Opinion: Beyond the Spin Doctors, Insurance Premiums Under Obamacare

Joel C. Cantor | August 9, 2013 | Opinion
Does the ACA mean higher or lower insurance premiums for New Jerseyans? In a word, 'Yes'

Joel C. Cantor
With less than 60 days until open enrollment begins for new coverage options under Obamacare, the testy debate about whether the health reform law is good for America has moved to a new front — health insurance premiums.
In our region, the spin on how premiums will change in 2014 when key provisions of the Affordable Care Act are in place began in earnest when New York Gov. Andrew Cuomo announced that premiums for individuals buying coverage in that state would drop by over 50 percent next year.

Other states have followed with announcements of their own. Last week Maryland released its 2014 premiums, touting how the state had negotiated a one-third reduction in premiums proposed by insurers in that state.

Dueling headlines ensued. The Baltimore Sun headline read, “Premiums to go up as much as 25 percent under health reform.” The Washington Post banner had a different take, “Maryland issues insurance rates that are lowest in U.S.”

Proponents of the Affordable Care Act argue that reductions in premiums are real and result from enhanced competition among insurers in newly created exchanges (now called marketplaces), while opponents argue that costs are rising because of onerous new Obamacare regulations.

When it comes to changes in health insurance premiums, statewide averages are of little value. Rather, it is important to understand why premiums would change, and only then can we understand whether they are rising or falling, and for whom. New Jersey has not yet released the rates for 2014. They will be out no later than October 1st, and, of course, we all want to know will they be up or down.

Not at all obvious from the current public debate is that for the majority who get coverage through their jobs, very little will change. For those with job-based coverage, premiums will go up like they do every year because of the rising cost of medical care. Fortunately, healthcare inflation has been unusually low lately (whether Obamacare contributed to the moderation of costs is another matter of debate), but costs are still going up faster than inflation so we will see increases.

More importantly, many workers will pay more of their premium out of pocket because the labor market remains soft, driving many employers to shift costs to workers. A few features of the health reform law will (in some cases already have) also modestly increase the cost of employer-sponsored coverage, including the rule that family plans cover young adults up to age 26 and regulations making certain preventive benefits available with no cost sharing. There is no free lunch.

The Obamacare premium-spin wars are about coverage of the small share of Americans without Medicare, Medicaid, or job-based coverage. The number of people in this boat, those who buy coverage directly from insurers, will grow under Obamacare, which imposes tax penalties on the uninsured and offers subsidies to make coverage more affordable for millions.

The premiums making headlines are for coverage of those eligible for subsidies through the new marketplaces (in New Jersey, the subsidies will be available at healthcare.gov).

Back to the question at hand: Are these premiums going up or down? The difficulty answering this question is that the 2013 to 2014 comparison is not apples-to-apples. Health insurance premiums are driven by a complex mix of forces: who buys coverage (i.e., the risk pool), what is covered (i.e., the benefit package), and what factors may be used in setting premiums (e.g., age, sex, health).
All of these drivers will change in 2014. Obamacare requires coverage of a package of “essential benefits” and restructures cost-sharing, aims to draw more young healthy people into the market, and imposes new rules limiting variations in premiums among age groups and by smoking status. Pre-existing condition exclusions and health-related premium variations will be banned. How these features play out will determine premiums, along with the usual forces such as medical inflation.

Even after adjusting for changes in benefits, market rules, and the composition of risk pools, making the 2013-2014 comparison of average premiums in a state is not terribly useful. There will be a wide distribution of changes in what it costs for coverage. The change in premium any individual will face depends very much on his or her individual circumstances.

For example, if you have chronic illness and live in a state that allowed insurers to charge higher premiums for people with pre-existing conditions (New Jersey did not), then you could be a big winner — your premiums will no doubt go down, perhaps dramatically. In contrast, if you are young and healthy and purchased a bare-bones plan with tight caps on benefits, you may have to move to a more expensive plan. But the health law anticipated this problem, so the change for the young and healthy may not be dramatic. For example, people under 30 will be permitted to purchase “catastrophic coverage” at relatively low premiums. Comparatively cheap insurance covering only up-front benefits, for instance, covering only a limited number of hospital days, but caps on covered costs (like the “Basic and Essential” plans available in the New Jersey market until the end of this year) will no longer be permitted. But premiums for the newly available catastrophic plans will likely be similar. While comparable in price, catastrophic plans are quite different than bare-bones coverage. These plans will have more cost sharing up front, such as high deductibles, but will have good coverage for high-end expenses that come with major illness.

What can we expect when the premiums for the New Jersey Marketplace are made public? There likely will be headlines much as we saw for Maryland — premiums will rise sharply and they will be lower! What to believe?

Currently, New Jersey has two kinds of plans in its non-employer-based market. The aforementioned Basic and Essential (B&E) plans have fairly low premiums (for instance, about $200 per month depending on the purchaser’s age and sex) because of their very limited benefits. Standard plan costs are two to five times higher, and are attractive only to older and sicker people who have sufficient income to afford them. In 2014, the more than 100,000 subscribers to the limited benefit B&E plans will have to switch to ACA-compliant plans. If B&E purchasers switch to a catastrophic plan, their premiums will not change much (although arguably they will have better coverage should they get very sick).

Those who are ineligible for the catastrophic plan (i.e., over age 30) or prefer more comprehensive benefits will likely see somewhat higher costs. Current purchasers of standard plans, who currently number about 43,000, some of whom pay over $1,000 per month, will no doubt have a range of good plan options with much lower premiums.

My recommendation, don’t be scared by bellicose headlines, in October go to healthcare.gov and find out how the changes affect you. You might be pleasantly surprised.