Untangling Obamacare: What’s behind the rate increases?

Rate hikes just keep coming.

The latest we’ve heard about come from Blue Cross Blue Shield in North Carolina, which just warned 125,000 customers who bought individual policies to brace themselves for unusually large increases. CareFirst Blue Cross Blue Shield of Maryland announced hikes averaging 25 percent for its individual policies and about 15 percent for small businesses. Medico, based in Minnesota, said it would increase rates an average of 13 percent for some 5,000 people covered through small employers who renew their policies this summer. Ditto in other states, where carriers already raised rates for individuals and small employers. Insurance insiders say more will come.

With these increases come lots of questions from the public, questions that journalists will be asked to address. In Rhode Island, Robert Cagnetta, a small business owner and a member of the Health Insurance Advisory Council for the state’s health insurance commissioner, wrote an op ed for the Providence Journal challenging recent rate increases—15 percent for small groups; 18 percent for individuals—announced by Blue Cross & Blue Shield of Rhode Island. “We’re asked to pay blindly, and more and more every year,” he wrote. “We need transparency now.”

Most Americans get their insurance from their employer, or the military, or Medicare. President Obama’s Affordable Care Act primarily affects those who buy their insurance on their own—currently about 15 million people. In that group, some premiums will indeed be pushed higher, while others will be pushed lower. Some people will get subsidies to help them pay their premiums, while others will not.

Will insurance be affordable? It’s a question reporters will be asked to address, and one that can only be fully answered family by family, budget by budget. But journalists can help. The best thing they can do now is work to understand how health insurance is priced.

But insurance pricing is tricky. What follows is a brief primer on some of the nuts and bolts of rates and premiums, which, not so incidentally are key to the success or failure of Obamacare.

What’s pushing up premiums

The insurance industry’s standard line is that the reason premiums are rising is because the underlying cost of care continues to rise. Companies maintain they are simply passing along those continuing increases in medical costs, plus a slice for profits and expenses (which include high salaries for CEOs). At least that’s what they’re telling customers.

But how does that rationale square with the news that medical costs have moderated, as the White House points out? A few weeks ago the White House deputy press secretary, quoting the chairman of he Council of Economic Advisers, said that health expenditure data shows the lowest rate of growth since reporting began in 1960. What gives?

Part of the answer: Even though healthcare inflation has slowed a bit, that doesn’t mean it has stopped, or that insurers don’t factor medical price increases into their premiums. They do. While healthcare inflation—called “medical trend” in insurance jargon—has moderated relative to what it has been in the past, that doesn’t mean the price of care has not gone up. It’s running between 4 and 7 percent a year, and insurers account for it in the premiums they charge. (Sometimes, though, carriers now add on slightly more than the current medical trend, particularly for high-deductible plans. The reason: while high deductibles remain fixed, the price of care is not. In 2014 all plans will be subject to these add-ons.)

Higher medical costs don’t explain all the premium hikes, though. And yes, Obamacare is part of the puzzle. The law may indeed cause companies to boost the price of coverage—and “fairly substantially in most states, before a premium subsidy is applied,” says Jim O’Connor, an actuary with the Milliman firm.

But if the main provisions of Obamacare have yet to take effect, how can it be the reason for this year’s increases?

There are several possibilities. Carriers may well be trying to get a jump for next year, when major provisions of the law take effect. Or, as some industry insiders say, companies may be playing catch-up because they’ve held the line on rate increases for the past few years in response to pressure from the Department of Health and Human Services, which pushed to keep rate increases under 10 percent after the health reform passed. And then there is always the possibility that insurance companies are using Obamacare as an excuse to do what they might have done anyway.

So how will Obamacare affect premiums?

For one thing, restrictions on how much more older people can be charged for health insurance means that younger people will pay more than they would under current arrangements. “A 27-year-old healthy male may see a 130 percent increase,” predicted one industry insider. Unisex rates, also mandated by the health reform law, mean that men will pay more. (Historically women paid more because on average they used more medical services.)

How much the increases will pinch the pocketbook also depends on which state people live in. Since one objective of Obamacare was to toughen regulation in the individual market, those who live in states like Ohio or Indiana—where regulators have used a softer approach to regulating—will see higher rates than those in New York and New England, where rates are already higher because of tougher state regulation. On the other side, meanwhile, an analysis for the New York Health Benefits Exchange predicts lower premiums for those buying in the individual market.

What insurers fear most is that swarms of sick people will buy their policies. The law requires that on January 1 they have to cover them no matter what diseases they have. How much these people will cost is something of an unknown at the moment. So carriers may be trying to take precautions now against pricing their coverage so low that it won’t be enough to pay claims of sick people, who will get coverage next year, and still make a profit.

Carriers also worry that some healthy people will buy bare bones policies in the exchanges—the bronze policies that are designed to cover just 60 percent of their medical expenses. And that then, when they do get sick, they’ll switch to a policy with richer benefits, like the gold or the platinum plans designed to cover 80 and 90 percent of the costs. For the companies, that could mean being on the hook for more of the expenses of people now needing lots of medical services. Premiums for these plans are, of course, higher, but still may be insufficient to cover the cost of claims from some very sick people. Some carriers are pricing their policies with this potential scenario in mind.

Then there are the fees and taxes Obamacare calls for to help pay the subsidies for the soon-to-be insured. The health insurance tax levied on all insurers will raise, cumulatively, $59 billion by 2018. Insurers see it as a huge cost, most likely passed on to employers in the form of higher premiums for their workers. Both insurers and small businesses are lobbying hard to get the tax repealed. There’s also a user fee tacked onto every policy sold in the new shopping exchanges, as well as a “reinsurance” fee aimed at covering the cost of care for very sick people. Mandated benefits, called essential benefits, will also add to the premium. For example, many policies now sold in the individual market do not have maternity coverage. After January 1, they will have to offer it.

