Obamacare Premiums a Guessing Game — Again

Insurers still aren’t certain just how risky the risk pool will be in 2015.

MIAMI, FL - JANUARY 15: As people stand in line to speak with an insurance agent Dailem Delombard sits with an agent from Sunshine Life and Health Advisors as she tries to purchase health insurance under the Affordable Care Act at the kiosk setup at the Mall of Americas on January 15, 2014 in Miami, Florida. Today is deadline day for those that want insurance to start on February the 1st. According to the owner of Sunshine Life and Health Advisors, Odalys Arevalo, their business selling insurance under the Affordable Care Act has exploded so much so that by the end of the week they will be moving to a 24,000 square foot space at the mall because they have outgrown the kiosk. They have over 25 agents and are seeing hundreds of people daily, last Saturday they saw about 1,000 people with wait times of over 5 hours. 
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Sam Baker
March 27, 2014, 5 p.m.

Wheth­er Obama­care premi­ums will in­crease next year — and by how much — will once again come down to good-old guess­work on the part of in­sur­ance com­pan­ies.

Set­ting prices for 2014 was very much a game of pin the tail on the don­key for in­surers, who gen­er­ally make such de­cisions based on the costs they ex­pect to in­cur over a year: If they have a lot of sick cus­tom­ers who are likely to file a lot of claims, premi­ums rise; if the cus­tom­er base is health­i­er, prices drop. But while the Af­ford­able Care Act’s new mar­ket­places offered firms mil­lions of po­ten­tial cus­tom­ers, they provided hardly any in­form­a­tion about how healthy or un­healthy those people might be.

With a year of real-world ex­per­i­ence un­der their belts, in­surers should, in the­ory, find it easi­er to set premi­ums for 2015. But be­cause it’s no longer leg­al to dis­crim­in­ate against people with preex­ist­ing con­di­tions, the Obama­care ap­plic­a­tion doesn’t ask about health status. Which means the only data firms have is what they’ve col­lec­ted from en­rollees so far — and that’s not much.

“You look at your claims his­tory when you’re set­ting rates, and there’s not a lot of claims his­tory on these folks,” one in­dustry of­fi­cial said.

From an ac­tu­ar­ial per­spect­ive, a healthy 50-year-old is bet­ter than a sick 25-year-old. But for now, with no bet­ter al­tern­at­ive, in­surers and health care wonks are simply us­ing age as a proxy for health status. A young adult is as­sumed to be health­i­er than someone older. That’s a very broad as­sump­tion, and one that leaves much un­cer­tainty in the cal­cu­lus.

In in­sur­ance, un­cer­tainty of­ten trans­lates to high­er premi­ums. When a firm isn’t sure what it will have to spend, it tends to build in a cush­ion. The White House has already taken one step to pre­vent that scen­ario: It delayed the next en­roll­ment peri­od and the dead­line for rate fil­ings, giv­ing in­surers an ex­tra month to take stock of who signed up this year. Rates for the fed­er­ally run in­sur­ance ex­changes are now due at the end of May, rather than the end of April.

“There’s no ques­tion there is a chal­lenge. For the [fed­er­al mar­ket­place], the bids are due at the end of May, and the reas­on that was pushed back was to give the plans more time to un­der­stand what their risk pro­file ac­tu­ally looks like,” said Kar­en Ig­nagni, the pres­id­ent of Amer­ica’s Health In­sur­ance Plans.

The ex­ten­sion is, in part, an ac­know­ledg­ment that young, healthy con­sumers — those least likely to use their in­sur­ance — are ex­pec­ted to sign up at the last minute. So, giv­ing in­surers more time to as­sess their risk pools should help them take those con­sumers in­to ac­count, and per­haps make firms more com­fort­able with lower premi­ums for 2015.

There are oth­er factors that might also help lim­it premi­um hikes.

First, the law in­cludes a three-tiered safety net, known as the “three Rs” (risk ad­just­ment, risk cor­ridors, and re­in­sur­ance), de­signed to soften the blow if in­sur­ance com­pan­ies turn out to have guessed wrong about the pre­vi­ous year’s risk pools. If their real-world ex­per­i­ence is bet­ter than ex­pec­ted, they pay in­to a fund that provides pay­ments to car­ri­ers with a worse-than-ex­pec­ted ex­per­i­ence.

Second, the law sets rules on in­surers’ spend­ing. Plans in the in­di­vidu­al mar­ket have to spend 80 per­cent of their premi­ums on med­ic­al care, leav­ing only the re­main­ing 20 per­cent for over­head and profit. If they miss that ra­tio, they have to pay out the dif­fer­ence in a re­bate to their cus­tom­ers. That could dis­cour­age plans from rais­ing premi­ums just to be safe — a high­er premi­um is less at­tract­ive to new cus­tom­ers, and any ex­cess will just go back to poli­cy­hold­ers, any­way.

Third, there are the ba­sic in­cent­ives of a com­pet­it­ive mar­ket­place. Even with all the ini­tial un­cer­tainty, premi­ums for 2014 came in well be­low the Con­gres­sion­al Budget Of­fice’s ex­pect­a­tions, be­cause in­surers want cus­tom­ers — healthy ones in par­tic­u­lar. And those cus­tom­ers are the most likely to shop for the low­est premi­um rather than the richest cov­er­age. Plans prob­ably won’t want to sac­ri­fice long-term mar­ket share to avoid risk­ing a short-term bump in the road, some in­dustry of­fi­cials said.

Non­ethe­less, in­dustry in­siders say the 2015 rate-set­ting pro­cess will still work a lot like the 2014 pro­cess, when in­surers were en­ter­ing a com­pletely new mar­ket.

“What they’re go­ing to have to base their rates on is a best guess, based on lim­ited in­form­a­tion,” the in­dustry of­fi­cial said.

Which means the don­key’s tail could still wind up tacked pretty high on the wall.

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