For all the talk about rate shock—next years Obamacare-induced spike in health insurance prices—there are a few states where youd think rate shock shouldnt happen. In Maine, New Jersey, New York, Vermont, and Washington, insurance markets are already regulated in much the same way that Obamacare will. These states force insurers to cover everyone, despite pre-existing conditions, and they oblige carriers to charge similar rates to younger and older customers. Despite these factors, it turns out that in Washington state, Obamacare will still increase the underlying cost of individually purchased health insurance by 34 to 80 percent, on average.
Washington state imposed ACA-like reforms in 1993
As I described in an article last year, the Evergreen State blew up its individual health insurance market in 1993, when Democrats instituted a set of reforms modeled after Hillary Clintons plan for universal coverage. The state instituted guaranteed issue (barring insurers from excluding pre-existing conditions), community rating (the young subsidizing the old), premium price controls, and planned to phase in employer and individual mandates to purchase health insurance. It mandated the benefits that each plan must carry, and raised taxes to subsidize the purchase of these insurance plans by low-income state residents.
But in 1994, Washington voters put Republicans in charge of the state legislature; the GOP repealed all of the Democrats reforms except two: guaranteed issue and community rating. As Carol Ostrom of the Seattle Times described, Washingtonians quickly figured out how to game the system by dropping in and out of coverage when they had health bills to pay:
“What happened next is starkly summarized in a 1995 letter sent to Premera Blue Cross by a woman in Eastern Washington.
A few months before she gave birth that year, the woman bought an individual policy from Premera. As soon as the insurer paid her hospital expenses, the woman canceled the policy, telling Premera “we will do business with you again when we are pregnant.”
True to her word, in 1996, she bought insurance, Premera said, once again canceling after the insurer paid for the delivery of her next child. Altogether, she paid in $1,807 in premiums. Premera paid out $7,024.68 in medical bills.
You dont have to be a business genius to recognize the problem with those numbers when multiplied by thousands of customers. Claims went up. Premiums rose. Pretty soon only sick people thought insurance was worth the cost. Premiums rose even more. Healthy people, like the Eastern Washington woman, waited until they needed insurance to buy it. At the time, Gov. Gary Locke likened it to buying fire insurance after your house is on fire.
The individual market collapsed. Premiums went up by as much as 78 percent, and enrollment dropped by 25 percent. Insurers abandoned the market.
Finally, in 1999, the state enacted reforms that restored some functionality to the market. The state modified the guaranteed-issue requirement such that the costliest 8 percent of the population would move into a state-funded high risk pool. It also allowed insurers to exclude pre-existing conditions for nine months, up from the previous three.
The legislature also replaced premium price controls with controls on gross margins; insurers were required to maintain a medical loss ratio of at least 72 percent. (The rate-review authority was restored in 2008.)
Still, Obamacare will increase premiums for all age groups
The point of all that background is to explain that Washington state already has an individual insurance market that is regulated in a similar way to Obamacares. So, in theory, we should expect that Obamacare has little impact on the Washington market. But it turns out that, while rates wont go up in Washington as much as theyll go up in California, theyll still go up by a lot.
With the help of my Manhattan Institute colleague Yevgeniy Feyman, and our summer intern Paul Chung, I compiled premium data for the five cheapest plans available on healthcare.gov for the most populous ZIP codes in each county in Washington state. As with my previous analysis of individual-market premiums in California, I then adjusted these premiums using a weighted average formula to take into account the small proportion of people who were denied the posted rates. (In Washington, no one was charged a higher rate than the listed rate, but 4-7 percent of applicants were rejected from a given plan; I assumed that these individuals found coverage elsewhere for three times the price.)
Paul and Yevgeniy then compiled the premiums for Washingtons exchange, formally titled the Washington Health Benefit Exchange. Eight insurers are participating in the exchange: BridgeSpan, Community Health Plan of Washington, Group Health Cooperative, Kaiser, LifeWise, Moda, Molina, and Premera Blue Cross Blue Shield. LifeWise is owned by Premera and BridgeSpan by Regence Blue Shield; Regence, Premera, and Group Health are the three largest insurers in the state. LifeWise is the leader in the individual market.
On average, the lowest prices were offered by Group Health: $174, $212, and $498 a month respectively for 27, 40, and 64-year-olds. The highest prices were offered by Molina: $282, $344, and $807. For the purposes of comparison, we took the median of the lowest-priced plans offered by each insurer in each of Washingtons five rating regions.
As you can see in the above chart, for the roughly 93 percent of Washingtonians who lack serious pre-existing conditions, Obamacare significantly increases the cost of individually-purchased insurance, pre-subsidies. For 27-year-olds, the increase is 80 percent on average; for 40-year-olds, its 50 percent; for 64-year-olds, its 59 percent. The riskiest 7 percent of the population should see lower premiums, however.
