Obamacare Sticker Shock Is Overdue
The 25 percent increase in Obamacare premiums for 2017 announced on October 24 is eye-popping. That is five times the increase that workers are likely to see in the cost of health benefits offered by employers. Politically, this is a disaster.
However, the jump in premiums is overdue. Insurers in the exchange market have found that the cost of providing coverage is much higher than they initially projected. We expect insurers to offer coverage to everyone, regardless of their health condition. That’s good social policy, but it is expensive.
None of this comes as a surprise. Large insurers have been warning us for the past year that they were incurring millions of dollars in losses in exchange markets. Aetna, UnitedHealth, and Humana—all highly successful insurers in the employer market—pulled out of many of those markets for the coming year. Nonprofit co-op plans created and subsidized by the Affordable Care Act have also failed due to financial problems. Just seven of the original 23 co-ops remain in operation.
The main problem is that premiums charged for exchange plans were set too low to start. Insurers entering the exchange market at the start in 2014 had no information about who would enroll in their plans or what their health care costs would be. Premiums were also lower initially because insurers hoped to attract market share that first year. The ACA’s mandate did not drive young, healthy people into exchange coverage, leaving insurers with an unbalanced risk pool heavily tilted to people who use more health services.
Rates have been on a steady upward climb since the start of the exchange program. The average premium increase was 2 percent for 2015 and 7 percent for 2016.
Given past increases, this year’s jump is shocking—at least to those who thought the ACA would lower the cost of health insurance. Instead of the dream of offering middle-class benefits at low prices, the exchanges offer high deductibles, tight provider networks, and soaring premiums.
Should we be concerned about this? The Obama administration thinks not.
Kevin Griffiss, HHS public affairs chief, said that 78 percent of consumers who could purchase exchange coverage would qualify for subsidies. As a result, “for the vast majority of marketplace consumers, the headline rates are simply not what they pay.” In other words, ACA costs are increasing sharply, but that is fine because taxpayers are footing the bill.
The fact is that expanding health insurance coverage is a far riskier proposition than the designers of the ACA expected. Mandating that people purchase insurance does not mean they will actually comply. Even heavy subsidies will not lead young healthy people to purchase coverage that is not a good value for them. That is particularly so when the penalty for not buying insurance is smaller than the cost of coverage.
The latest premium increase will only make exchange coverage less attractive. The administration predicted that exchange enrollment would increase by 1.4 million next year, but that announcement was made on October 19—a week before the premium increase was announced. Enrollment is stalled, and there is no reason to think that will change on its own.
Some Republican commentators are ready to take the latest news as evidence that Obamacare is dead, or at least on its last legs. But they forget that government entitlement programs never die. Instead, ways are found to add even more money without addressing fundamental policy problems.
Republicans and Democrats have a shared interest in developing new approaches that guarantee access to private health insurance that is truly affordable and not just heavily subsidized. The 25 percent premium increase should be a wake-up call to the next president, no matter who it is.