No matter how you slice the numbers, Obamacare premiums will rise significantly next year. The Obama administration estimates rates will rise 7.5 percent in 2016, compared with 2 percent in 2015.
Insurance markets are complicated. But the story of Obamacare's 2016 premium increase is actually pretty simple: Many health plans — even those with decades of experience selling insurance — underestimated how sick health law enrollees would be.
This meant that in 2014, many insurers spent more paying out medical bills than members paid in premiums. Premera Blue Cross Blue Shield of Alaska lost $9 million covering just under 8,000 Obamacare enrollees that year. In Colorado, Rocky Mountain HMO found medical bills to be about 36 percent higher than premiums.
Now insurers are raising their rates to make sure premiums do cover claims. In some states, that means double-digit rate hikes.
There are other insurers who didn't have this problem, who priced correctly and turned a profit. But they're in the minority of those selling on the health law's new marketplaces.
"Many more insurers lost money than made money in 2014," says Larry Levitt, senior vice president for special initiatives at the Kaiser Family Foundation.
Insurers had little information when they set prices in 2014. The Obamacare marketplaces had never existed before, so health plans essentially had to guess who would sign up.
Those guesses were not very good. They underestimated how sick health law enrollees would be.
This year is a different story: For the first time, insurance plans have an entire year of data on their patients. They know that their patients are sicker than expected — and will soon learn whether Obamacare enrollees are willing to pay significantly higher premiums.
As Caroline Pearson, a senior vice president at the health consulting firm Avalere, puts it, "2016 is going to be a make-or-break year."
Obamacare premiums initially came in low — setting up the current rate hike
In the summer of 2013, the Obama administration trumpeted what it believed was great news: Premiums on the marketplace would be 16 percent lower than federal forecasts had projected.
"What we're seeing is that consumers are getting a hint of how much money they're potentially going to save because of this law," Obama said of the numbers in July 2013.
But what looked like good news for Obamacare at the time now appears to be a pricing mistake: Insurance companies underestimated how many claims their new members would file.
"We were excited at how it went in the beginning, but realistically, rates coming in so far below projections was not sustainable," says Jonathan Gruber, an economist at MIT who advised the Obama administration on the health law. "I don't think it's a crisis, but higher premiums are going to deter enrollment to some extent."
It's hard to know whether this underestimation was intentional — a market strategy to lure in consumers with low prices — or an honest miscalculation. In any case, the low prices left insurers short-handed when it came to paying their new members' claims.
Take Blue Cross Blue Shield Tennessee, which will hike its Obamacare premiums 38 percent next year. In federal filings, the Tennessee insurer says it took in about $517 million in premiums in 2014. That year, it also paid out $645 million — which leaves the insurer $128 million in the red. Blue Cross Blue Shield is raising its rates 36 percent for 2016.
Or there's Health Net in Arizona. That company paid out $189 million in claims while taking in $116 million in premiums.
It's important to note that insurers aren't trying to make up those losses in their new rate filings. Instead, they're trying to set premiums high enough to cover all the claims they anticipate, now that they know how sick their members are. And the big question is whether they'll get the numbers right this time — and if those higher prices will scare current enrollees away.
The big question: Are rate hikes the new normal?
Insurers know they can't run a business where they take in less premiums than they pay out. And the big question about 2016 is whether these new, higher rates allow them to break even — and possibly even make some profits.
"If a company has gotten its estimate correct for 2016, you would expect the increases to go back to something closer to health cost growth trends," says Barb Klever, who chairs the American Academy of Actuaries' Individual and Small Group Markets Committee.
Kevin Counihan, the chief executive of Healthcare.gov, is bullish on growth. Of the 2.8 million people who have so far selected plans on the federal marketplace, 1 million of them did not have coverage when they signed up.
"The first two years we were able to get the low-hanging fruit, the people who really wanted to sign up," Counihan says. "These folks are the higher-hanging fruit, who have been out of the market for two years. This is what you want to see."
But it's also possible that won't happen. As prices get higher and as some health insurers scale back their benefit plans, there is the possibility that some consumers might decide coverage isn't worth it. Premera Blue Cross in Alaska already found that new members who joined the plan in 2015 had health care costs 40 percent higher than those who did not renew.
"I think that higher prices might lower enrollment just a little bit," says Gruber. At the same time, he points out that the penalty for not carrying insurance will rise in 2016 to $695 or 2.5 percent of income, whichever is greater, which should create a stronger incentive to stay covered.
Insurance plans are likely going to watch 2016 to see whether enrollment continues to increase, which would be a sign of healthier consumers entering the market after sitting out earlier sign-up periods.
"Enrollment has to grow to make the market attractive," Kaiser's Levitt says. "If it plateaus, some might think twice about participating."