What we don't know, we don't know.

Obamacare Premiums Are Magical Mystery Tour

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Last week, we finally learned the prices for the new benchmark plans for Obamacare. The good news: Prices are falling slightly. The bad news: Contrary to optimistic early reports, that doesn't mean that everyone's costs are falling; consumers will have to be attentive to make sure that their costs don't go up. The worse news: We won't actually know what effect the Affordable Care Act is having on insurance prices until 2017, when a bunch of temporary subsidies for insurers expire.

The important thing to keep in mind is that when the "benchmark rate" goes down, that doesn't mean that the cost of the old benchmark plan has fallen. It just means that whatever plan is now the second-cheapest "silver" plan on the exchanges is cheaper than whatever was the second-cheapest plan last year. Industry expert Bob Laszewski writes:

The new 2015 Silver baseline plan may have a lower premium than the 2014 Silver baseline plan. But that is almost always because the insurance company that held that slot in 2014, and almost always got the largest share of business, significantly increased their rates for 2015.

Then another insurance company, who didn't write much business and likely now eager to increase market share, decreased their rates and has become the 2015 baseline plan. The second company was able to decrease their rates without much fear because the Obamacare "3Rs" reinsurance scheme virtually protects them from any material losses.

So, this headline about the baseline plans decreasing their rates in so many markets is more about the carriers who sold the most in the first year increasing their rates while the plans that sold very little business, and able to fall back on the Obamacare reinsurance scheme, cut their rates in a no lose attempt to gain business.

OK, why does that matter? That's market competition for you.

Yes, but. We don't know what those new plans look like. Are the networks narrow? How easy will it be to get an appointment for a doctor? And remember that the benchmark plans are used to calculate the subsidies, which means the subsidies are going down. If Laszewski is right, and the costs of the most popular plans are rising substantially while the cost of undersubscribed plans is falling, that means that people who want to stick with their old plans may have to pay substantially more as the subsidy falls while their premium rises. The Barack Obama administration has planned to auto-renew anyone who doesn't go onto the exchanges and select a new plan. Given these realities, consumers would be foolish to take that option; they need to go onto the exchanges and select a new plan, or at least decide whether they're willing to pay more for what they have.

What about the rest of us, who are watching but not buying? Should we take cheer from this news?

Actually, I don't think we know much of anything yet. No, that's not quite right -- we know that rates aren't rising disastrously this year, which is great. But I don't think we can draw conclusions about the future path of insurance prices, for two reasons.

The first is that these prices are not being set based on much claims data. As Laszewski points out, companies began setting these rates just a few months after open enrollment closed, and because so many people bought in the last few weeks, that means they had little meaningful idea of what their expenses would be. The companies that are coming in are looking to gain market share, not make a profit.

The other reason that we cannot learn much from these data is that right now, and for the next year, insurers are operating under the expectation of large subsidies from the Obama administration via the various reinsurance provisions in Obamacare. Those provisions expire in 2016, and if a Republican takes the White House that year, insurers can also probably forget about getting favorable regulatory rulings.

Right now, it's just not very risky to write a policy that loses a bunch of money, because your losses are capped at a few percent. Starting in 2017, all that changes. Insurers are going to need to price policies with the expectation of making money and the fear of losing it.

What we want to know is what happens when they're actually in a competitive market. I can tell a story where the exchanges create transparency and competitive pressure that drive prices down; I can tell a story where the subsidies and various regulations drive prices even higher. I can tell a story where the insurers conclude that this market isn't worth the tsuris and leave it to Blue Cross/Blue Shield, with all sorts of fascinating results. We won't know which story is true until 2017 or beyond.

So if you're planning to buy the benchmark silver plan this year, whatever it is, you can safely rejoice. Everyone else should exercise caution.

  1. That may turn out to be a dubious competitive move, depending on how consumer behavior evolves on the exchanges. If people switch plans a lot, then there's no benefit to setting rates low initially to gain market share; you'll just lose it to whoever is cheapest next year.

  2. Most people forget that the individual market is tiny and has high transaction costs, making it pretty unattractive relative to, well, almost any other way a health insurer can make money.

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To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net