The six ways Obamacare changes insurance premiums

June 3, 2013

Perhaps it's worth simplifying this discussion about premiums under Obamacare a bit. This whole conversation is about the individual insurance exchanges, which effectively replace today's individual market (and have nothing to do with the insurance offered by Medicare, Medicaid, or employers). If all goes well, a bit less than 10 percent of the population will get insurance through these exchanges by 2023. In 2014, however, only about 2.5 percent are expected to be in the exchanges.

So what happens when you turn the individual market into the exchanges? A few things, mainly:

- No more raising prices or refusing to offer insurance to sick people;

- Less price discrimination allowed against old people;

- More regulation of what counts as "insurance";

- About $950 billion in subsidies to lower-income participants over the first 10 years;

- More direct and transparent competition between insurers.

- An individual mandate that pushes the uninsured-by-choice to purchase insurance or pay a penalty.

These factors affect premiums for different people in different ways. Ending discrimination against sick people raises premiums for the healthy but lowers them for the sick. Reducing discrimination against old people raises premiums for the young but reduces them for the old. Regulating insurance products raises prices at the low-end of the insurance market but cuts costs for people who actually get sick and need insurance that actually covers illnesses. Pumping a trillion dollars in subsidies hugely cuts costs for the poor. Encouraging competition between insurers should reduce costs, though that's dependent on it working. The individual mandate should reduce average premiums by bringing younger, healthier applicants into the market.

When people talk about "rate shock" they're applying a very odd kind of analysis to premiums in the exchanges: They're counting the costs to the young and healthy and wealthy but ignoring the savings to, well, everyone else. And they're also, and more importantly, ignoring the subsidies.

To state the obvious: A trillion dollars is a lot of money. Those subsidies are the gamechanger in this market. Absent them -- and arguably absent the individual mandate -- these rules would simply shift costs around. They would help older and sicker applicants at the expense of younger and healthier ones, and if they drove younger and healthier folks out of the insurance market, they'd hurt everybody. But a trillion dollars in subsidies helps a lot of people buy insurance. And most of those people are, surprisingly, young and healthy.

This is something Ron Pollack, director of Families USA, pointed out to me in an interview last week. "The tax credit premium subsidies are disproportionately going to be helpful for the young adult population. They’ll get the largest tax credit subsidies of any age group." The reason, put simply, is that young people are likelier to be poor than older people.

Those subsidies make the market positive sum (though perhaps not for the rich folks who are getting taxed to pay for them, or the Medicare Advantage users who will see their benefits cut). They make it so you have rules that help the old and sick and money that helps the young and poor. And if you can have an individual market where the old and sick can now get health insurance and the young and healthy can now afford it, well, that's the ballgame.

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Ezra Klein · June 3, 2013