Gov. Schwarzenegger’s War on Choice in Health Insurance Heats Up

Ever since Gov. Arnold Schwarzenegger’s California Health Care Deforminator ABX1 1 stumbled just short of the finish line last January, he and his Democratic allies in the legislature have been looking to move bits and pieces of the failed health reform plan forward.

According to the Los Angeles Times’ Jordan Rau, they are very close on two bills. One (SB 1522) is bad. The other (SB 1440) is catastrophic. Both are motivated by the media firestorm around “rescission” of individual health insurance polices by plans that allege fraud by applicants, addressed frequently in this blog.

Mr. Rau, as is typical for the LA Times, painted individual health insurance in a bad light – but at least he got the basic facts right. That is, he wrote that the monthly premium for a single in the small-group market was $382 in 2006, versus only $259 for a single in the individual market. (This impressed me because it recognizes that the difference between the share of group premium paid by the employer and that paid by the worker is fictional: the firm’s share is also paid by the worker, through lower wages. Most journalists do not seem to understand this.)

However, he also notes that the person with individual coverage paid $1,825 in deductible and co-payments, versus only $630 for the person with small-group coverage. These estimates come from research by John Gabel and colleagues for the California HealthCare Foundation, published in Health Affairs and in one of CHCF’s snapshots.

Gabel and colleagues use a proprietary model to calculate their estimates. These are very serious researchers and I don’t want to criticize them unfairly, but their out-of-pocket spending estimates seem high to me. On average, they estimate annual spending on deductible and co-pays of $630 for a small-group beneficiary and $1,825 for an individual beneficiary.

Dividing the population into quintiles, they estimate that a person in the top quintile (in “excellent” health), spent $505 out-of-pocket in 2006 if he was in the small-group market, and $1,447 if in the individual market.

Gabel and colleagues figure that the average small-group plan covers 83.3% of costs, after deductible and co-pays, but the average individual plan covers only 54.6%. Arithmetic then tells us that the average health cost is $3,772 for a small-group beneficiary (i.e. $630/0.167) and $4,020 for an individual beneficiary (i.e. $1,825/0.454). That in itself is odd because Gabel and colleagues state that the individually insured population is in better overall health than the persons with group insurance (Snapshot, p. 28). So, why do they have higher health costs overall?

Furthermore, recall that the most expensive 50% of the population account for about 95% of health costs and the least expensive 50% account for only 5%. A little more arithmetic tells us that a person in the low-cost half of the population would have total health costs of $189 (small-group) or $201 (individual). So, where do those huge out-of-pocket payments for the quintile in “excellent” health come from? They do not appear plausible.

Oh well, let us note that Gabel and colleagues’ “adjusted” monthly premium (i.e., adjusting for individual policies poorer actuarial benefits) is $405 for small-group coverage and $392 for individual coverage. So, when all is said and done, individual coverage wins by a whisker.

Furthermore, other research shows that individually insured persons in only fair or poor health are less likely to become uninsured than those with small-group polices. Why? Because their policies are guaranteed renewable and not dependent on their jobs, which small-group beneficiaries can lose if they are in poor health.

Now, back to the legislation in question! SB 1522 would forbid insurers from designing policies that they think people want to buy. Instead, it creates a “menu” of policies from which insurers can offer. Gov. Schwarzenegger wants to soften this bill by allowing insurers to design polices, but requiring them to categorize them according to the state’s definition.

Much worse is SB 1440, sponsored by Sen. Sheila Kuehl, an advocate of government-monopoly whose approach I have discussed in this blog). SB 1440 threatens to impose an 85% Medical Loss Ratio (MLR) on insurers, which will reduce individuals’ choice of health plan, as I’ve discussed in my analysis of ABX1 1, and in this blog.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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