Health Policy$ense

What the Coronavirus Pandemic Could Mean for Health Insurance Premiums

Mark Pauly for The Inquirer

[cross-posted from The Philadelphia Inquirer]

The immediate task at hand for all of us is to mobilize resources and personnel to provide care to save the lives of those who contract COVID-19. However, even if the epidemic is brought under control soon, as we all fervently hope, there is a dark cloud for the future. Insurers are paying for coronavirus tests with little or no cost sharing, many of them have agreed to more generous benefits for treatment, and there may be mandates for coverage without cost sharing. And even for people with deductibles, insurers will be paying out billions of dollars in claims above those deductibles for those hospitalized for treatment. Then what?

Regulators of the insurance market in California, which has been hard hit by the virus, have delivered a prediction of sorts: be prepared for an extra 4% to 40% jump in private insurance premiums, and possible employer and consumer responses in terms of cuts in coverage. The low end number would not be so bad, but the upper end would be scary. So if you get your coverage in the private sector, should you prepare for this dark future?

Not necessarily. The reason is that we are talking about insurance here, not a method of deferred payment for a large purchase that sooner or later will have a bill come due. To be specific, most of the buck for COVID-19 treatment will stop with insurers and employers, not with consumers. 

Humility is an important virtue these days, especially about predicting the future. We do not yet know if the epidemic will increase claims costs, since it is delaying elective procedures and doctor visits for other complaints. But if claims do increase enough to matter, those higher insurer costs would not be expected to land on the people who bought the insurance. After all, the whole point of insurance is to shift the risk of a large unexpected loss (for which coronavirus expense will qualify) away from the consumer who had not budgeted for it—not just now, but (unless the event is sure to repeat), not in the future either.

So if you as an insured person are not going to have to pay that much, who will? If you have job based coverage, the answer depends on details about that coverage that you probably do not know but might want to find out. Specifically, even if some insurance company’s name is on your “membership” card, are you one of the majority of workers who gets coverage from an employer who self insures, or is the insurance company at risk for all claims?

The latter case is the situation with most kinds of insurance you buy. An insurer charges a buyer a premium, puts some of the money into reserves in case of large losses, and uses the rest to pay claims, pay insurance company employees, and (unless it is a nonprofit “Blue” or mutual plan) return some money to stockholders. If your employer is relatively small, your boss may have chosen to get group health insurance for the workforce from such a firm. Then the story is simple: the unexpectedly high claims from COVID-19 are to come out of the insurer’s reserve or buffer; you can be pretty sure there is enough money there, because it is regulated by the state and because many insurers (especially the aforementioned Blue plans) have piled up even more reserves than they need (used in good years for health fairs, bicycles, and lobbying).

If instead your employer has taken advantage of the possibility to self-insure and pay claims itself (which allows it to avoid some state taxes and regulations), it will be your employer who will have to come up with extra money. Large employers will probably have to cover it all; smaller self-insured employers probably bought some “catastrophic” coverage from an insurer which might be triggered by unusually larger claims.

Suppose that next winter coronavirus either disappears (as some hope) or can be prevented, at least relative to this year’s scale. Won’t your insurer or your employer be returning to collect? Surely some may try, but economists note that there are some powerful forces that will prevent this from happening.

Take our two cases. Suppose your small firm’s insurer, having shelled out money from its reserves last year, raises the premium by 40% to cover the past losses as well as fears about next year’s risks. If your employer or your employer’s broker is not asleep at the switch, they should be able to get a quote for next year’s coverage from a different insurer that reflects only the much lower claims you and your fellow workers expect to incur then, after the epidemic his dissipated. To be sure, insurers that drew their reserves down below the minimum level required by regulation will have to rebuild them, and so there may be some combination of higher premiums plus recourse to the capital market to do that—but the increase next year should be much smaller than the hit this year. 

What if your self-insured employer had to pay? It could try to cut your wages next year or increase your share of the premium to get the money back. But if (as we also fervently hope) the labor market recovers next year, it will not be able to compete for workers if it tries to do so.

Of course, either of these predictions would be wrong if insurers or employers conspired to agree to raise premiums or cut wages, but antitrust laws should be invoked to prevent that. Insurers are lobbying the government for funds to offset these (and other losses); with a sufficiently feckless political class we may end up paying, not through the insurance or labor markets, but through taxes—which does not seem either fair or necessary. We should not use this extraordinary event to try to advance causes or views on the perennial problems that will be present even after it goes away. Still, it is interesting to think that, had the epidemic struck within a fully public system (as is the case in Europe, especially in Italy and Spain), fully 100% of the cost would have to be borne by taxpayers. Our mixed system has what to some may be the virtue of spreading the burden between the public and the private sector, with each making a contribution.