The Health-Care Trilemma: How Obamacare is changing insurance premiums

October 29, 2013

The White House's biggest frustration right now is that Obamacare's technical failures are obscuring its great success: Premiums are much lower than the Congressional Budget Office estimated when the law first passed.

In a new report for the liberal Center for American Progress, Topher Spiro and Jonathan Gruber quantify exactly how much lower. Spiro and Gruber find that the average individual premium in the Affordable Care Act's insurance marketplaces was projected to be $4,700 in 2014. In fact, it's more like $3,936 -- $764, or 16 percent, lower than expected.

That's a big deal in terms of cheaper premiums, but it's also a big deal in terms of the budget: If the savings hold, the Affordable Care Act will cost $190 billion less than the CBO estimated over the next decade.

At the same time, people who are currently buying insurance in the individual market are moving to the Obamacare's insurance exchanges and many are reporting that they're seeing significantly higher premiums for very similar plans.

This almost seems like a paradox: How can premiums in Obamacare both be lower than expected and, for some people, higher than they were before?

In any conversation like this, a disclaimer is necessary. When people talk about "premiums under Obamacare," they're not talking about premiums for people who get insurance through their employers, or through Medicaid, or through Medicare. They're talking about the so-called "individual market," which serves about 5 percent of the country now, and which, if Obamacare succeeds, will serve about 10 percent of the population. So we're talking about insurance premiums for a small minority of the population. But it's still millions of people.

The conversation over these premiums has been confused to the point of being outright misleading. It's become common, for instance, for the Affordable Care Act's critics to compare prices sticker prices in the individual market to the prices in the exchanges now. Since it was routine before for a quarter of people to be turned away or quoted a higher price after revealing their health history, this isn't just comparing apples to oranges. It's comparing apples to oranges that many people couldn't even buy.

The right way to understand this is to think of premiums as a "trilemma" between comprehensiveness, accessibility, and affordability. Imagine this as a triangle:

premium trilemma

In the individual market, insurance premiums depend on the balance you strike between these values. A plan could have extremely comprehensive benefits and be extremely cheap so long as it's not open to people who are sick, or are likely to get sick. That would look like this:

trilemma first

You could also imagine a plan that was open to all comers and very affordable -- so long as it didn't cover much. That might look like this:

affordable accessible

Prior to the Affordable Care Act, insurance in the individual market kept costs down by turning the away the sick, raising prices on the likely-to-get-sick, and offering, in many cases, pretty stingy benefits. So let's say it was here:

insurance market now

The Affordable Care Act makes individual market insurance both more accessible and more comprehensive. The accessibility comes from barring discrimination based on health status and limiting discrimination based on age. The comprehensiveness comes from setting minimum standards about what insurance needs to cover and what kind of limits it can set for out-of-pocket expenses, etc.

aca triangle

What's important to understand about this trilemma is that it means, roughly, that every change has winners and losers. Put bluntly, the Affordable Care Act's changes are raising insurance premiums for some people who did well under the old system and lowering them for many of the people who were locked out or discriminated against.

A good example of the tradeoffs is the case of Dianne Barrette, a 56-year-old Florida woman who's been featured in the media because her current plan will cost 10 times more under Obamacare. As Erik Wemple discovered, her old plan was health insurance in name only. It didn't cover inpatient hospital care, it didn't cover ambulance services, and so forth. Under Obamacare, all plans have to cover those benefits. So Barrette's old plan was extremely affordable -- $56 a month -- because it covered basically nothing. Her new plan is much more expensive but also much more generous.

But it's not all zero sum. The law pumps a trillion dollars of subsidies into the market to help people making less than 400 percent of the poverty line -- which is $94,200 for a family of four -- afford insurance. So now the actual premiums people are paying exist on a continuum, with some people seeing premiums increases and some people paying literally nothing at all:

subsidies aca triangle

The final factor here is increased transparency and competition among insurers -- which should bring down premiums over time. Spiro and Gruber credit competition for Obamacare's lower-than-expected premiums. We'll see if it sticks.

So the bottom line is that Obamacare makes insurance more accessible and more comprehensive, which raises average premiums, but it adds subsidies and competitive markets, which lower premiums. Whether premiums are higher or lower for an individual person depends on their precise situation. But premiums are, in general, lower than was expected when Obamacare passed.

One thing to note about the media coverage around this is that some of the old plans in the individual market are being canceled or moved onto the exchanges at a time when the exchanges aren't really working. So we're hearing from people losing something but we're not hearing much yet from the people who're gaining insurance, or lower-priced insurance, through the law. That's another consequence of the web site's failures, but it's a temporary one. There will be some losers under Obamacare, but because of the subsidies, many more winners.

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Neil Irwin | October 29, 2013