Ever since the Affordable Care Act (a.k.a. Obamacare) passed on a party-line vote more than six years ago, each negative development has been a lightning rod for declarations by critics that the law is collapsing. The divisive politics surrounding the ACA tend to create a maelstrom of spin, pro and con, with context and nuance often getting obscured.
Now comes the latest news that premium increases in the ACA’s health insurance marketplaces will be higher next year. (Keep in mind that health insurance premiums almost always go up, and often went up quite a bit before the ACA. What we’re talking about here is that they’re likely to go up more in 2017 than they have been since the ACA took effect in 2014.)
Why is this happening, and what does it mean for the future of Obamacare?
1) We don’t actually know that premium increases will be higher in 2017, much less how much higher they’ll be
Insurance companies have submitted detailed premium requests — sometimes running thousands of pages long — to state insurance regulators. But the public can’t actually see all of those requests yet, since the states decide when and if to release the information. So far, it has only been made public in Virginia and Oregon, and it’s impossible to generalize from just two states.
However, this initial premium information is consistent with the idea that premiums are heading up, and that increases will vary a lot across insurers. For example, in Oregon, proposed increases for insurers participating in the marketplace range from 14.5 percent to 32.3 percent. These increases are all subject to approval by state insurance regulators, as is the case in many states.
Absent systematic data, the news that premium hikes are going to trend upward is based more on reading the tea leaves.
2) Still, it’s a good bet that premiums are heading upward
Maybe the best evidence is that the insurance industry itself has said that premium increases are heading up, and they actually know. Here’s Marilyn Tavenner, the head of America’s Health Insurance Plans, in a recent interview with Morning Consult:
"I’ve been asked, what are the premiums going to look like? I don’t know, because it also varies by state, market, even within markets. But I think the overall trend is going to be higher than we saw previous years."
The reason insurance companies will likely be raising their premiums is because many have been losing money on Obamacare plans. The health insurance industry is still very profitable overall, but companies generally do not want to use profits from one line of business to subsidize another.
Behind the insurance industry’s repricing is a simple fact: Insurers initially set premiums for their Obamacare plans too low to find profits.
Since they could no longer deny coverage to people with preexisting conditions, insurers had to make a guess as to how many sick people and how many healthy people would sign up for Obamacare. Many companies guessed wrong.
There are other factors that will affect premium changes in 2017. One is the expiration of a temporary program under the ACA that provided $20 billion in "reinsurance" payments to insurers to cover part of the cost of people with very high medical expenses. The idea was to mitigate the uncertainty insurers faced under the new ACA rules that prohibited discrimination against people with preexisting health conditions. The end of these reinsurance payments could push premiums up 4 to 7 percent.
Meanwhile, health care costs go up every year (as they did before Obamacare), and insurers pass those costs through to consumers as higher premiums.
On the other side of the ledger, Congress provided insurance companies with a tax holiday in 2017, which will provide some relief from all the other things pushing premiums up.
3) It’s a big country, and prices will vary from state to state, county to county, and insurer to insurer
The rules under Obamacare are largely uniform across the country, but insurers choose whether to participate county by county and premiums vary by area. How much premiums change in 2017 will depend on a lot of local factors, including who is signing up and how competitive the market is.
For example, a Kaiser Family Foundation analysis of 2016 benchmark premium changes in major cities in each state found a huge range, from an 11 percent decrease in Huntington, West Virginia, to a 38 percent increase in Nashville, Tennessee.
Some insurers are doing better financially than others, and may not have to raise premiums by much. You might have heard a lot about UnitedHealth, a big insurance company that has struggled to compete in the ACA’s marketplaces and is pulling out in many parts of the country. But you probably haven’t heard of Centene, an insurer that historically served Medicaid beneficiaries and is doing quite well in the ACA marketplaces.
4) Most people won’t be affected by Obamacare’s premium increases — and that includes some people buying Obamacare plans
While Obamacare gets most of the attention, the truth is that the new health insurance marketplaces only cover a pretty small share of the population. While 12.7 million people have signed up in the marketplaces, and millions more buy their own insurance outside of the marketplaces (and are part of the same pool for the purposes of paying premiums), more than 250 million people get their insurance from an employer, Medicare, or Medicaid. The upcoming premium increases in Obamacare marketplaces are not about them.
Even in the ACA marketplaces, premiums going up doesn’t mean that all consumers will pay more.
About eight in 10 enrollees receive government subsidies based on their income. This means they can enroll in one of the two lowest-cost plans in their area and what they pay is capped at a fixed percentage of their income. The federal government then makes up the difference. These consumers can avoid premium increases altogether, but they may have to switch insurance plans in order to do that, which can be disruptive. In fact, 43 percent of renewing ACA customers switched plans this year.
Higher premiums will mean higher costs to taxpayers, though the cost of Obamacare to the federal government has up until now come in lower than expected. That includes not only government spending for premium subsidies, but also the federal cost for expanding Medicaid, which is part of the health law as well.
People whose incomes are high enough that they don’t qualify for a government subsidy will probably find themselves paying more, too.
5) Higher premiums don’t mean Obamacare is collapsing
It certainly won’t be good news for the ACA if premium increases are higher in 2017 than they have been over the past couple years. And details about these premium increases will be coming out over the next few months, right in the middle of an election where the very future of the law is being debated.
But higher premiums don’t mean that the law is collapsing or that the insurance marketplaces are unsustainable.
As the ACA was beginning, critics argued that it would perish in a "death spiral." That’s actually a technical term, describing an insurance market in which sick people are more likely to sign up than healthy people, which causes premiums to rise, which in turn causes some healthy people to drop coverage, and so on.
There are many reasons to believe that the ACA is not in a death spiral. Enrollment is still growing (although growth has slowed). The income-based premium subsidies make insurance a good deal for many people, even those who are healthy. The ACA’s individual mandate — which requires people to get insured or pay a penalty — was being phased in but now is a big incentive for healthy people to buy insurance. And transition rules that allowed people with noncompliant plans to keep them for a while expire at the end of next year, which should bring a healthier-than-average group of people into the ACA’s insurance pool.
If premium increases allow insurers to earn a profit on Obamacare plans, it could very well be a one-time correction for previous underpricing that helps stabilize the market for the future. But it will take a few more years to see if that’s what 2017’s premium increases represent, or whether the threat to Obamacare is more serious.
Larry Levitt is Senior Vice President from the Kaiser Family Foundation.