4 Reasons Why Obamacare Exchange Premiums May 'Double In Some Parts Of The Country' In 2015
Avik Roy, Forbes Staff
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As we reach the end of the first year of enrollment in Obamacare’s subsidized health insurance exchanges, we’ve been trying to solve a couple of mysteries. First: how many people who have signed up for coverage were previously uninsured? Second: will the botched rollout and design flaws lead to even higher health insurance costs next year? We’re starting to get indications from insurers that premiums on the exchanges will go up significantly in 2015. Here are four reasons why.
Concerns about an Obamacare ‘death spiral’
For years, analysts have worried about the possibility that, for people who shop for coverage on their own, Obamacare could lead to an “adverse selection death spiral.” The law makes healthy people pay a lot more for their health insurance, in order to make coverage a better deal for the sick.
If the healthy people recognize this for what it is—a bad deal for them—they’ll sit Obamacare out, making the law’s health plans even less affordable than they were before. That’s why, in theory, the law uses an individual mandate to force people to buy coverage that they don’t need.
I’ve long been skeptical that a formal death spiral would occur; Obamacare’s subsidies ensure that some healthy, but low-income, people will sign up for coverage. We have experience in places like New York and New Jersey, pre-Obamacare, with a two-tiered system in which subsidized coverage works okay for those who qualify.
It’s the people who aren’t eligible for large subsidies—those who aren’t poor enough—who will gradually be squeezed out of affordable options.
Premiums, on average, may increase by 20-40% in 2015
Aetna CEO Mark Bertolini was among the first to sound the alarm about the potential for rate shock on the Obamacare exchanges. In December 2012, he told investors that “in some markets,” individual-market premium increases “could go as high as 100 percent.” This past January, in an interview with CNBC, he asked, “are we going to get beat up because [next year’s premium increases will be] double-digit or are we just going to have to pull out of the program?”
Yesterday, Elise Viebeck of The Hill cited unnamed health industry officials as telling her that “Obamacare-related premiums will double in some parts of the country, countering claims made by the administration.” One insurer indicated that “his company expects to triple its rates next year on the Obamacare exchange.” I’ve been hearing that insurers expect to see rate increases of about 20 to 40 percent, on average, throughout the country. Here are four reasons why.
1. The White House is making up the rules as it goes along
Insurers are particularly upset about the White House’s extralegal improvisations, in which key Obamacare regulations have been delayed, suspended, or exempted in various circumstances. In particular, the administration’s decision to continue to allow people to keep their “grandfathered” pre-Obamacare plans, in some limited instances, will keep a lot of those healthy people out of the Obamacare exchanges.
“We’re exasperated,” an insurance executive told Viebeck. “All of these major delays on very significant portions of the law are going to change what it’s going to cost.”
Think about it this way. According to the Associated Press, 4.7 million Americans who shop for coverage on their own have been notified that their old plans will be canceled. Let’s say about half of these people—2.5 million—elect to preserve their old arrangements under the new Obama dispensation. Let’s further estimate that about 4 million people have enrolled in Obamacare exchange plans, of which about three-fourths were previously insured.
That’s three million previously insured people enrolling in Obamacare, versus 2.5 million finding coverage elsewhere: more than enough to substantially skew the risk pool in the exchange toward sicker and older people.
2. The administration has avoided talking about the individual mandate
A few weeks back, the Obama administration suspended the individual mandate for those whose plans had been previously canceled, declaring this feature of Obamacare to be a “hardship” worthy of exemption. The best part is that in order to apply for the exemption, you simply have to “attest” that your old plan was canceled. My colleague Scott Gottlieb has tabulated 14 different waysyou can avoid complying with the mandate.
The administration hasn’t created a mechanism with which to verify that this has actually happened to you. As a result, lots of people will be able to opt out of the individual mandate.
Arguably worse is the fact that the White House has deliberately avoided talking about the individual mandate in its outreach to the uninsured. My sources indicate that the U.S. Department of Health and Human Services, and affiliated outside groups like Organizing for Action, tested a number of different messages on young people that might encourage them to sign up for coverage. The ones that tested most poorly were those that mentioned that young people would pay a steep fine if they refused to buy into Obamacare.
That’s why, in all of the gauzy ads you see promoting Obamacare to young people, two things are never mentioned: (1) the steep prices of the plans; (2) the individual mandate. In February, Sharon Long and Dana Goin of the Urban Institute published a survey indicating that less than two-fifths of the uninsured had heard “some” or “a lot” about the individual mandate.
If the individual mandate falls down in a forest, and nobody hears it, does it really exist?
3. Many of the young people enrolling are pregnant women
We’ve been talking a lot about the proportion of young people signing up for Obamacare versus old people. Around 30 percent of the signer-uppers are under the age of 35. That’s not great—but it’s not catastrophically bad in and of itself. What’s hidden in that figure, however, is that a lot of the younger people signing up under Obamacare are also consuming a lot of health care.
One of the biggest changes that Obamacare makes to the private health insurance market is that it forces all insurers to cover a wide range of health care services that the government has deemed “essential.” One of those newly mandated health benefits is maternity coverage.
If you’re expecting, you have a huge incentive to sign up for Obamacare-based insurance. According to a survey by Truven Health Analytics, in 2007 the average insurer paid $18,329 for a vaginal birth and $27,866 for a cesarean birth, inclusive of maternal and newborn charges. But for a typical 27-year-old, Obamacare-based insurance might cost around $200 per month.
Though I don’t have any hard numbers, the indications I’m getting from insurers is that they’re seeing a disproportionate number of pregnant enrollees among younger people. In addition, NerdWallet calculates that the average cost of “recommended annual preventive services and…oral contraceptives for an uninsured woman” is $1,231, making Obamacare much less expensive, on net, for those who seek these services. Insurers are going to take that into account when they price their premiums for 2015.
4. Obamacare’s design gave insurers an incentive to ‘underprice’ in 2014
One last point. The various mechanisms that Obamacare’s exchanges use to keep insurers on board—what industry wonks call the “three Rs” of risk adjustment, reinsurance, and risk corridors—have been exploited by some insurers to offer prices that, while still high, are relatively lower than their competitors. Obamacare incentivizes insurers to do this, because they know that in the early years of the exchanges, they’ll be reimbursed by taxpayers for doing so.
This is why Sen. Marco Rubio (R., Fla.), among others, has been sounding the alarm about a taxpayer-funded “bailout” of Obamacare-participating insurers. But as time goes on, the incentive that insurers have to use these tactics recedes. In 2015, many insurers who tried to underprice their premiums relative to their costs are planning to bring rates more in line with what they’re actually spending on health claims. That’s going to drive prices upward.
Pricing data will come out this summer
Insurers will have to file their proposed rates for 2015 in the late spring of 2014. So we should know by summer how this all shakes out. Don’t be surprised if Congress’ August recess is filled with another set of town hall meetings in which angry constituents ask politicians about their latest round of premium hikes. For those who already struggle to afford their health insurance bills, the worst is not yet over.