These benefits—which give people better coverage—will add between 3 and 17 percent more to the premium depending on the carrier. It’s axiomatic in the insurance business that better benefits bring higher premiums. In other words, you get what you pay for. Obamacare effectively eliminates most of the limited benefits policies now on the market, (although loopholes in the law will still allow some policies offering few benefits to be sold).

Will policies be affordable?

When actuaries combine all these factors, some predict that some individuals will see increases higher than 100 percent. But note: that is before taking into account any premium subsidies called for by Obamacare. Some people will get help paying for their insurance.

The White House and Obamacare advocates argue that although premiums may be high, subsidies called for by the health reform law will make the overall premium more affordable and manageable. And that’s true, for about 60 percent of those 12 to 15 million people who buy their coverage in the individual market. Using US Census data, insurance experts estimate that proportion of customers in the individual market will get some government help to make their outlay “more affordable.” To be clear: that doesn’t mean their premiums won’t increase, just that those who get subsidies won’t have to pay the total cost.

Think of subsidies as akin to the help workers get from their employers who pay some portion of their premiums. Subsidies will be available to those with incomes less than 400 percent of the federal poverty level this year—$94,200 for a family of four and $45,960 for a single person this year. If people have too much income or too many assets, they are over the line, and there’s no government assistance. The 40 percent who are over the line will have to pay the full cost (though they can still shop in the exchanges).

Whether premiums will be affordable for someone in the 60 percent group depends on the amount of their subsidy. The less income a family has the larger the subsidy.

For some, subsidies may indeed be substantial, and make insurance much more affordable. Those at the upper ends of the income eligibility spectrum, on the other hand, will get smaller subsidies. And it’s possible that subsidies won’t be large enough for some people to make premiums affordable at all. A study by the Congressional Budget Office notes that a family of four buying a silver plan—a plan that pays 80 percent of a policyholder’s medical expenses—with income between 139-149 percent of the poverty level, would get a subsidy covering about 96 percent of the policy’s cost. The same family with an income between 300 and 349 percent of poverty would get a subsidy covering roughly 44 percent of the premium; and a family whose income came to 350 to 399 percent would get a subsidy of only about 35 percent, meaning they have to pay two-thirds of the premium out of pocket.

If subsidies are not adequate, supporters of the law fear that some families will simply take the penalty for not having insurance, rather than buy something they can’t afford. In the end, it will come down to a matter of a family’s budget and its spending priorities.

A piece published awhile back by The Associated Press offered readers a glimpse of what insurance affordability looks like in dollars and cents. It presented five scenarios, using different families buying insurance in the individual market, and showed how the law might affect their pocketbooks. The AP’s examples also show that the subsidies are hardly a one-size-fits-all affair.

When people apply for coverage in an exchange and pick a policy, the exchange will automatically generate the amount of the subsidy. A family of four, for instance, with a 40-year-old policyholder and a family income of $50,000—near the median of $51,400—could get a government subsidy of $8,745 for a policy costing $12,130. The family would have to pay $3,385, an amount that may or may not be affordable.

The AP also showed what a single adult age 30 might face. Assuming an income of $30,000 and an annual premium of $3,440, the government subsidy would only be $932, while the person’s share would be $2,509.

Softening the price wallop

The insurers’ game is to grab as much market share as possible, as fast as possible. To do that, they need to entice customers with low premiums. The White House euphemistically calls low-cost policies “more efficient”—words that tend to obscure the trade-offs and choices that shoppers will have to make.

A low premium means that a consumer may have to take a policy that requires high deductibles, high coinsurance (a percentage of a bill they have to pay), or high copayments (a set amount for a particular service). Shoppers in the exchanges will also have to make other trade-offs depending on the strategies insurers use to fashion a premium that sells in he marketplace.

One strategy some carriers are considering is a narrow network of providers; in other words, fewer choices of doctors and hospitals. For example, some specialty hospitals may not be included. If an insurer goes that route, it will allow in the network only providers who agree to discounts on the price of their services. Discounts could be higher—depending on who has the leverage in a given market. If doctors and hospitals have the leverage, discounts will be lower, because they have the power to keep their prices as high as possible. If insurers have the upper hand in a market, they can demand higher discounts from providers and, at least theoretically, charge lower premiums.

It’s possible carriers will take their narrow networks one step further by choosing providers who offer what they consider value. Perhaps they give better care, more coordinated care, or have higher quality or satisfaction scores on a variety of measures. The trade-off for policyholders: more choice and a higher premium versus less choice— and maybe better care and a lower premium.

Some tips for reporters

• When you hear the word “affordability,” understand who is using the term and why.

• Try to avoid passing along any spin as a he said/she said quote. But if you must, explain what it means. Context, context, context!

• Building on the model the AP used, explain the subsidies and how they work with real numbers. Better yet, use real people and show how subsidies will or won’t help them.

• Take some time to understand how insurance actuaries arrive at a premium. Understanding the different factors will help you explain to audiences how they will have to make some difficult trade-offs in the shopping exchanges. This will help avoid he said/she said presentations that are of little use to the public.

• Don’t be afraid to talk to actuaries, either on or off the record. Although it’s fashionable to discredit them because they work for insurance companies, they are the ones who best understand how policies will be priced, and can explain the nuts and bolts to you. That will help you spot the spin and avoid the trap of he said/she said.

• Keep in mind the dominant player in your market—insurers or healthcare providers. Knowing and understanding who is in control, big hospital systems, or the big insurance companies, will help you explain what’s going on for your audience.

This primer originally ran in the Columbia Journalism Review on May 13, 2013.