, me and all other citizens to make up the shortfall and my companies obviously cannot do this. I’m somewhat amazed that a business person as yourself would favor government cheating when competing with private business.

          Regarding you other statement about weasel out of paying (b) & (C):

          You probably are not aware that the government plan, Medicare, has the highest % of claims denied of any health insurance company.

          Regarding cherry picking (A):

          Unfortunately no one as yet devised a plan to stay in business only insuring people when they get sick. This will be moot if bills become law with a strong mandate. Then companies will no longer have to cherry pick.

          The CBO, hopefully took all the above into consideration, even though they had no actual bill to study.

          Actually Jim, I expect to come out of this episode better than before. My people provide a needed service and they are not unionized bureaucrats. We are most efficient as we only get paid when we make a sale and the account is pleased enough to renew. We don’t get paid while at the water cooler or shuffling papers and no one is paying those expensive benefits for us. I have no fear competiting with the government or co-op’s as my present competition is much harsh.

        • Alan said

          Jim and Rick: My thanks to both of you for your dialogue. You’re both very articulate and it’s great to see this blog spark and host this kind of discussion.

          My two cents on the substance of your comments:

          1. Jim is right that those buying coverage on their own get the worst deal and he identified many of the reasons. On one, however, Jim, I do have good news. When a carrier negotiates rates with a doctor or hospital, those lower rates benefit the insured (you) even when you’re still paying your deductible. Put another way: your insurance policy provides you with discounted medical care even if you never meet your deductible.

          2. Rick is right that it’s very difficult to imagine a government-run health plan paying by the same rules as private carriers. Whether this is called “cheating” or something else doesn’t really matter. Rick identified many of the likely problems. Others include the government driving consumers to the public option not because it’s in the consumer’s best interst, but to make sure the public option doesn’t fail. The public option will also avoid paying premium taxes and other fees private carriers often pay.

          3. It’s also true, as World Vitamins points out, that none of the legislation goes far enough in restraining the cost of medical care. They probably go further than they’re given credit for, but that’s not saying much. But remember, passage of a bill this year doesn’t end health care reform efforts. Congress will need to specificlly address costs sooner rather than later. And they won’t be able to hide behind the need for market reform once a bill passes this year.

          4. The debate over private or public health plans is beside the point. If a private plan can offer a product that consumers think is better, it will win in the market. If it can do so and deliver profits to its shareholders at the same time, that should be fine. If non-profits can win in the marketplace, they will and private carriers will suffer. At the end of the day, it’s not the legal structure of a carrier that matters, it’s whose products consumers vote for with their wallets.

          Again, thanks for your comments and insights.

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