THE NEW YORK TIMES
Margot Sanger-Katz
MAY 6, 2016
It already looks clear that many Obamacare insurance plans are going to raise their prices significantly.
Over the last few years, average premium increases in the Obamacare markets have been lower than the increases for people who bought their own insurance in premiums before the Affordable Care Act. But several trends are coming together that suggest that pattern will break when plan premiums are announced in early November. Many plans may increase prices by 10 percent, or more. Over the last two years, I’ve written articles warning against scary headlines that exaggerate premium increases. Next year, those scary headlines are more likely to be accurate.
Peter Lee runs the country’s largest and most stable state marketplace, Covered California. The typical rate increase has been only 4 percent over the last two years. Next year will be different. “We expect our rates to go up more than that this year,” he said at a recent meeting with health reporters. He predicted “big rate increases” in other states.
Only two states have collected proposed rates for 2017 yet, but in both of them, popular carriers are asking for double-digit increases. Insurers don’t always get what they want, and there is local variation in insurance rates, but these early requests are in line with statements from insurance officials and regulators about what to expect.
Most people who are buying insurance on the Obamacare marketplaces will not feel the effects of these increases; the formula that calculates federal subsidies will offset the increases for them. But rising prices will hurt higher-income Americans who have to pay their own premiums. That group is already paying a lot for health insurance, and the coverage often comes with high deductibles and other forms of out-of-pocket expenses.
That’s a problem, but some context is helpful. Higher prices are not, by themselves, a sign that the insurance marketplaces are dysfunctional or failing. Most of the reasons prices will go up next year are pretty predictable. The initial prices for Obamacare plans were much lower than forecasters expected. To some extent, the coming increases will be a correction, not a sign that markets are spiraling out of control.
There are three main reasons premiums are likely to be substantially more expensive — and one factor offsetting the increases:
Medical care is expected to cost more
Being treated will cost more in 2017 than it does now. That’s true for everyone using the medical system — not just people with Obamacare plans. It will be true for people in government insurance programs like Medicare and Medicaid and for people who get their insurance through work. The cost of medical care basically goes up every year, so that’s not a huge surprise. But the last few years, that growth has been very slow by historical standards. Actuaries are predicting that 2017’s bump will be a little bigger. That increase is not because of Obamacare, but because of drugmakers releasing more new, expensive products; hospitals raising prices; and doctors offering more technologically complex treatments. Actuaries differ a bit in their estimates, and the cost of medical care varies by place, but the estimate I’ve heard in my reporting is somewhere around 6 percent.
The training wheels are coming off Obamacare
The health law included some protections for insurance companies in the first few years, devised to help the markets become stabilized and protect insurers who made miscalculations in setting prices while they were getting used to things. Two such programs expire at the end of this year. One is currently paying the bills for the rare patients who require extremely expensive medical care. Another was set up to protect insurers who made bad guesses on how sick their overall pool of customers would be. Together, the loss of those protections is expected to raise rates by about 4 percent.
A lot of insurers charged too little to cover costs
Even if medical costs stayed flat and the early buffer programs continued, a lot of insurance companies would still be raising their rates. That’s because the prices many of them charged in the first few years weren’t high enough to cover the medical bills of their customers. Some insurers bet so badly that they have gone under or have chosen not to return to sell to the new marketplaces. Others plan to return, but will need to raise rates to make the business more sustainable.
Some of the early underpricing may have been strategic — as insurers were hoping to hook new customers with low prices and to try to keep their loyalty as prices rose. But it seems that a lot of the underpricing was a mistake, as insurers made bad estimates of how many people were likely to enter the markets in the early years and how much it would cost to pay for their medical care.
Not every insurance company is losing money in the Obamacare markets, so this last factor won’t affect every plan. But there is evidence that underpricing was fairly widespread, so it will affect a substantial number of them.
But: Congress gave plans a windfall
As part of its spending deal late last year, Congress gave the insurance industry a big financial gift that should help drive down premiums. It temporarily eliminated a tax on health insurance premiums. The tax had been passed along to customers, as taxes usually are, in the form of higher prices. Experts claim that the savings should flow the other way — making price increases about 2 percent less than they would be otherwise.
There are other ways the insurance plans can help keep down costs. Many have started narrowing their networks of doctors and hospitals to those they believe to be lower priced. That trend may continue and may help some insurance companies hold down price increases.
Most states need to submit proposed rates to the federal government next week. But the final numbers for most states won’t be clear until Nov. 1, when HealthCare.gov opens its doors for shoppers.
While headlines about high prices may be right, beware of predictions that they mean Obamacare is failing. A one-year price increase does not spell doom.