The Inconvenient Truth About Obamacare's Premium Spiral

The Inconvenient Truth About Obamacare's Premium Spiral
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Insurers have until Sept. 5 to reveal what they will charge for coverage through Obamacare's exchanges next year. They are required to finalize their rates by Sept. 5 -- and sign their contracts by Sept. 27. The numbers they've released thus far aren't pretty.

In Iowa, insurer Medica is seeking a 43.5 percent increase. BlueCross Blue Shield of South Carolina put in for a 33 percent increase. Molina, which is pulling out of most states' exchanges, wants a 55 percent boost in the few markets where it will remain. In Idaho, one insurer is asking for an 81 percent jump

Obamacare's defenders -- and insurers themselves -- have attributed these rate hikes to the "uncertainty" Republicans have injected into the marketplace. First with their on-again, off-again effort to repeal the law, and second with their indecision about ending the law's Cost Sharing Reduction subsidies.

But a new analysis of premium data from the past four years provides evidence that two regulations at the heart of Obamacare are largely to blame for years of rate hikes. Those regulations are the law's guarantee of coverage to all and its requirement that insurers charge the same premium to all people of the same age, regardless of health status or history.

The analysis was conducted by McKinsey for the Department of Health and Human Services. The consulting firm looked at rate hikes in four states: Georgia, Pennsylvania, Ohio, and Tennessee. Premiums in each had doubled or tripled since 2013 -- the year before Obamacare went into effect. 

In Georgia, the average premium for the equivalent of a mid-level "Silver" plan for a 40-year-old male went from $94 a month in 2013 to $323 a month in 2017. In Tennessee, it went from $104 a month to $431.

Some critics of Obamacare have claimed that the law's "essential health benefit" mandates, which require policies to cover certain treatments, bear much of the blame for these premium hikes. According to McKinsey they have raised premiums, but not much. These mandates contributed as little as 5 percent to the hikes in Georgia and Ohio, 7 percent in Pennsylvania, and 1 percent in Tennessee 

Obamacare's taxes and fees have boosted premiums, too -- but only between 3 and 7 percent. The general growth of health costs is responsible for 10 percent of the premium increases in the four states studied. 

The biggest reason for Obamacare's rate hikes? Two of its most popular provisions, guaranteed issue and community rating. These are the technical terms for Obamacare's ban on insurance companies denying coverage or charging people who are sick more.

The McKinsey report found that in Georgia, these mandates added between 44 and 52 percent to premiums. In Ohio, they were responsible for 41 to 50 percent of the hikes -- and in Pennsylvania, as much as 62 percent. In Tennessee, guaranteed issue and community rating accounted for between 73 and 76 percent of premium increases.

This shouldn't come as a surprise. A study by Milliman, a consultancy, in 2013 predicted that Obamacare's guaranteed issue and community rating rules would sharply increase premiums. 

Further, several states experimented with guaranteed issue and community rating in the 1990s. All of them saw premiums spiral upward, insurance companies drop out of the market, and consumers stop buying individual policies. Most of those states ended up either abandoning the two rules altogether or seriously watering them down.

The reason is simple. Guaranteed issue encourages the young and healthy to hold off on buying insurance until after they get sick, secure in the knowledge that insurers can't turn them away. And since insurers also can't charge the sick more, thanks to community rating, there's an even stronger incentive to wait.

Consequently, the insurance pool gets sicker and more expensive, premiums spiral upward, and more and more people exit the market.

Obamacare tried to mitigate these problems by offering generous subsidies to low-income families, imposing a tax penalty on those who didn't buy insurance, and providing only limited enrollment windows. But these "fixes" plainly haven't worked. 

Guaranteed issue and community rating are certainly popular. Ninety-one percent of the public supports the two measures, according to an IBD/TIPP poll conducted earlier this summer. 

They’re popular largely because people fear that insurers will turn away huge numbers of Americans with pre-existing conditions if the regulations are scrapped.

But other federal laws already protect patients who get coverage through their employers or government programs. Only the 8 percent of Americans who shop in the individual market could be denied coverage without guaranteed issue and community. Most would have nothing to worry about. Pre-Obamacare, insurers turned away one in seven applicants for coverage in the individual market. That’s equivalent to about 1 percent of the non-elderly Americans.

Well-funded, state-run high-risk pools could provide affordable coverage to this sliver of the population. The government could also protect consumers by prohibiting unreasonable rate increases for those who maintain continuous coverage -- even if they develop a costly condition.

Guaranteed issue and community rating are incompatible with affordable premiums. As long as they govern the individual insurance market -- including those in the exchange markets -- coverage will remain out of reach for millions of Americans.


 

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