Obamacare Has Failed to Collapse – But Its Premiums Continue to Climb

By Avik Roy | September 17, 2014 | 11:22am EDT

Democrats are trumpeting preliminary estimates indicating that premiums on Obamacare’s insurance exchanges will rise modestly, on average, in 2015. These early indications have led to a peculiar type of crowing from Obamacare supporters: “See, Obamacare isn’t collapsing!” And it’s true: Obamacare isn’t collapsing. But in the real world, we don’t measure the success of the “Affordable Care Act” by its failure to collapse. We measure it by looking at the underlying affordability of American health care. And there can be no doubt that health care today is more costly than it would have been without Obamacare.

McKinsey: 8 percent average increase in Silver plan premiums

First, the data. Last week, McKinsey released its latest analysis of preliminary rate filings for 2015. Among other things, McKinsey looked at the premium of the lowest-priced Silver plan in 2015, and compared that to the premium of the lowest-priced Silver plan in 2014. This comparison is useful because Obamacare’s insurance subsidies are geared to the cost of Silver plans, and because 65 percent of those selecting plans this past year chose Silver plans.

(As a reminder, you can buy five different types of plans on the Obamacare exchanges: Catastrophic, Bronze, Silver, Gold, and Platinum. The higher-tier plans have lower deductibles and co-pays, but higher premiums.)

McKinsey found that the premium of the lowest-priced Silver plan increased by an average of eight percent in 2015. That’s slightly above PriceWaterhouseCoopers’ estimate of 2015 medical inflation: 6.8 percent.

In other words, Obamacare plans on average aren’t bending down the cost curve—in fact they’re bending slightly upward—but an 8 percent increase is most certainly not the catastrophic death spiral that some conservatives recklessly predicted.

PwC is conducting its own survey of 2015 exchange premiums, using a different methodology than McKinsey. PwC calculates the average 2015 premium rate increase as 7.0 percent. Another study in nine states from Avalere Health pegs the average rate increase at eight percent.

It’s important to emphasize that these rate increases are preliminary, because each state’s insurance commissioner—and also the federal government—must approve these proposed rate increases before they are enacted. We now have complete filings for 19 states: Washington, Oregon, California, Nevada, Colorado, Michigan, Indiana, Ohio, Kentucky, Tennessee, Georgia, Maine, Vermont, New York, Rhode Island, Connecticut, Maryland, and Virginia. Because these government agencies almost always try to jawbone insurers into tempering their rate increases, we could see a somewhat lower increase than what the preliminary numbers indicate.

No death spiral is imminent—but prices keep going up

It is certainly encouraging that we’re not seeing a health insurance “death spiral” on the exchanges. But measured over two years, Obamacare’s rate hikes remain toxic. And further increases are on the horizon in 2017, when some of the law’s subsidies to insurance companies are set to expire.

Contrary to Paul Krugman and other ACA cheerleaders, rate shock isn’t a myth. It’s a fact. I and my colleagues at the Manhattan Institute looked at the actual, finalized rate filings in 2014 and compared them to what was available in 2013. The average U.S. county saw a rate increase of 49 percent. You can dig through our findings, or find out how much individual-market premiums went up in your county, by visiting our interactive map.

But the health law’s $2 trillion in subsidies cushion the impact of rate shock for those whose incomes are low enough to qualify for them. That’s why 85 percent of those who signed up for exchange-based plans this last spring were people eligible for subsidies.

And Obamacare isn’t out of the woods by any means. Insurers are extremely nervous about the fact that much of the Obamacare website’s “back end”—the part that processes subsidy eligibility and payments, among other things—remains a mess. Earlier this summer, the U.S. Government Accountability Office entered 12 fake applications into the federal exchanges, and found that 11 were approved.

Insurer ‘bailout’ suppressing Obamacare premium hikes

Importantly, a set of Obamacare exchange provisions called the “three Rs”—risk adjustment, reinsurance, and risk corridors—effectively encourage insurers to offer premiums on the exchanges that are imprudently low. If you are an insurance company, and you lose money because your premiums were lower than your actual claim costs, Obamacare subsidizes that loss for you. It’s this part of the law that Sen. Marco Rubio (R., Fla.) and others have been calling a “bailout” of participating insurers.

The problem is that the “three Rs” are transitional. Reinsurance and risk corridors expire at the end of 2016, at which point insurance companies like Aetna, Humana, and Cigna will have to charge premiums in line with their costs. That may lead to a spike in premiums in 2017. Indeed, insurance companies heavily lobbied Obama consigliera Valerie Jarrett this year to spend more on the “three R” subsidies, threatening substantial rate hikes if they weren’t accommodated. They were accommodated.

Taking stock

All this is to say that the story is more complicated than either side would like you to believe. It is a good thing that premiums on Obamacare’s exchanges aren’t rising rapidly for 2015. But premiums did go up a lot in 2014. And they may go up again, as the “three R” program phases out.

The bottom line is that if you shop for coverage on your own, and you don’t qualify for Obamacare’s subsidies, you’re probably paying a lot more for insurance today than you did before. And that’s why Obamacare remains unpopular with the public.

Avik Roy is a Senior Fellow at the Manhattan Institute for Policy Research, and the author of How Medicaid Fails the Poor (Encounter, 2013).

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