“The other thing we’ve done is to say, what are the critical needs of small business? A lot of time, one of the biggest challenges is to make sure that you, as a sole proprietor, that you can get health insurance for you and your family. So when you hear about the Affordable Care Act — Obamacare — and I don’t mind the name because I really do care. That’s why we passed it. You should know that once we have fully implemented, you’re going to be able to buy insurance through a pool so that you can get the same good rates as a group that if you’re an employee at a big company you can get right now — which means your premiums will go down.”
— President Obama, campaign speech in Cincinnati, July 16, 2012
President Obama has embraced the phrase “Obamacare,” once originally intended as an epithet by the heath-care law’s opponents, but we were a bit surprised the other day when he declared that health insurance premiums were going to go down.
We have previously dinged Republicans for claiming that premiums have already gone up because of the law. And we have noted the president made what we called a “foolish, dubious” campaign promise with a huge asterisk — that premiums would be $2,500 lower than they would have been without the law.
But, here, the president is claiming that premiums actually will go down for people in the individual and small group markets. The health-care law is obviously a work in progress but are there data that back up this sweeping claim?
Since the law has not taken full effect yet, we have to rely on studies that estimate the potential impact. A 2011 White House report, using Congressional Budget Office data, argues some small businesses (ie, sole proprietors with employees) will have access to a new marketplace where they can compare benefits and services and find a plan that works for them. The theory is that these new exchanges will help drive down costs for businesses.
For instance, the White House report says the CBO estimates that small employers will experience decreased premiums of up to 2 percent. The report, also citing CBO, also claims that individuals purchasing coverage on the exchanges would see premium savings of 14 to 20 percent when compared to the purchase of the same policy without the law.
Sounds great, right? But the law also mandates a number of significant changes that many experts believe will put upward pressure on premiums. There are potentially important policy reasons for each of these changes. But remember, you usually don’t get something for nothing.
Here are some of the key factors:
1. Currently insurance companies offer lower premiums to younger Americans, since they generally have lower health costs. But starting in 2014, the law implements an age band so that the amount an older individual pays will be no more than three times what a younger individual pays. So if a state currently allows an age band of 5:1, older Americans might see a premium decrease — but younger Americans would see a premium spike.
2. A similar dynamic exists with the law’s requirement that insurers selling policies through the health exchanges will no longer be able to charge different premiums based on a person’s health status when coverage is first purchased. This is known as a community rating. So healthier individuals generally will see higher premiums.
3. The popular provision that requires insurers to accept everyone regardless of their health status (i.e., pre-existing conditions) also will transfer costs to healthier individuals.
4. Insurers must offer an “essential health benefits” package, providing coverage in 10 categories. The list includes: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.
It’s a great package, but the benefits are more extensive than what most individuals and small businesses already purchase. So that will also boost premiums, especially if you currently have a less extensive plan. A report in the June edition of Health Affairs found that “more than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under the rules of the exchanges in 2014.”
5. The law also contains various taxes and fees, including a health insurance tax. Those costs presumably would be passed on to consumers, resulting in higher premiums.
Every legislative change has winners and losers. All things being equal, the list above suggests some of the biggest losers would be the young and healthy, though Americans might believe that is a fair price to pay — because eventually people become old and unhealthy. (A study for the state of Ohio found a healthy young man would experience a rate increase of 90 to 130 percent while a 60-year-old with chronic health conditions would see a significant premium decrease.) Moreover, the law provides subsidies to low-income people, so the effect of premium increases on that population may be mitigated.
There have been several national and state studies, conducted by credible analysts, that have attempted to calculate the impact of these changes on premiums.
The good news is that there would be a significant expansion of people with health insurance. And, after tax subsidies, many people may experience premium decreases. One could argue that overall there are more winners than losers.
But the bad news is that, on average, premiums almost certainly will go up — with some people really getting hit with increases. “Based on the analysis of the individual market, there is a concern for rate shock to a material portion of the population,” a report for Rhode Island said. “The individuals who currently are qualified for preferred rates will be seeing large increases in their healthcare premiums if they do not qualify for premium subsidies.”
Here’s a summary of the research:
A nationwide study conducted by Milliman Inc. for the Society of Actuaries found that nationwide the premiums in the individual market would increase from 8 to 37 percent in 2014 — with a cumulative increase of as much as 122 percent between 2013 and 2017.
Indiana determined the law would boost premiums in the individual market on average by 75 to 95 percent and in the small employer market by 5-10 percent in 2014.
Ohio found rates would go up 55 to 85 percent above current rates, before tax credits.
Minnesota concluded that individual market premiums will increase between 26 to 42 percent
Maine said individual premiums will increase on average by 40 percent and premiums in the small group market are likely to increase 8 to 9 percent. About 20 percent of the individual market would still experience premium increases even after subsidies.
Maryland concluded individual premiums will go up on average by 34 to 36 percent and in the small employer market on average by 2 percent
Wisconsin found that before tax credits, the average premium increase in the individual market will be 30 percent.
Colorado said individual premiums will go up on average 19 percent.
Rhode Island found that before tax subsidies, premiums for individuals will increase on average by 8 percent.
So how does the White House report present such a rosy outlook, using data from the Congressional Budget Office? It tends to highlight the favorable data and ignore or play down CBO findings that undercut its argument.
So, yes, the CBO says 57 percent of the people in the exchanges will get tax subsidies, but that means 43 percent will not, and thus would not be able to offset any increase in premiums. The CBO also said that subsidies would cover nearly two-thirds of the total premiums.
Moreover, the CBO makes clear that average premiums would be 27 to 30 percent higher because the law demands greater insurance coverage (page 6). The CBO emphasized that those provisions, along with others, “ would have a much greater effect on premiums in the nongroup [individual] market than in the small group market, and they would have no measurable effect on premiums in the large group market.” On page 11 of the report, the CBO notes in a headline: “A Greater Actuarial Value Would Increase Nongroup Premiums.”
The law’s backers, however, believe that over time, increased insurance coverage for more Americans will make the health-care system more efficient and ultimately reduce costs.
But that is far in the future. The report for Wisconsin, for instance, concluded that a majority of the individuals in the non-group market would pay more in premiums in 2016 than they pay today — both before and after tax credits are applied.
Jonathan Gruber, a Massachusetts Institute of Technology economist who advised the administration on the health-care law and co-authored the Wisconsin, Colorado, Maine and Minnesota studies, said the president’s comment was “a bit too sweeping. What we know is that for individuals the majority in most states (Wisconsin is the only exception I know of so far) will see premiums fall after tax-credits. For small firms it is less clear.”
The Pinocchio Test
The president asserted that because of the law, small business and individual premiums “will go down.” But the reality is much more complicated than that.
The law’s provisions, especially the requirement for essential benefits, will almost certainly increase premiums, though tax subsidies will help mitigate the impact for a little over half of the people in the exchanges. But a lot of other people — such as a young male who currently has a plan that does not include all of the required benefits — are likely going to have sticker shock when they see what happens to their premiums starting in 2014.
As we said, you don’t get something for nothing. And the president should be more careful about suggesting that is the case, especially when discussing a complex law with still-uncertain ramifications.
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