Yesterday, the federal government released its list of proposed gross premium increases for health insurers selling policies on the Exchanges. To many, particularly supporters of the ACA, the results released at healthcare.gov were jaw dropping. The median increase requested in New Mexico was 59%. In Pennsylvania, Highmark Health Insurance, the state’s “Blue Cross” insurer requested rate increases on many of its plans over 35%. In Illinois, Coventry Health Care, an Aetna subsidiary, requested rate increases of over 30% on several of its plans. In Oregon, PacificSource, the state’s third largest health insurer, sought increases of 29% and higher on several of its plans. In short, in many states, very large increases in gross premiums were requested by a diverse set of major and minor players.
Pundits, including me, have pointed out that one should not leap from a view of these numbers to the conclusion that policyholders in the Exchange markets should invariably expect double digit increases. The only companies in the data released yesterday are those requesting more than a 10% increase. As Larry Levitt, a top executive at the influential Kaiser Family Foundation, said, “Trying to gauge the average premium hike from just the biggest increases is like measuring the average height of the public by looking at N.B.A. players.”
In fact, however, the math of Obamacare means that many purchasing policies on the Exchange will actually experience larger net premium increases than even the huge ones proposed by many insurers. This is so because of the way the Affordable Care Act computes the net premium paid by policyholders.
Let me take a quick example to illustrate the reason net premiums are going to go up even more than the numbers from healthcare.gov suggest. Take an individual who has an individual policy for which the gross annual premium is $4000. And suppose that the premium increase for that plan, as is proposed in many places, 25% up to $5,000. But suppose that the second lowest priced plan in the state, which was also charging $4,000 goes up only 5% to $4,200. What happens to net premiums.? Let’s make our individual a typical Exchange purchaser with an income equal to 250% of the federal poverty level. In 2015, that individual would be paying about $2,334 in net premiums. In 2016, because net premiums are pegged to the price of the second lowest silver plan, that individual would be paying about $3134 in net premiums.
In short, the policyholder experiences an increase not of 25% — bad enough — but of 34%, even worse. If the policyholder wants to keep its plan, and perhaps the network of medical practitioners that have developed an understanding of the policyholder’s medical conditions, it is going to require the policyholder to pay 34% more. To be sure there are complications that might tweak that number a bit, but the basic math is right.
It will be even worse for some. We know that in some states, a few plans are proposing reductions in their gross premiums. In our prior example, if the second lowest plan went down by 2%, the net premium of the plan the individual actually purchases will go up to $3414 per month, an increase of 46%.
Or, keep the assumption that the second lowest silver plan goes up by 5%, but have the purchaser have a income not of 250% of FPL but of 175% of FPL. Policies are supposed to be affordable for them too. Formerly they would have paid $1021 per year in net premiums. Now, they will pay $,1821 per year in net premiums, an increase of 78%. It turns out that keeping your healthcare plan is going to be an extremely expensive proposition.
So, yes, in some sense the gross premium increases released yesterday by the federal government are unrepresentatively large. But in terms of what people actually pay, they are, in many instances, unrepresentatively small. Of course, many people will be unwilling to pay increases of 34% or 46% or 78%. But to avoid those increases, they will increasingly need to flock to the second lowest silver plan. Doing otherwise will prove ever more expensive. And so, the promise of “choice” in healthcare plans contained in the ACA may be fulfilled significantly less than its proponents anticipated when the bill was passed. The architecture of Obamacare may induce yet more purchasers to converge on Silver HMO plans.