OPINION - Affordable Care Act’s Savings Overhype

"Obama Overhypes Health Savings" by Lori Robertson, FactCheck.org 7/19/2013

President Barack Obama presented a glowing but incomplete view of how much Americans can save on premiums thanks to the Affordable Care Act.

In a July 18 speech, he said 8.5 million Americans would receive rebates “averaging around 100 bucks each.”  But much of the money goes to companies offering insurance to their employees, not directly to individuals.  Plus, the $100 average is per family, not per person.  Obama also held up New York as an example of how premiums on insurance exchanges could be significantly lower than they are now on the individual market.  But he didn’t mention that New York’s insurance regulations make it a special case.

Obama made his comments at the White House, standing in front of Americans who had received rebates because of the Affordable Care Act’s requirement that insurance companies spend at least 80 percent of premium dollars on health care, as opposed to marketing, administration or profits.  If insurers don’t do that — it’s called a medical loss ratio, or the 80/20 rule — they have to refund part of the premiums to consumers.  (Large group plans have to spend at least 85 percent of premiums on health costs.)  The estimated total in rebates this year is about $500 million, according to the Centers for Medicare and Medicaid Services.

Obama, July 18:  Last year, millions of Americans opened letters from their insurance companies — but instead of the usual dread that comes from getting a bill — (laughter) — they were pleasantly surprised with a check. In 2012, 13 million rebates went out, in all 50 states.  Another 8.5 [million] rebates are being sent out this summer, averaging around 100 bucks each.

Obama is a bit off on the facts.  The average rebate is about $100 per family — not per person.  It’s not 8.5 million rebates “averaging around 100 bucks each,” as the president said.  Instead, it’s 8.5 million consumers who will benefit, with an average rebate of $100 per family.

But the more glaring omission is an acknowledgment that a lot of this money goes to businesses, not individuals.  Americans who buy their own insurance on the individual market would receive these checks.  But for Americans on group plans through an employer, it’s the employer that gets the rebate.

Last summer, when Obama also touted the benefits of the 80/20 rule, saying “nearly 13 million of you will receive a rebate from your insurance company,” the Department of Health and Human Services said 4 million in the individual market would get a rebate.  The rest of the checks, totaling $1.1 billion that year, would go to employers, which could indeed pass the savings along to their workers.  As a 2012 report from the Kaiser Family Foundation said, “Rebates in the group market will generally be provided to employers, and in some cases be passed on to employees as well.”  But that’s not quite the same as receiving a check in the mail.  The Department of Labor, which issued guidance on this, says that employers who pay at least part of the premiums are entitled to at least part of the rebate.

Even some in the individual market won’t get a check, but instead will see a reduction in future premiums.  The Centers for Medicare and Medicaid Services, which releases data on the rebates, says they can be issued in four ways:  “You may receive a rebate check in the mail, a reimbursement to the account you used to buy your insurance, a reduction in next year’s premium, or, if you bought your insurance through your employer, your employer must use the rebate for your benefit.”

For this year, the CMS estimates that of the 8.5 million Americans that will benefit from the rebates, 2.7 million of them are in the individual market.  That means the rest are on group, or employer, plans.  The average rebate for those in the individual market is $94 per family, CMS says, with wide variation among the states.  Some Americans will see sizable benefits:  The 2,626 families set to get rebates in Washington state will receive an average check of $499.  The 48,015 receiving rebates in Wisconsin, however, get an average of $26.

So, “millions of Americans” received checks last year and are set to receive rebates again this summer.  But not 13 million last year, or 8.5 million this year, as Obama implied.  Most of the checks go directly to employers that provide the health plans.

Obama also claimed that the 80/20 rule had saved Americans even more money on premiums, as insurance companies worked to lower costs and avoid having to send out rebates later.  But, as the Washington Post‘s Fact Checker wrote, Obama failed to note that this was an administration estimate that attributed all premium savings to the Affordable Care Act.

Obama, July 18:  And because of this new rule, because of the fact that it improves the value of the coverage that you purchase, last year alone, Americans saved $3.4 billion in lower premiums.  That’s $3.4 billion on top of these rebates.

The Kaiser Family Foundation published its own estimate of how the law may have lowered premiums as insurance companies reduced overhead to meet the new requirements.  It determined that premiums in the individual market were $1.9 billion lower in 2012 than they would have been had insurers kept medical loss ratios at pre-health care law levels.  It’s certainly logical to accept that this happened to some degree.  And KFF notes the impact would be stronger in the individual market, where “fewer than half of plans were in compliance with the ACA’s MLR thresholds in 2010.”

But KFF also lists several limitations with its estimates:  It’s difficult to know what premiums would have been in the absence of the 80/20 rule; it’s difficult to separate the impact of this rule from other effects of the law; and there’s a lack of good data on insurance premiums and claims before the law was passed.

Obama doesn’t list any limitations, instead touting his own administration’s loose estimate as fact.

New York’s Good News

Obama also highlighted news out of New York that the state exchange would offer premiums at least 50 percent less expensive than what consumers can get now on the individual market.

Obama, July 18:  Just yesterday, state officials in New York announced that average premiums for consumers who buy insurance in their new marketplace will be at least 50 percent lower next year than they are today.  Think about that — 50 percent lower.  … So if you already buy insurance on the individual market, meaning that you don’t get insurance through a big group plan through your employer, that could mean thousands of dollars a year that can go towards paying a mortgage, or putting a kid through college, or saving for retirement.

New York Gov. Andrew M. Cuomo made the announcement this week.  A New York Times chart shows substantial savings between 2013 standard H.M.O. rates in Manhattan and proposed 2014 rates for standard plans on the state exchange.  That’s not comparing the exact same plans, but it’s a big drop in prices, nevertheless.

Obama’s statement is correct — and some in New York could save “thousands of dollars a year” from what they’re paying now, whether they receive federal subsidies to buy insurance or not.  But Americans across the country should be cautioned not to expect the same kind of price cut in their states.  New York’s insurance regulations required carriers to take anyone, regardless of preexisting conditions.  That contributed to the state’s individual market being among the most expensive in the country.

The Times quoted one expert saying the lower exchange plan prices weren’t all that surprising.  “If there was any state that the A.C.A. could bring rates down, it was New York,” said Timothy Jost, a law professor at Washington and Lee University, who writes a blog about the law for the journal Health Affairs.

New York is one of just seven states that don’t allow plans to adjust premiums based on health status.  New York and Vermont are the only states that have across-the-board prohibitions against price adjustments based on gender, age and tobacco use, according to the Kaiser Family Foundation.

Factors in the Affordable Care Act bringing down the cost include the requirement that everyone have insurance (which will help bring healthy folks into the individual market in New York), and competition among insurance plans for the new business.  The Times reported that 17,000 state residents buy their own coverage now; 615,000 are expected to do so through the exchanges.  That’s a huge change in the insurance risk pool, and a lot more business for private companies.  Plus, there are federal subsidies for those earning up to 400 percent of the federal poverty level, enticing folks to sign up.

Other states with currently high premiums on the individual market could see a decrease as well, but plenty of states on the low end of the cost spectrum could not.  As we’ve said before, no one knows exactly how much premiums on the exchanges will cost — and whether they’ll be more or less expensive than what an individual is paying now depends on the level of coverage purchased, health status, and current state regulations, among other factors.

Obama is correct in touting the news out of New York, but he doesn’t make clear that that kind of premium decrease is likely to be the exception, rather than the rule, among all states.