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An Expert Explains Why Obamacare Premiums Are Shooting Up

Rising premiums and big loses for insurance companies have Republicans once again denouncing Barack Obama's signature legislative accomplishment. Are things really as bad as some are saying?

by Mike Pearl
Oct 26 2016, 3:24pm

Obama signs the Affordable Care Act into law on March 23, 2010. Photo by Pete Souza via Wikimedia Commons

Creating and implementing the Affordable Care Act, a.k.a. Obamacare, has been a political slugfest that's lasted nearly the entire Obama administration. In 2009, when it was first proposed, Republicans literally screamed in fury about it. After it finally became law a year later, conservatives dragged it to the Supreme Court in an unsuccessful attempt to crush it and are still challenging aspects of it in lawsuits. The Republican-controlled House has voted repeatedly to repeal Obamacare, and during the GOP primary, all the leading candidates promised to get rid of it.

Meanwhile, the law has helped millions of Americans get health insurance, including some who badly needed it. But over the summer, it became apparent that there were problems with the state "exchanges" set up on Healthcare.gov, the official Obamacare website where people could go to buy plans from private insurers. These companies were losing money on these exchanges, and as a result, experts were warning that premiums could rise; some insurers ditched the exchanges altogether.

On Monday, the White House gave the country the bad news: Premiums are indeed going up an average of 25 percent in the 39 states with working exchanges, and in many places, people will only have one insurer they can buy plans from. Though government subsidies will help most of those covered by Obamacare—and this doesn't affect people who get insurance through their jobs—this is still bad news for the complicated system.

To find out how Obamacare got here, I called up Cynthia Cox, associate director of the Kaiser Foundation's Program for the Study of Health Reform and Private Insurance. She told me why operating within the Obamacare marketplaces turned out to be a real jolt for insurance companies, and what some healthcare reform reforms might look like.

VICE: Insurance companies selling plans in the marketplaces have been complaining about losing money on these marketplaces for months. How is Obamacare costing them?
Cynthia Cox: Before the reforms went into place, there was the old way of doing business: Avoid the sick people. The reforms all [went] into place at the same time in 2014. Not only the reforms to the market, but the way that people buy coverage changed. That's why in some cases it was a shot in the dark how they priced their premiums.

What did they base these new premiums on?
What they did is they started with the premiums for when they would sell to small businesses. So they would start with that premium, and kind of work from there by adding additional factors of what they were estimating the health status of people might be who are purchasing coverage.

And what was wrong with those assumptions?
In some ways, their expectations were unrealistic, but in other ways, it may have been that the people who signed up were sicker than people expected. I think this really depended on the state. Another change that happened in the first year was that there were what were called "transitional policies" that were allowed to stay in place—these kinda non-compliant plans. The healthy people stay in those plans, and don't move onto the new market, and that means the sicker people on average are purchasing in the new market. So those are kind of a combination of factors that led to insurers guessing wrong.

Is it possible that people who had just gotten insurance for the first time in awhile were suddenly getting a lot of treatment they needed but couldn't get before?
That's a pretty reasonable assumption. In fact, insurance companies assumed that there would be what's called "pent-up demand" for healthcare. So they assumed that a lot of these people had been blocked out of the market before. They weren't able to get coverage because of preexisting conditions. They wanted coverage. They needed healthcare. And once they got it, they used it. I think the fact is that maybe insurers under-appreciated how much demand there would be for healthcare. And then also maybe underestimated how long it would take for that to wear off. I think the expectation was that there would be pent-up demand for the first year or two of the exchanges, and it may be that that's actually continuing longer—that people still have healthcare needs that have gone untreated, or that maybe have gotten worse because they weren't treated on time.

Will this be a one-time price hike?
That was generally the expectation especially as of earlier this year. In the first two years of the exchanges, insurers had very little information to use. Now they have a year a and a half at least of data that they can use to set accurate premiums.

Do you see any reason this could happen again?
There were a number of insurance companies that started announcing [they were leaving the exchanges]. This can have the effect of starting to destabilize the market. And it also may mean that premiums go up more than we expected them to. Because now, some insurers have the opportunity to revise their premiums if their competitors were dropping out, they now have to take on more enrollees than they were expecting, and so the stability of this market has been called into question.

How could the authors of Obamacare have created a more stable market in the first place?
There's always been a question as to whether the individual mandate was strong enough. There's a question about whether the penalty [for not getting insurance] is large enough to actually encourage people to purchase, because it's capped at whatever a bronze premium would cost—so in no case is someone spending more on the penalty than they would if they'd bough an unsubsidized bronze plan. But at the same time, there are questions about whether the subsidies were enough. So there are carrots and sticks in this market, particularly to try and encourage young and healthy people to sign up.

What might we see during a Trump or Clinton administration to drive rates down?
Some of the legislative changes that could be made would be to increase the subsidy amount to help more people, maybe even people with higher incomes than currently get financial assistance. You could also increase the money that goes into outreach and enrollment assistance to help people understand their options and to sign up. Of course, both of those ideas cost money and may meet resistance. The other options out there are a little more dramatic. There are people out there who suggest repealing the law altogether. There are people on the left who support a public option [allowing many more people to buy insurance directly from the government]. These would be more fundamental changes to the way that health insurance works in this market.

This interview has been edited for length and clarity.

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