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The confused debate over Obamacare and insurance premiums

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On Monday, we got a first look at insurance premiums under Obamacare when Vermont's insurers became the first in the nation to set their bids. The answer? Insurance premiums in Vermont will be pretty much the same after Obamacare as they were before Obamacare.

Vermont might prove an outlier. As the Wall Street Journal reports, "because benefits in the state's plans are already relatively close to meeting most of the law's requirements, insurers didn't need to make major changes to the relatively costly policies they already offer."

One man's "relatively costly" insurance is, of course, another man's "thank God, my insurance covers that" insurance. And it works the other way, too. One man's relatively cheap insurance is another man's endless fight with the insurance company because his plan, confusingly, didn't cover his illness. Didn't he read the super-fine print beneath the fine print?

That gets to the heart of what's become a terribly confused debate over premiums in Obamacare. Vermont's insurers didn't have to change their products because their products were already very good. In other states, some of the insurance products will have to be upgraded, as they're stingier. But Obamacare will help people pay for the better insurance. Comparing the two isn't just comparing the cost of apples to the cost of oranges. It's comparing the cost of apples to somebody taking you out to dinner.

Let's say I work a job at a firm we'll call Texas Inc. It's an okay job. But the insurance they give me is crummy. It doesn't cover any conditions I had before I took the job. The deductible is really high. The network is limited. The dentist they send me to is named "Dr. Nick" and he starts every appointment with a faintly accented, "Hi, everybody!" On the bright side, the premiums are low. But Texas Inc. doesn't help me pay them.

But then I get a new job at Vermont, LLC. Their insurance plan is excellent! The network is expansive. They cover everything that's wrong with me. The deductible is low. The doctors are the best in the area. And the premiums, consequently, are higher. But my employer pays half the cost -- and so the total, out-of-pocket cost to me is lower.

Did my premiums just "go up"? Or did I switch to a better insurance plan?

For most people, this would be called switching to a better insurance plan. In fact, this is why employers offer good insurance in the first place: It helps them lure talented workers from companies that don't offer good health benefits.

People want better insurance! When they're able to afford it -- either because their employer helps them pay for it, or because they got richer, or because they turned 65 and qualified for Medicare -- they don't wander around lamenting their higher premiums. They celebrate.

When people say that Obamacare will, in certain parts of the country, for certain people, increase premiums, what they mean is that something akin to the switch from Texas Inc. to Vermont LLC. Obamacare will force insurers to upgrade their products to meet a minimum level of comprehensiveness, lay down some rules limiting price discrimination against the sick and the old and the female, and then help people pay for the final product. It's a lot like what happens if you move to an employer that offers better health insurance and helps you pay for it.

This graph, from Sarah Kliff, shows how this might work in California's individual market. The price of the insurance people are buying goes up, but for many of the participants, the cost they're actually paying goes way down thanks to the subsidies:

This isn't, by the way, some new insight, or argument. The Congressional Budget Office wrote about this effect during the Obamacare debate, and its study was widely reported, including on this blog.

CBO found that for most Americans, very little would change. If you get insurance through your employer, or through the government, then Obamacare probably won't effect you much. When we talk about premiums changing, we're talking about the minority of Americans who buy health insurance on their own or through a very small employer.

For them, on average, CBO predicted premiums would increase because subsidies would make it possible for them to purchase higher-quality insurance. In other words, with more money to purchase insurance, they were going to purchase better insurance -- that is, after all, the point of the law. But if you held the insurance product constant, then premiums for the same policy in the same market would actually fall, as the risk pool would get a bit healthier.

The intent of Obamacare is to ensure that almost all Americans are covered by high-quality insurance that they can afford. To say that the law will move many Americans onto more costly insurance products is simply to restate part of that premise more negatively, and to leave out the effect of the subsidies, or the change in the underlying insurance product, is to mislead.

Further reading:

1) How will Obamacare hit premiums? Let's break down the numbers.