Health insurance premiums are projected to increase an astronomical 25% for plans in the health insurance exchanges. Some pundits claim that these increases represent that Obamacare is crumbling or in a death spiral. As premiums rise, healthy people flee the market. This leaves insurers with only more sick individuals which leads to premium increases. More increases mean that the moderately sick leave and so on. Eventually, insurers leave the marketplace due to excessive adverse selection. In fact, health insurers (e.g., Aetna and UnitedHealth) have already left the marketplace.
Is this what is going on or is there another explanation?
There could be other explanations include:
- Low introductory offer. 2017 health insurance premiums may be high, but premium hikes in 2015 and 2016 may have been unnaturally low. Insurers could have kept pricing low to attract new business. If health plans are “sticky” in that patients are less likely to change plans, pricing low initiatively may be a good approach initially. There is some evidence that premiums may have been too low in the early Obamacare years.
- Insurers didn’t know the market. The individual insurance market differs greatly from the group market. Health insurers such as Aetna and UnitedHealth that are more used to group plans may have underpriced. Insurers remaining after their exit may represent a more realistic picture of the true cost of care.
- Reinsurance goes away. When Obamacare was set up, the government would subsidize an insurer’s highest cost patients. Reinsurance funds were set at $10 billion in 2014, $6 billion in 2015, and $4 billion in 2016 (KFF). However, by 2017, these funds are likely to dry up and insurers will be responsible for covering the full cost of their highest cost patients.
- Blame the risk corridors. Risk corridors are a form of market stabilization whereby very profitable plans subsidize less profitable plans. Specifically, KFF reports: “HHS collects funds from plans with lower than expected claims and makes payments to plans with higher than expected claims. Plans with actual claims less than 97% of target amounts pay into the program and plans with claims greater than 103% of target amounts receive funds.” Similar to the reinsurance system, the risk corridors are going away in 2017.
In short, the large increase may represent the end of Obamacare, or it could just represent the stabilization of the market as government subsidies dry out and insurers more experienced in the individual market settle in.