After an insurance industry report said that premiums would rise sharply with the passage of comprehensive health care legislation, Jon Gruber, a health care economist at the Massachusetts Institute of Technology, said he evaluated the report Monday at the request of Senate Democrats and found it deeply flawed.

The industry report, prepared by PricewaterhouseCoopers, was released Sunday evening by America’s Health Insurance Plans, the major industry trade group, and has sparked a furor, drawing angry responses from the White House, Congressional Democrats and other supporters of the legislation.

Mr. Gruber, who helped Massachusetts with its effort to provide universal health insurance coverage, said that the industry report failed to take into account administrative overhead costs that he said will “fall enormously” once insurance polices are sold through new government-regulated marketplaces, or exchanges.

And Mr. Gruber said that the PricewaterhouseCoopers report failed to take into account government subsidies that would be provided to help moderate-income Americans purchase insurance. PricewaterhouseCoopers acknowledged in its report that it did not factor in the effect of those subsidies.

As a result, Mr. Gruber reached the opposite conclusion of the insurance industry.

He said that premiums would actually decline for individuals purchasing and families purchasing insurance, either with or without the government subsidies. Mr. Gruber’s analysis did not look at employer-sponsored plans or group plans.

“If you literally take the data from the Congressional Budget Office you can see that individuals will be saving money in a nongroup market,’’ he said.

But the findings by Mr. Gruber, a prominent health economist, seemed unlikely to diminish the partisan firefight that has erupted in recent days, with Republicans citing the insurance industry report as evidence of their belief that the Democrats’ health care legislation would lead to higher taxes and higher costs.

The insurance industry report seeks to predict what will happen to insurance premiums across the entire industry, which is a very broad approach.

And the reality is that it is virtually impossible to predict the impact that the proposed legislation will have on insurance premiums.

The nonpartisan Congressional Budget Office, which has thoroughly analyzed all of the major legislative proposals in Congress, has said that it cannot forecast what would happen to premiums because so many uncertain variables come into play.

Generally speaking, health insurance premiums are expected to rise. For example, the federal Office of Personnel Management recently said that health insurance premiums for federal government employees would rise an average of 8.8 percent in 2010, and in the most popular Blue Cross insurance plans the premiums would increase 15 percent for individual coverage and 12 percent for family coverage.

Whether premiums will increase more or less than otherwise would have been expected as a result of the overhaul depends on innumerable factors, including the specifics of the legislation, which has yet to be approved, and the specifics of individual policies, which could change based on the specifics of the legislation.

In addition, the legislation could lead to other unexpected changes in the health care system that could drive overall prices up or down in the short term.

Mr. Gruber also disputed an assertion in the insurance industry report that some plans meeting the minimum requirements in the proposed legislation, so-called “bronze plans,” would be so costly that they would be hit by a proposed excise tax on high-priced or “Cadillac” insurance policies.

Mr. Gruber called that claim “completely implausible” and said that the industry report overstated the cost of a bronze plan, even in a state with extremely expensive insurance prices.

Here’s his analysis:



The Senate Finance Committee Proposal Lowers Nongroup Premiums

Jonathan Gruber, M.I.T.

Oct. 12, 2009

The Senate Finance Committee proposal includes health insurance and delivery system reforms, new options, premium assistance and other proposals to improve quality, affordable health care for all Americans through state-based exchanges. The premiums that individuals will face in these exchanges are, according to the non-partisan Congressional Budget Office, considerably lower than what they would face in the existing nongroup insurance market, due to the market reforms put in place by the S.F.C. plan and the market economies of new exchanges. This report, and the attached slides, illustrates this point by relying solely on analysis available from C.B.O., as well as the details of the premium assistance available through tax credits in the Senate Finance plan.[1] In addition, following the usual assumption in my model I assume that health insurance premiums grow at 6 percent/year.

The analysis focused on two types of individuals and a family: a 25-year-old, a 60-year-old, and a family of four where the family head is 45 years old. I examined these family types at four different income levels, where they would be getting four different tax credits for premiums. The impact is for 2016, the first fully-phased in year of the reforms, although income is expressed in $2009 for ease of interpretation. The analysis compares what they would pay if they are currently insured in the nongroup market versus what they will pay in the exchange.

Under the Senate Finance Committee proposal, the average estimate premium changes would mean:

* Sizeable premium savings for young. An individual aged 25 at $19,000 in income (175 percent of poverty) would benefit from tax credits and would save, on average, $685. A higher income young person could always buy a “bronze” plan without tax credits for a savings of $230. Moreover, they could qualify for a catastrophic policy – also known as a “young invincible” policy. This policy would cost on average only $1,190, saving them $585 at all income levels.

* Even larger premium savings for older individuals. A person age 60 with income at $19,000 (175 percent of poverty) would save, on average, $7,890. A person at age 60 with income at $40,600 (375 percent of poverty) would continue to benefit from tax credits and would save, on average, $4,100. Even at a high enough income level to not benefit from tax credits, older persons purchasing a bronze plan would save about $2,800.

* Also large premium savings for a family. A family with income at $38,000 (175 percent of poverty) would save, on average, $8,550. That same family with higher income could buy a “bronze” plan without tax credits at a savings of $2,430 over current nongroup prices.

Conclusion: The nonpartisan analysis based on information from the C.B.O. shows clearly that for those facing purchase in the nongroup market, the S.F.C. bill will deliver savings ranging from several hundred dollars for the youngest consumers to over $8,500 for families. This is in addition to all the other benefits that this legislation will deliver to those consumers – in particular the guarantee, unavailable in most states, that prices would not be raised or the policy revoked if they became ill.

[1] The C.B.O. reports that a typical nongroup single plan is projected to cost $6,000 in 2016. For the family plan for a family of four, I assume the premium is 2.7 times the single premium, as with group insurance. I assume that there is a 5:1 ratio between premiums for 25- and 60-year-olds in the existing nongroup market. The C.B.O. also reports that a silver plan (with an actuarial value of 0.70) would cost on average $5,000 in 2016. The Bronze plan has an AV of 0.65, so the price is 93 percent as high. I assume that the premium for a 25-year-old is half that amount and for a 60-year-old is twice that amount for a total age band of 4:1. For the catastrophic premium, I assume and actuarial value of 0.5. For a family plan, I assume that the premium is 2.7 times the single premium.