If you compare these prices to those in California, what youll notice is that Obamacare brings both states to about the same place. The difference is that today, before Obamacare goes into effect, California premiums are much less expensive than those in Washington. Hence, after Obamacare goes on-line, Californias rate shock is much more pronounced.
One surprising finding from this analysis is that older individuals will endure as much rate shock as younger individuals. The community-rating feature of Obamacare is designed to protect older individuals from much of the increase in insurance prices. But in Washington, 64-year-olds will face a greater percentage increase (59 percent on average) than 40 year olds (50 percent).
27 year olds, and young people generally, will face the steepest rate hikes under Obamacare, and this remains true even in Washington state. Unlike California, there isnt a whole lot of regional variation in Washingtons individual insurance premiums; however, rate increases are generally highest in the western third of the state.
As my progressive friends will insist I note, these numbers are for underlying premiums, and dont include the impact of Obamacares subsidies for low-income Americans. Ive expressed many times that its important to understand the impact of the law on underlying insurance premiums, because the subsidies arent free—theyre funded by taxpayers—and only some people benefit from them. If you want to understand how the subsidies interact with rate shock, you can read my previous analyses here and here.
‘Actuarial value a key driver of Obamacares premium hikes
Weve spoken a lot about guaranteed issue and community rating as principal reasons why Obamacare forces insurance premiums upward in the individual market. But there are a number of other things that the law does to increase rates. The most important of these is whats known as actuarial value.
Actuarial value is defined as the amount of an insurance policy that will be paid out by the insurer, as opposed to by the policyholder in the form of cost-sharing: co-pays, deductibles, and coinsurance. A plan with high deductibles and co-pays has a low actuarial value; a plan with low deductibles and co-pays as a high actuarial value.
As with most things in life, there is no free lunch in health insurance. If you want a plan that has low deductibles and co-pays, and therefore low out-of-pocket costs for the patient, that plan is going to cost you more in the form of higher premiums.
All plans sold in the Obamacare exchanges that are eligible for the laws subsidies must have a standardized, and high, actuarial value. “Bronze” plans must have an AV of 60 percent; “Silver” 70 percent, “Gold” 80 percent, and “Platinum” 90 percent. Platinum plans, as you would expect, are more expensive than Bronze plans, because they have lower co-pays and deductibles.
Obamacare did this for two reasons. First, the authors of the law felt that consumers have too many choices in the individual market today; this wide variety of choices, they felt, was too confusing for the consumer. By requiring insurers to standardize their actuarial values, it would be easier for the consumer to compare competing plans, and trust that insurers wouldnt pull fast ones by offering nice-sounding plans that, in the fine print, exclude key health expenses.
Second, there is an ideological aversion to cost-sharing by many on the left. Plans with high deductibles and high co-pays are considered a priori bad. The problem with this worldview is that it forces insurers to charge higher premiums, and it also leads to a lot of overutilization of the health-care system. If youre not paying for something directly, youre more likely to consume more of it. Think of the difference between a cash bar and an open bar.
Its easy to fix actuarial value-driven rate shock
Under Obamacare, no plan—with the exception of an unsubsidized catastrophic plan available to people under 30—can have an actuarial value lower than the Bronze level of 60 percent. But a paper by Jon Gabel and colleagues published in Health Affairs calculates that more than half of individual health plans sold in 2010 fell below the 60 percent AV threshold. By contrast, the average AV of employer-sponsored insurance in 2010 was 83 percent.
There are other things that Obamacare does to increase premiums. For example, the laws taxes on insurance premiums, pharmaceuticals, and medical devices will increase premiums by around 2 to 3 percent. But outside of community rating and guaranteed issue, actuarial value requirements are the biggest driver of rate shock.
There is a simple way to rectify this problem: reduce the actuarial value bands in the Obamacare exchanges. Right now, as I described above, theyre 60, 70, 80, and 90 percent for Bronze, Silver, Gold, and Platinum, respectively. You could move these down to 40, 55, 70, and 85, for example. This change would give consumers a low-cost option that would still protect them from bankruptcy due to high medical bills.
The roadblocks to a fix are familiar. Republicans, understandably, have little interest in improving a law that was forced upon them by the Democrats. And Democrats are largely happy with the way that Obamacare regulates the insurance market.
Health and Human Services Secretary Kathleen Sebelius routinely expresses contempt for high-deductible insurance. “Some of these folks have very high catastrophic plans that dont pay for anything unless you get hit by a bus,” she once said incredulously. “Theyre really mortgage protection, not health insurance.” As Megan McArdle observes, this only goes to illustrate that Sebelius is “sincerely confused about the difference between insurance and prepayment. Which explains a lot about the new health law.”
Indeed it does. And its why, even in an enlightened, liberal state like Washington, where insurers must already cover those with pre-existing conditions, Obamacare will still drive premiums skyward.
Original Source: http://www.forbes.com/sites/theapothecary/2013/06/23/even-in-over-regulated-washington-state-obamacare-will-increase-individual-market-premiums-by-34-80-percent/