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CBO Looks at Senate's Health Insurance 'Exchange' Proposal

By Drew Armstrong, CQ Staff

November 30, 2009 -- People buying health insurance under the "exchange" in Senate Democrats' health care bill would pay higher premiums than they would under current law for their plans, but new subsidies would more than offset the increased costs for more than half those people, paying almost 60 percent of their premiums, according to a new analysis.

A Congressional Budget Office (CBO) reading of the bill (HR 3590) also indicates that part of the reason for the higher premium costs would be that, under the proposed regulation in the bill, insurance companies would have to offer a greater level of coverage in the plans they sold.

According to the CBO analysis, once the bill's programs were fully implemented in 2016, people buying insurance plans individually on the exchange would pay 10 percent to 13 percent more per person for them than under current law. But some 57 percent of people on the exchange would get subsidies in the form of tax credits, and on average those people would actually pay 56 percent to 59 percent less for their premiums than they would otherwise.

The average premium for people buying through the exchange would be $5,800 for a single plan, or $15,200 for a family plan. Under current law, in 2016 an individual plan would cost $5,500 and a family plan $13,100.

According to CBO, however, "the majority of nongroup enrollees (about 57 percent) would receive subsidies via the new insurance exchanges, and those subsidies . . . would cover nearly two-thirds of the total premium." That means that while premiums cost more, most people required to buy them under the legislation's mandate to have insurance would actually pay far less than they would otherwise.

The new rules would affect companies buying coverage, as well. Policies for companies with fewer than 50 employees would stay roughly the same — between 1 percent more expensive and 2 percent less expensive — but with the premium subsidies for small businesses, the cost of covering a person on the "small group" market would decrease by 8 percent to 11 percent.

The effect on large companies would be negligible, according to the analysis.

The report is sure to cause substantial argument as the Senate opens debate Monday on health care legislation put forward by Majority Leader Harry Reid, D-Nev.

The CBO report was released Monday in response to an inquiry by Evan Bayh, D-Ind., according to a cover letter that accompanied it.

Senate Finance Committee Chairman Max Baucus, D-Mont., crafted many of the financing and cost-control portions of the bill, and hailed the news from CBO.

"The vast majority of Americans will see lower premiums than they would if we don't pass health reform," Baucus said, citing the estimate. "We also learned that the millions of Americans who are underinsured—who don't have enough coverage to prevent them from financial ruin—would be able to purchase significantly more coverage for an affordable price."

But the report also provided plenty of individual data points that could, and likely will, be used by Republicans and Democrats to make very different points. Republicans quickly pointed to the premium cost data to say the bill would drive up costs, even though for many people their actual out-of-pocket costs would not increase.

"The Democrat bill will actually increase premiums for American families," Senate GOP Leader Mitch McConnell of Kentucky said in a statement Monday. "A bill that's being sold as a way to reduce costs actually drives them up."

The CBO analysis is good news for Democrats, who have been seeking assurances that their legislation will in fact lower the cost of health insurance. Because of the new regulations in the bill, according to the report, the cost of providing a specified amount of coverage for people buying insurance on their own would actually go down by 7 percent to 10 percent. The report calls that analysis the "apples-to-apples" comparison, and it seems likely that Democrats will latch on to that figure and others to argue that their proposals will make insurance more affordable for Americans.

The report also concludes that administrative costs—the term for what insurance companies spend on everything but medical care—would decrease. "Compared with the plans that would be available in the nongroup market under current law, nongroup policies under the proposal would have lower administrative costs, largely because of the new market rules," the report reads.

The lower administrative costs are caused by more people entering the market, which creates economies of scale, as well as by requiring standard benefits and other new regulations.

While premiums would be higher because of the increased level of benefits, the report also concludes that competition in the exchanges would help keep them lower than they would be otherwise. In many markets, there is little competition among health insurers. In the exchange, having many plans available would create "additional competition [that] would slightly reduce average premiums."

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