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Funny Math: The Government Pretends They Save You Money

The federal Centers for Medicare & Medicaid Services claim that consumers saved $3.9 billion because of restriction on insurance companies under Obamacare. The figure is almost meaningless. Also, they don't mention that Obamacare is raising insurance premiums, not lowering them.

In contrast, CMS (a part of the Department of Health and Human Services) is now claiming that saving you money means not making you spend as much as you would have under Obamacare.

CMS issued a press release June 20 touting a report on Medical Loss Ratios. Under Obamacare, insurance companies must use 80% of premium income for health care and "quality improvement", leaving 20% for profit and overhead. CMS said that "For many consumers, the report found that the law motivated their plans to lower prices or improve their coverage to meet the standard."

In the accompanying report (pdf), CMS claims further (emphasis added):

Consumers benefit from the 80/20 rule in two ways. First, they benefit upfront because insurance companies now keep premiums lower and operate more efficiently in order to meet the 80/20 rule. And second, if an insurance company doesn’t meet the 80/20 rule, then the consumer benefits by receiving a rebate for the amount that exceeds this threshold. In 2012, the 77.8 million consumers in the three markets covered by this 80/20 rule saved $3.4 billion upfront on their premiums because of the 80/20 rule and other Affordable Care Act programs

But neither the logic nor the arithmetic work. If companies can only spend 20% of premiums on profit and overhead, that's incentive for them to have as large a premium as they can.  Competition and, to a lesser extent, regulation counteract that. The Medical Loss Ratio is a factor raising prices, not lowering them.

What do the "other Affordable Care Act programs" include? A CMS spokesperson emailed:

The Medical Loss Ratio standard (or “80/20 rule”) works in conjunction with other provisions of the Affordable Care Act, including the required review of proposed double-digit premium increases, to stabilize and moderate premium rates and provide consumers better value for their premium dollar.  As the report indicates, the $3.4 billion was a result of upfront savings on premiums, and the remaining $[500] million were from rebates.

Critics of the law are arguing that premiums will rise by selectively looking only at one part of the law, while simply ignoring critical provisions of the law that lower costs and drive premiums downward.

John Goodman of the National Center for Policy Analysis, said "If [insurers] paid rebates, it's just because they haven't learned how to game the system. Give them a couple of years and there won't be any more rebates. They'll learn how to organize their affairs so as not to pay rebates. You can count on that."

CMS listed items saving consumers money:

  • Tax credits 
  • Reinsurance 
  • Risk adjustment
  • Risk corridors
  • Allowing for the purchase of lower-premium coverage under a catastrophic plan for young people and individuals who otherwise cannot afford insurance  
  • The new authority to ensure premium hikes are transparent and publicly reported

Goodman said none of those things actually lower premiums to any significant degree. Tax credits increase a consumer's income, but make it possible for premiums to rise. Eventually they come from someone's taxes.  Reinsurance, risk adjustment, and risk corridors are all of minor value. 

Young people can buy catastrophic coverage now if they chose, so that's not saving anyone any money. "And," Goodman agreed, "the catastrophic care would be more expensive under Obamacare than it would be now in the market. "

The only item listed that could lower premiums are the regulations limiting premium increases. That is simply the latest attempt at price controls, which never work.

[T]he premium savings number captures another way consumers benefit from the 80/20 rule (aside from the rebates) - it captures an estimate of the lower premiums consumers saw due to lower administrative costs and profits. So, this number represents how much more consumers would have paid in premiums if the medical loss ratios had not improved between 2011 and 2012.
The $3.9 billion number is not an actual savings, that is, it's just their estimate for how much more consumers would have paid if the MLR rule had not been in place and insurers had still raised their prices as if it were.

"After they figure out how to do this," added Goodman, "it will just shift the administrative costs to the doctor's side of the ledger."

"The main thing is, once everybody adjusts to this there are going to be no savings from that rule. Zero. Because they will just shift the administrative activities over to the supplier side of the market instead of having the insurance company do it. There will be something like an Independent Doctor's Association that does what the insurance company would have done, but it doesn't count as an insurance company so the rule doesn't apply to it."

 According to CMS, 2012 premium savings were calculated by:

(2011 administration - 2012 administration) * (claims in 2012)
I have been looking at this for several days and can't figure out why that formula was used. It's possible that "claims" is actually supposed to be premiums. In either case, the numbers used are hopelessly inexact, with exaggerated accuracy.

"That's just seat-of-the-pants," said Goodman. "That's not careful. They're not understanding that administrative costs are buried in the premium even if they're not born by the insurance company."

The Department of Health and Human Services has been working overtime to try to sell Obamacare. The level of propaganda they are forced to adopt is quite telling: if the product were as good as they say it is, it would be selling itself.