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The real story behind Obamacare’s double-digit rate hikes

Joe Raedle/Getty Images

The headlines about "Obamacare's "skyrocketing" premiums are pretty much everywhere right now.

The Wall Street Journal ran a recent op-ed titled "The Unaffordable Care Act." Slate asserted "Obamacare's Bill is Due." And, in its typically sober headline format, the New York Times noted "Health Insurance Companies Seek Big Rate Increases for 2016."

All of these articles make a similar argument: This is the year that Obamacare premiums go up. Way up. Most of them cite a recently approved 25 percent rate hike for the largest Obamacare plan in Oregon, Moda Health. And they look at similarly big increases that insurers in North Carolina and Tennessee have proposed.

Are these double-digit rate increases the new normal? Not exactly.

I've spent the past few days talking to experts about what to expect from Obamacare rates in 2016. And they do expect premiums to rise faster this year, largely because health-care costs are going up faster, too. But they caution against reading too much into the little information currently available — and they don't expect the huge rate increases making headlines now to be the norm.

"This is going to vary dramatically across the country," says Elizabeth Carpenter, a director at health research firm Avalere Health. "Each state has a different process for releasing rates, and the bottom line is it will probably be very close to enrollment when we actually have a complete picture."

Obamacare rates are expected to go up faster this year than last year — but not by double digits

Health insurers look at dozens of factors when they set rates. They attempt to game out, for example, how much health care they expect members to use, how much they expect health-care prices to rise, and how much their competitors are charging for similar benefit packages.

This means there's a ton of variation in how much premiums rise and fall — and that one insurance plan's proposal isn't a great lens into larger trends in the market.

A great way to get the 30,000-foot view is the Kaiser Family Foundation's annual report looking at the rate increases in 11 major cities. That report, released in late June, shows that the price of a midlevel plan (in more technical terms, the benchmark plan) will increase by an average of 4.4 percent in 2016. That's a far cry from the double-digit hikes, but still higher than the average of 2 percent in 2015.

What's most notable about the Kaiser study is the widespread variation between the cities its authors chose in different states. Portland, Oregon, where the 25 percent rate increase was approved, will have the highest increase — 16 percent. But a three-hour drive up north, you see Seattle's midlevel plan price falling 10 percent.

(Kaiser Family Foundation)

"Oregon is the extreme," says Larry Levitt, a co-author of the Kaiser report. "If you look at the markets as a whole the increases still seem modest."

Separate research from Avalere looks at proposed rate increases — which may differ from the actual rate increases — for some of the most popular Obamacare plans: those that cost the least. Researchers found that premiums for the average second-lowest-cost silver plan and the average lowest-cost silver plan will rise 4.5 percent and 1 percent, respectively.

(Avalere Health)

These rate increases are higher than the rate increases in 2015. But they're also significantly lower than the rate hikes that were common before Obamacare. A 2014 Commonwealth Fund study found that between 2008 and 2010, individual market plan premiums grew by an average of 10 percent annually.

Most of the news now is about proposed rate increases. But proposed rate increases are misleading.

Oregon was among the first states to finalize rates for 2016, which helps explain why the big increases it approved got so much attention. But most of the rate increases floating around right now — a 54 percent rate hike in Minnesota, for example, or a 36 percent increase in Tennessee — aren't final. These are proposed rate increases — essentially, the insurers' opening bid for a negotiation with regulators. Both Minnesota and Tennessee have to approve insurers' rates before they go to market.

Insurance regulators typically negotiate insurance rates downward. A 2011 Kaiser Family Foundation study looking at 98 individual market rate hike proposals found that the average increase dropped from 8.9 to 6.3 percent in the course of negotiations.

(Kaiser Family Foundation)

Premiums are rising faster for three main reasons

One explanation has to do with larger trends in health-care costs — and two with Obamacare specifically.

1) Health-care costs are expected to grow faster. Since 2009, health-care costs have grown at pretty much the same rate as the rest of the economy — a stark departure from decades of health-cost growth outpacing just about everything else.

Federal actuaries expect that to begin changing this year. In the most recent health-spending projections, published in October, Medicare officials projected that health costs would grow 1.1 percentage points faster than overall economic growth. You can see their projections in this chart, where NHE means "national health expenditures":

(Health Affairs)

If overall health-care costs are expected to rise, then it makes sense that insurers are raising rates to cover those costs.

2) Insurers underestimated the cost of enrollees in 2014 and 2015. For the past two years, health insurers selling on Obamacare marketplaces had little information to estimate how much medical care their members would use. After all, they had never sold on Obamacare's insurance exchanges before.

Now that they have two years of experience under their belt, health plans do know a bit about who signed up — and some say that their enrollees have used more medical care than expected, necessitating big rate increases. Blue Cross Blue Shield of Tennessee, for example, says it lost $141 million in its first year offering Obamacare coverage — and that's part of the reason it's requested a 36 percent rate hike.

Some experts question whether this is an especially widespread issue. Kaiser's Levitt recently worked on a study showing that, on average, individual market plans spent between 81 and 87 percent of subscriber premiums on medical care — leaving the rest for administrative costs and profit. If medical care bills were really so much higher than expected, then those figures would be up above 100.

3) Obamacare's reinsurance funds are running out. This is the wonkiest explanation of all, but it's important. Obamacare's insurance expansion currently has a reinsurance program, which funnels extra money to the health plans that end up with unexpectedly sick and costly patients.

That program was meant to be transitional, as insurance plans figured out what types of premiums they needed to cover their costs. It ends after 2016. So it's possible that some of these big rate increases reflect insurance plans grappling with the fact that there won't be this backstop program to cover extra costs.

What the rate hikes mean for consumers

There will, undoubtedly, be some consumers who end up with double-digit rate hikes. That was true in 2015 and, judging from all available data, it will likely be more true in 2016.

There are two ways to think about what this means for these consumers, one more negative and one more positive. The negative is obvious: It sucks when something you're buying gets a lot more expensive! The plans that some Americans have come to rely on will become unaffordable and force hard budgeting decisions.

The more positive reading is that consumers here do have a choice. The individual market isn't like the employer market where I buy insurance, and where I have exactly one insurance carrier to choose from. If Cigna raises the rates it charges Vox, I'm essentially stuck with Vox.

That's not true in the Obamacare markets: The people buying coverage with health law subsidies can often shop around and find an insurer offering a similar benefit package for less. Yes, this will be disruptive. Doctor networks will be different, as will cost-sharing packages. But there will near certainly be lower-cost options for those facing steep rate increases. The question is whether Obamacare enrollees respond to rate hikes by shopping around for cheaper plans and in that way force insurers to keep costs down, or whether they simply pay the higher prices and let insurers dictate prices in the market.