Published February 19, 2013
Over the past couple of weeks, many insurance companies have provided guidance in their investor calls that premiums for insurance plans being sold in the individual market could go up as much as 50 percent on average.
One has to wonder how this is even possible when ObamaCare was passed under the promise of affordability and access. While some may argue that “rate shock” has become a mechanism for insurance companies to scare the market, the reality is that economics really leave the insurance market with no other choice.
ObamaCare requires insurers to offer benefit plans on the new exchanges that are relatively generous and would include coverage for maternity, prescription drugs and treatment of mental illness. These are clearly important areas to cover.
In order to get this level of coverage, however, many people in their 20s, who are used to buying basic coverage, will now be required to pay more for these required benefits in the exchanges. In fact, it is expected that more than 75-85 percent of individuals in this age group could end up spending more for insurance in these exchanges than they do currently.
Some argue that the annual price tag of $1,600 to $2,000 for an insurance plan is still an attractive deal, but if the penalty for not having coverage can be as low as $95 per year, the question remains whether many people will decide to opt out until they absolutely need insurance.
A key reason why insurance premiums are going up is because insurance companies will no longer be able to turn away or charge people more with pre-existing conditions. Even more significant is that these companies would only be able to charge its oldest customers three times as much as their youngest.
If younger individuals decide to wait until they get sick enough to require health insurance, this will obviously skew the insurance market where the sickest individuals will be the ones who are in the system, thus raising rates for everyone else. Many insurance companies are pushing the government to regulations that would charge higher rates for individuals who don’t sign up for insurance within a certain timeframe.
What many people also fail to recognize is the income they earn this year will impact the amount of subsidy and/or penalty that will be calculated for 2014. A recent survey indicated more than 70 to 80 percent of Americans had no idea how this year’s income reporting will impact the calculation of their benefits for next year, and as much as 40 percent of people between the ages of 18 to 34 were unaware that there was even a penalty for not having coverage.
Supporters of the law have downplayed the notion of rate increases with the idea that the new competitive markets will force insurers to provide competitive rates. History will tell us, however, that in the days of managed care it is very difficult to ultimately contain costs in the long-term, especially when you factor in community rating and guaranteed issue.
The other complicating factor in the equation is that, as of Friday, February 15, 2013, only about half of the states have agreed to proceed with setting up the insurance exchanges, while the other half is deferring to the federal government. What remains to be seen is how effective this dichotomy of market places will be in driving competitive advantage, and how insurance premiums will vary between these two systems.
The Congressional Budget Office indicated in its estimates that insurance premiums for those buying coverage in the marketplaces would probably be 10 to 13 percent in 2016 because the health plans would be more comprehensive. The likely outcome from the current effects of ObamaCare is that while rates come down for older people, they may increase for consumers in their 20s, which could leave an older, sicker population now, and an even sicker population down the road.
The idea that federal subsidies will help shelter the cost of those individuals who need to find affordable coverage is worrisome in light of recent findings. Several high-risk pools were established to provide assistance for those individuals with pre-existing conditions who needed help in finding coverage. As recent as last week, it was reported these high-risk pools were running out of money and are underfunded.
The harsh reality is with an aging population that has a growing need for care of their chronic conditions, the cost for providing adequate coverage will not be cheap, and the biggest fear among employers, states, insurance companies, providers and the consumer is how we will afford the price tag to provide for what has been proposed.
As premiums continue to rise out of control, the jury is still out as to whether the promises of ObamaCare will actually be able to reel these trends in, or whether it is a balloon that continues to drift away.