Will Premium Spikes Cause Another Round of Obamacare Bashing?

The health care law’s strong enrollment numbers might not actually mean lower costs for consumers in 2015.

WASHINGTON, DC - OCTOBER 18: Joseph Peterson, 22, Joy Ferguson, 27, and Hugh Surratt, 28, enjoy a leisurely lunch from food trucks at Farragut Square in Washington, DC on October 18, 2013. They said they liked the variety of food and people. 
Washington Post
April 3, 2014, 5 p.m.

Now that Obama­care’s first en­roll­ment win­dow has closed, we know ap­prox­im­ately how many people (at least 7.1 mil­lion) picked an in­sur­ance plan through the law’s new ex­changes. But one thing we still don’t know is wheth­er big premi­um hikes are loom­ing in 2015. The an­swer to that ques­tion — which we won’t be­gin to learn un­til this sum­mer — could go a long way to­ward de­term­in­ing wheth­er Obama­care is suc­cess­ful, not to men­tion in­flu­en­cing the out­come of Novem­ber’s elec­tion. Large spikes, after all, could hand Re­pub­lic­ans a new anti-Obama­care talk­ing point, in the wake of their pre­dic­tions about low over­all en­roll­ment largely fall­ing flat.

So how will next year’s premi­ums be de­cided? One factor will be the fi­nal demo­graph­ic break­down of those who en­rolled in the ex­changes — how many are young and (pre­sum­ably) healthy; how many are older and (pre­sum­ably) more ex­pens­ive to cov­er.

At the end of Feb­ru­ary, young adults con­sti­tuted about 25 per­cent of all sign-ups. That share could eas­ily rise once we see the fi­nal tally — young people were al­ways ex­pec­ted to sign up at the last minute. Even so, the law’s crit­ics have noted re­peatedly that it’s un­likely the mix of young adults will reach the ad­min­is­tra­tion’s ini­tial tar­get of roughly 40 per­cent.

That said, the size of next year’s premi­um in­creases de­pends not on what the ad­min­is­tra­tion pre­dicted, but on what in­sur­ance com­pan­ies pre­dicted. “What really mat­ters is what’s hap­pen­ing on the ground versus what in­surers ex­pec­ted to hap­pen,” says Larry Levitt, seni­or vice pres­id­ent at the Kais­er Fam­ily Found­a­tion. “That’s be­cause in­surers built in some pad­ding, and that pad­ding made premi­ums high­er than they would have been if they had ex­pec­ted a bal­anced risk pool.”

In­surers set their premi­ums for 2014 based on whom they thought would en­roll. If their as­sump­tions were pess­im­ist­ic, that pess­im­ism is already baked in­to the plan’s rates. And there are clear signs that in­surers made much safer bets than the White House did about the mix of young en­rollees.

In­deed, some health care wonks say the White House’s goal for the per­cent­age of young adults in the risk pool was com­pletely un­real­ist­ic. “Forty per­cent was a ri­dicu­lous ex­pect­a­tion,” says Car­oline Pear­son, vice pres­id­ent at con­sult­ing firm Avalere Health. “I don’t think any in­surer in the coun­try priced for that.”

The as­sump­tion among ana­lysts is that the White House got to this num­ber by look­ing at the demo­graph­ics of the over­all un­in­sured pop­u­la­tion. Young adults make up 40 per­cent of all un­in­sured Amer­ic­ans — so, the think­ing ap­par­ently went, they’ll be 40 per­cent of the newly in­sured un­der Obama­care. But the law provides oth­er op­tions ex­clus­ive to young people (such as stay­ing on their par­ents’ plans), and many young adults de­cide they can safely skip the ex­pense of health in­sur­ance (hence the term “young in­vin­cibles”).

All of which ex­plains why in­surers seem to have as­sumed lower turnout by young adults than the White House hoped for. But there’s an­oth­er factor driv­ing health care premi­ums as well. A seni­or ex­ec­ut­ive from Well­Point — the in­surer with the biggest pres­ence in Obama­care’s ex­changes — re­portedly told in­vestors re­cently that the mix of young adults “came in right where we ex­pec­ted it to be,” yet he also raised some eye­brows by say­ing premi­ums would nev­er­the­less in­crease by double di­gits in some mar­kets. The likely cul­prit, health care ana­lysts say, is un­der­ly­ing med­ic­al costs.

In­sur­ance premi­ums re­flect what’s known as “med­ic­al trend” — a met­ric that com­bines the growth in the cost of health care ser­vices with the rate at which people use those ser­vices. Health care spend­ing has been grow­ing at re­cord lows for the past few years, and while the White House has claimed that Obama­care de­serves at least some of the cred­it, the broad­er eco­nom­ic cli­mate is also a big part of the reas­on. The Kais­er Fam­ily Found­a­tion has found that health care spend­ing rises and falls with the eco­nomy, but lags a few years be­hind. That means the eco­nom­ic re­cov­ery might be about to show up in health care — and make premi­ums more ex­pens­ive.

“Based on our mod­el, right about now is when you’d ex­pect the im­prove­ments in the eco­nomy to start put­ting pres­sure on health care costs,” Levitt ex­plains. He says med­ic­al trend will prob­ably pick up by 5 per­cent or 6 per­cent next year. 

On top of that, one of the health care law’s safety-net pro­grams for in­surers be­gins to scale down next year. The law pumped $10 bil­lion in re­in­sur­ance pay­ments in­to the mar­ket this year, to help off­set the risk in­surers shouldered by en­ter­ing a new and un­known mar­ket. Those pay­ments scale down to $6 bil­lion in 2015. Ac­cord­ing to Levitt, that could add an­oth­er 3 or 4 per­cent­age points to premi­ums, on top of med­ic­al costs. “You could get pretty close to 10 per­cent just by those two factors alone,” he says.

Of course, in mar­kets with a lot of com­pet­i­tion, in­surers will have an in­cent­ive to keep their premi­ums low to at­tract as many cus­tom­ers as pos­sible. And Levitt says the demo­graph­ics of Obama­care’s en­rollees — the factor that crit­ics say will cause premi­ums to rise — could ac­tu­ally help keep next year’s costs in check. “If I were an in­surer, I would as­sume that it would get bet­ter. As en­roll­ment grows, you’re more likely to get more young­er and health­i­er people,” he says. “It’s hard to ima­gine the risk pool could pos­sibly get worse in the fu­ture.” But giv­en the oth­er factors in play, that cer­tainly doesn’t rule out spikes in premi­ums.

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