Baucus Junk

graphic by twolf1

Jane and Scarecrow show that Max Baucus’ real plan is for the uninsured to be forced to buy junk insurance. They are referring to the minimum actuarial value of the plans that Baucus is talking about. He proposes a mandate that uninsured people get plans that will cover “less than 70%” of medical costs.

How would you feel about this insurance plan: a $500 deductible; a 50% co-pay, and a maximum of $4,200 out-of-pocket cost. Using a highly simplified model from the CBO, this plan has an actuarial value of about 66%. The premium for an individual would be $3,290 plus the administrative costs, which range from 7% to 30%. The high end is for individual and small firm policies, so let’s say 25%, for total premiums of at least $4,112.50.

Under this plan, if you had medical costs of $8,725, or more, you would get back more than you paid in, that is, your premiums plus your co-pay plus your deductible would equal your costs. If you had $5,000 in expenses, maybe the cost of falling and breaking an arm (you’d be amazed how hard it is to find the cost for a medical procedure), you’d be out your premium and $2,750, a total of $6,862.50 that year. That is going to be a real problem for someone making $35,000 per year.

I’d call that a pretty good definition of junk insurance. The key point in any insurance policy is whether people can pay the costs of their health care without wrecking their budget. I don’t really see how this insurance would help anyone who got seriously hurt and had to miss time off from work, with all the attendant costs, including drugs and drug co-pays, and whatever else the insurance company could wiggle out of paying.

The CBO explains that the price of insurance is the amount the company expects to pay out plus the administrative costs. See page 59 (page 85 of the .pdf) of this .pdf from the CBO. This chapter gives an excellent and straight-forward explanation of insurance pricing. The CBO used this material as the basis for evaluating proposed legislation. The amount the company expects to pay is summed up in the term “actuarial value.” This is from page 62 (page 85 of the .pdf).

One useful way to compare health insurance plans with different design features is by examining their actuarial value. That summary statistic measures the share of health care spending for a given population that would be covered by each plan and thus reflects both covered services and cost-sharing requirements (see Box 3-1).

Cost-sharing requirements are deductibles and co-pays. You calculate the actuarial value by taking a group of policy holders with different annual medical expenses and calculating the amount the insurance company would pay for each. CBO gives an example on page 65. This is a very simplified version, which assumes that there are five different policy-holders with five different annual expenditures, and calculates the actuarial value from that.

Another way to read their example is to assume that there are 5 quintiles, each of which averages the amount of total annual spending shown in the chart. The payment levels are $600, $1,000, $1,500, $3,700 and $18,200. I have no idea if this matches up with the real world, and we don’t have any real actuarial data, but I assume they wouldn’t just work with a stupid example, so I use it to see what it means for policy holders.

If you use that data as the actuarial distribution, it is easy to calculate that my example of junk insurance, $500 deductible, 50% co-pay and a maximum out-of-pocket of $4,200, has an actuarial value of about 66%, which makes it viable under Senator Baucus’ leaked whatever it is.

That should make exactly one group happy: Baucus’ insurance company constituency.