Americans have been bombarded with information on the premiums they will pay for insurance coverage on the online marketplaces. Beginning on October 1, Americans will be able to purchase individual health insurance plans in what is known as the nongroup market on the new health insurance exchanges — the signature provision of President Barack Obama’s Affordable Care Act. Unfortunately, much of the information circulating is based on speculation and is lacking necessary details.
An important case that illustrates this point is the press release issued by the Ohio Department of Insurance, titled “Health Insurance Costs to Increase Significantly Under Affordable Care Act.” The Department said that it released the health care cost figures “to help health insurance consumers continue to prepare for the expected price increases.” The problem is that such a statement is far too general, and it gives a one-sided perspective on the issue of health care costs.
The press release reads:
The department’s preliminary analysis of the proposed plans for the individual market reveal that insurers expect the cost to cover health care expenses for consumers will significantly increase. Based on a report released by the Society of Actuaries earlier this year, the department estimates this increase is an average of 88 percent. … A total of 14 companies filed proposed rates for 214 different plans to the department. Projected costs from the companies for providing coverage for the required essential health benefits ranged from $282.51 to $577.40 for individual health insurance plans.
Presumably, the projected costs refer to claims and not premiums.
What the press release leaves out is key; it not does not explain whether the reported average of $420 from the wide range of claims costs are for a set benefit package or an average of a variety of different benefit packages. If it is the former, then it is confusing how the range of cost claims could be so wide. If it is the latter, the reported average of the numbers is unimportant. For example, it is not informative for a consumer to know that the average cost for a selection of cars is $110,422, when the group includes, Chevrolets, BMWs, and Ferraris, so why would such comparison be useful for a health insurance customer?
In order to properly inform insurance shoppers, the department should have added two pieces of information. First, the news release should have explained how federal subsidies — which will help individuals or households with incomes between 100 percent and 400 percent of the federal poverty level pay for coverage — will factor into costs. For low-wage earners, subsidies will significantly offset the reported 88 percent increase in costs, noted Princeton economics professor Uwe Reinhardt in an opinion piece for The New York Times. In addition, the department should have explained why the “cost to cover health care expenses for consumers” in Ohio has been projected to increase as a result of Obamacare.
An inspection of a study conducted by the Society of Actuaries, which is referenced in the report, has an answer to that question. The society — a professional organization for actuaries, who calculate insurance risks and premiums — inspected the average claims costs per insurer per month for what it termed “pre-ACA” and “post-ACA” conditions. The pre-ACA figure represented the estimated claims cost per insured person per month in 2014 if the Affordable Care Act was not in place, while the post-ACA number reflected the assumption that the entire act had been implemented in 2014.
The actuaries calculated that if Obamacare was fully implemented in 2014, the average claims cost in Ohio’s nongroup risk pools would increase from the estimated pre-ACA level of $223 to the post-ACA level of $406, an 82 percent increase that assumed that Medicaid would not be expanded in Ohio. However, the increase in total, system-wide health spending in the state resulting from Obamacare would only be an estimated 3.2 percent.
Costs will rise for two reasons. The Affordable Care Act mandates that the minimally accepted health insurance plan be much more generous than many of the leaner policies traditionally sold in the nongroup market because those packages typically leave the insured exposed to high financial risk. But a much larger driver of the projected cost increase is the the expected change in the risk profile of the insured in Ohio’s nongroup market.
In the nongroup market, the number of insured individuals will increase from 415,000 to one million thanks to Obamacare’s individual mandate. Many of the newly insured are expected to be relatively sicker, and therefore, were previously excluded from Ohio’s nongroup market because they could not afford the high premiums they were quoted — insurers had refused them coverage outright, or they were included in the state’s high-risk pool.
To support this change in the risk profile of the nongroup market, a switch from medically underwritten premiums to community-rated premiums was needed. This change, combined with more expansive insurance plans, could significantly increase premiums for health individuals with incomes high enough to exclude them from federal subsidies. But, for projected new entrants who are relatively less healthy, the community-rated premiums could be significantly lower than their medically underwritten pre-ACA premiums.
The Ohio Insurance Department did touch on “one-size-fits-all pricing,” and said that it was the reason for the increased cost of health insurance that the release announced. A “fact sheet” that the department appended to the release said:
Health insurance today is priced based on individual characteristics. Those with healthier lifestyles are rewarded with more affordable options. Under the A.C.A., all Ohioans will be lumped together for the purposes of pricing thereby eliminating the benefits of healthier choices. This method of rating is commonly known as community rating. … Because Ohio is being forced into this type of pricing, health insurance costs are increasing in 2014.
However, it should be noted that many serious illnesses are the result of accidents or genetic factors that have little to do with lifestyle choices.
That document also noted that Governor John Kasich and Lieutenant Governor Mary Taylor, who is also acts as the director of the Department of Insurance, support repealing Obamacare.
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