If you’re one of the 155 million people on employee-based health insurance plans …

Here’s the main reason why YOUR health insurance premiums have gone up.

Since Dems have made pre-existing conditions a centerpiece in their midterm campaigns, lets flashback to a 2009 post which injected some sobering facts into the debate…


All the healthcare attention seems to be on the 20 million people who are getting insurance via Extended Medicaid or ObamaCare Exchanges.

Virtually no light is being shined on the vast majority of folks who are covered by employer plans.

Case-in-point: the soaring premiums being paid by employees … hardly the $2,500 reduction that was promised.

Here’s one of the reasons that premiums have gone up not down …


Most people – probably bordering on all – would agree that people with pre-existing conditions should be able to get health insurance.

I accept that as a non-debatable point.

But, I got curious about the economics of so-called “guaranteed coverage”… i.e. how much does it cost, and who pays for it?

Specifically, for folks covered by employer plans, how much of their increase in health insurance premiums over the past couple of years is attributable to guaranteed coverage?


Let’s take a whack at the numbers …


For simplicity, assume that all members of an existing insurance pool “consume” $5,000 annually in healthcare … and assume that the health insurer is a simple not-for-profit co-op that sets premiums to cover the incurred costs … $5,000 per enrollee.

If there are 1,000 enrollees, then aggregate costs equal aggregate premiums … 1,000 times $5,000 equals $5 million.


Several sources (including the Kaiser Foundation) peg the percentage of people with disqualifying pre-existing conditions at about 25%.

That percentage sounds high to me, especially since some may have developed their conditions after enrolling in a plan, i.e. they are already in our pool of 1,000.

So, let’s cut that number way back to, say, 10% with pre-existing conditions.


It’s oft-cited that the medical costs of a chronically ill person (roughly synonymous with “pre-existing condition”) are, on average, ten times as high as those of a qualifying healthy person.

So, for our example, each person with a pre-existing condition consumes $50,000 in medical care each year (10 times $5,000).


OK, we’ve got the pieces, so let’s enroll 100 people (10% of 1,000) with pre-exiting conditions into our insurance pool.

There are now 1,100 people in the pool.

Our original group of 1,000 still consumes $5 million in medical care.

The new 100 with pre-existing conditions also consume $5 million (100 times $50,000).

So what happens to premiums?

They go up to $9,090 ($10 million divided by 1,100) … an 81% increase.


That sounds way high, so let’s cut the consumption ratio from 10 to 1 down to a more reasonable sounding 4 to 1.

Doing the same arithmetic, the new pre-existing condition folks consume “only” $20,000 in medical care annually … $2 million as a group.

So, the aggregate medical expenses are $7 million (1,000 times $5,000 plus 100 times $20,000).

Premiums increase from $5,000 to $6.363 ($7 million divided by 1,100) … a 27% increase.

Cutting to the chase, the pre-existing condition enrollees get $20,000 of health care for $6.363.

How is it paid for?

Each of the original 1,000 enrollees provides a $1,363 subsidy towards the higher medical care consumption of the new , pre-existing conditions folks.

That’s not  judgmental … it’s simple arithmetic.


If these assumptions (10% new enrollees with pre-existing conditions, 4:1 cost ratio) are in the ballpark, then we’ve explained more than 100% of premium increases for the past couple of years.

Everything else is just rounding error.


These basic factors were available for analysis back when ObamaCare was being pitched.

Makes one wonder why folks were told that their premiums go down, not up.

Hard to imagine cost-curve-bending (which, by the way,  never did materialize) more than offsetting the tsunami of pre-existing conditions being added to the insurance pools … especially since insurance payouts are now uncapped.


Let’s take one more angle …

Above, we agreed that most people – probably bordering on all – would agree that people with pre-existing conditions should be able to get health insurance.

I wonder how many would still agree if a simple gut-check phrase were added: “… and you will pay for it with a 27% bump in your premiums”?

My bet: the numbers would slip a bit … maybe a lot.

As a general rule, good deeds have more appeal when somebody else is paying for them.



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2 Responses to “If you’re one of the 155 million people on employee-based health insurance plans …”

  1. Deepak Gupta Says:

    Prof Homa, I understand you bringing healthcare up again during election time and I agree Obama Care needs some reform, but I haven’t seen and credible response or proposal from conservatives either especially when in last two years republicans had both senate and house. Surprisingly in none of the mid-term campaigns this is becoming a big issue and being brought up. Trump promised to repeal is very next day of election. What happened?
    I don’t think solution to healthcare problem will come from government it will come from private enterprise

  2. Ben R Says:

    Deepak, do you realize that many other governments have already solved healthcare for all? Private enterprise has NEVER. Where is your faith coming from?

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