Health Care

Soaring Premiums Mean Soaring Risks for Obamacare

Anyone healthy is going to think twice before paying premiums that are up, say, 70 percent. So the exchanges will be left with the very ill.
Photographer: Patrick T. Fallon/Bloomberg

Buying insurance on the Obamacare exchanges? Prepare to see your bill rise by about a third.

A new report from the consulting firm Avalere predicts large rate hikes for the mid-priced “Silver” plans that form the backbone of the exchanges, with somewhat smaller increases in the cost of “Bronze” and “Gold” plans.

That’s a national average of course, and only for the most popular policies. In reality, the premium hikes will vary by state and by type of coverage. If you live in Alaska, you’ll actually see your premiums fall by around 25 percent (though thanks to the unique challenges posed by Alaska’s geography, they’ll still be relatively expensive). In Iowa, on the other hand, a Silver plan will cost you 70 percent more than it did last year.

Avalere cites a number of factors that are driving up premiums. Many are the same problems we’ve been seeing for years, the product of bad program design: lower-than-anticipated enrollment in the marketplace and limited insurer participation. Some are a result of policy uncertainty: not knowing exactly what the government is going to do about Obamacare, insurers want to hedge their bets, so they don’t lose a fortune if the Trump administration suddenly decides to take off in a new direction. And then, of course, there are the CSR payments.

Ah, yes. The cost-sharing reduction, a set of special subsidies for Silver plans that are sold to lower-income consumers. By law, insurers have to sell those consumers (people whose incomes are under 250 percent of the poverty line) special policies with lower out-of-pocket expenses. Alas, in their haste to push the law through Congress, Democrats neglected to provide a funding stream to pay insurers for this special subsidy, and when Republicans took over Congress, they refused to appropriate money for that purpose. The Obama administration kept making payments to insurers to cover the added cost of those policies, but the legal basis for doing so was pretty dubious. Trump has been threatening to cut off the slush fund for quite some time, and a couple weeks ago, he finally made good on that threat.

That has put insurers in something of a bind: If they operate on the exchanges, they have to sell poorer consumers those policies with lower out-of-pocket expenses. But they can’t charge any more for them than any other Silver plan. One obvious solution is to raise the price of all Silver policies, and our nation’s insurers have embraced the obvious.

Outside of a few states, it’s safe to say that unsubsidized purchasers are in for a nasty shock. In only four states can they look forward to anything below a double-digit increase in the cost of their insurance. Many of them may decline to buy. And given that the healthiest consumers are the most likely to decide to forgo insurance, raising the average cost of covering those who remain, that may well mean further rate hikes next year.

Then there are the customers who are buying off-exchange, a group we know relatively little about. But we can be certain of two things: first, that they are not getting any subsidies; and second, that issues on the exchange will leak into their market, because Obamacare requires that companies treat both their on- and off-exchange policies as a single actuarial risk pool.

Could we be looking at the dreaded death spiral, in which rising premiums keep pushing healthy consumers out of the market, and insurance becomes more and more expensive, until the cost of buying insurance approaches the uninsured cost of being very sick? Perhaps in the future. There’s a little-known provision of the law that prevents subsidies from growing too large: When total expenditure on premium subsidies hits 0.504 percent of GDP, the subsidies will no longer be pegged to whatever the cost of the “benchmark” Silver plan is, and will instead grow by a formula tied to inflation. If premiums rise too fast, we could hit that cap -- at which point, even subsidized people will be exposed to further premium increases, and the market will be at greater risk of collapse.

But for now the biggest dangers are somewhat less cataclysmic. The first is simply that more insurers will decide that the political and economic risks are too big, and exit the exchanges. That risk will mitigate somewhat if the CSR issue is resolved, but that doesn’t look all that likely. A judge just issued a stinging rebuke to states that sued to force the administration to make the payments, and the much ballyhooed bipartisan efforts at a legislative fix don’t look all that promising.

But even if we fix the CSR problem, other problems will remain -- large problems, as we can see from the large increases in the cost of Bronze and Gold plans, which aren’t eligible for CSR payments, and therefore shouldn’t be affected by their cancellation. These increases aren’t nearly as big as the hikes for the Silver plans, but they’re still into the double digits, which is not a good sign.

And the second imminent danger is that unsubsidized folks will end up uninsured, sending the recent improvements in the number of uninsured people into reverse. As that happens, the individual market will likely shift even further toward poor demographics -- older people and sicker people. To be clear, those are the groups that Obamacare cares most about covering. But covering them affordably means having lots of young, healthy people also buying insurance. We’ve never even gotten close to bringing as many of those people into the market as Obamacare’s architects hoped, and as premiums rise, we’re likely to see those numbers retreat even further from a healthy balance.

Overall, the news is not good. Maybe this is the year when insurers finally got pricing right, when profits and markets will begin to stabilize. But maybe we’ll see a further buildup in the stresses that threaten to ultimately tear the markets apart.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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