One of the goals of the Affordable Care Act (ACA) is to stabilize the market making more accessible and affordable for individuals. Many of the proponents of the law argued that by creating a well-regulated insurance market health insurance premiums would fall and stabilize. However, there have been several stories in papers across the country speculating that health insurance premiums for individuals are going to rise as much as 30 percent when the health insurance exchanges and other insurance market regulations go into effect next year.
So what is going to happen to premiums in the individual health insurance market? Well, in the spirit of Harry Truman who asked for a one-handed economist because he was tired of hearing “on the other hand” the right answer is: it depends. It depends on who is asking the question, where is the question being asked and when is the question being asked. The Georgians who enter the individual health insurance market after ACA is implemented will do so only if their premiums (net of subsidy) are lower than the current premium they face.
Health insurance premiums are determined by three things: the generosity of the insurance plan; the average health of the risk pool; and the regulatory environment of the market. The Affordable Care Act changes all three of these factors.
The ACA changes how premiums are determined. Currently in Georgia individual premiums are determined by age, gender, and health status of the individual. There is no guarantee issue for the individual market so insurers may refuse to offer coverage to those with high-cost pre-existing conditions. Insurers cannot measure health status accurately, but they do know that people most anxious to purchase coverage are those most likely to need care. As a result premiums are higher for individuals than they would be for large employment based groups.
Under the ACA insurers are unable to use personal characteristics other than age to determine premium. That means that premiums are determined by the composition of the entire group who purchase individual coverage rather than a separate premium for each individual. People who currently purchase individual insurance coverage in Georgia are slightly older and much more female than the rest of the population. If the only change in the individual market was the pooling of those currently purchasing coverage in that market then by definition the average premium would not change, but younger healthier individuals would face higher premiums while the older and/or less healthy would face lower premiums.
However new groups of people are going to enter the individual market as a result of other insurance changes brought about by the ACA. Those groups include 1) people who enter the individual health insurance market because, for them, the premium is lower under ACA due to risk pooling; 2) people who enter the individual health insurance market because, for them, the premium is lower under ACA due to the subsidy; 3) people who enter the individual health insurance market because they would pay the tax penalty under the individual mandate provision; 4) people who enter the individual market because their employer dropped coverage. People may belong to more than one of these groups, but it is informative to examine each group separately to determine the group’s effect on insurance premiums.
The people in group 1 are currently excluded or priced out of the insurance market because they have a high probability of needing health care services. Their addition to the risk pool must increase the average cost of the risk pool and therefore increase premiums. The Urban Institute has estimated that up to half of the uninsured have chronic conditions. Assuming those conditions make those individuals 50%more expensive to cover and the formally uninsured are 30 percent of the individual market after implementation of the ACA the average premiums in the individual market would be 15 percent higher than before ACA as a result of group 1 entering the market.
The people in group 2 are induced to enter the individual market because they are eligible for the subsidy. To the extent they look like those people currently in the individual insurance market with respect to age, gender, and income they are likely to have lower health risks. If they had similar health risks they would as those who do purchase coverage now they would have felt the current price of coverage less then the benefit of coverage and already purchased. However, the subsidy at lower levels of family income is fairly significant so they may be more likely to enter the market as a result of the subsidy.
The people in group 3 are likely to be in better health than those already purchasing or they would have sought coverage already. The size of group 3 is a matter of some controversy. The financial penalty is relatively small in the first few years of ACA implantation, but the law itself calls it a mandate and the Supreme Court ruling may be too obscure to change that perception. The inclusion of this group would likely lower average premiums in the individual market.
Finally the group that enters the individual market from employment-based coverage does so only because their employer dropped coverage. Employer’s who offer coverage now will drop it only if dropping coverage reduces their labor costs. That occurs only if employees lower the value they place on their employers coverage as a result of alternative choices that make the employees better off. This group is therefore likely to be at least as healthy as those currently in the individual market. The inclusion of this group would likely lower average premiums in the individual market.
Another factor affecting insurance premiums will be the generosity of the plans sold in the individual market. Currently those plans have to meet state mandates on coverage, but there are a wide variation in plan design, covered services, and cost sharing. The ACA requires that plans cover essential benefit benefits. In Georgia essential benefits are defined as the benefits covered by most purchased small group health insurance products plus additional coverage for preventive services deems proven to be effective. Given the variation in individual plans that implies that on average premiums will be higher even if the cost of a dollar of coverage remains the same. In other words Georgians will pay more to get more coverage.
If you have made it this far you see that two factors clearly raise average premiums, one factor clearly lowers average premiums, and two factors could go either way. The key question is which group is larger.
The mandates on both individuals and insurers, the subsidy for the purchase of individual coverage, and the risk corridors that protect insurers from the effects of adverse selection for the first three years are intended to ensure that the groups lowering premiums are larger than the groups who increase premiums.
It is import to note is that the changes in premiums year to year will be changes in average premium. A healthy individual who gains coverage now may find coverage in future years unaffordable if they suffer an illness. Under an ACA that healthy individual may pay more in the first year but their premium in the second year will not be affected by any change in health status they suffer in that first year.
All of this is part of the experiment that is the Affordable Care Act. Without this experiment the private health insurance market is unsustainable. Whether the experimental marketplace created by the ACA is sustainable remains to be determined.