With key elements of the Patient Protection and Affordable Care Act (PPACA) taking effect in the coming year, many health care and financial pundits foresee up to double-digit premium increases for insurance coverage. Yet others disagree, believing PPACA has the potential to keep insurance affordable. In fact, President Obama made this assertion during his recent State of the Union address.
One issue grabbing headlines is the looming implementation of employer and individual mandates as part of PPACA’s health benefit expansions and insurance reforms. This blog briefly examines several key factors that could impact future insurance premium levels.
Initial CBO Estimates
In 2011, the Congressional Budget Office (CBO) projected PPACA would have a mild impact on small and large employer plans – citing estimated premium increases of “somewhat less” than 10-13%. “Although premiums in the individual market will be higher on average, many people will end up paying less for health insurance,” said CBO Director Douglas W. Elmendorf in a statement before the U.S. House of Representatives’ Subcommittee on Health. “Premiums for employment-based coverage obtained through large employers will be slightly lower than they would otherwise be.”
However, many experts now disagree with the earlier CBO estimates, including some insurance actuaries that estimate insurance premiums could increase as much as 25-50% in the small-group and individual markets in coming years.
Two significant indicators of potential premium hikes are the Medical Care Index (MCI) and the Consumer Price Index (CPI). These indices effectively show the average change over time in the prices paid by consumers for certain goods; specifically, the MCI reflects changes in the cost of medical care.
The CPI has increased at a relatively low rate of 1.7% in the past year. However, the MCI has consistently exceeded the CPI, and last year increased at an annualized rate of 3.2%. These figures reflect a larger increase in the cost of medical care over other types of goods and services. In future years, the MCI rate might grow at an even faster clip as more uninsured and underinsured Americans, including high-risk individuals, have full access to the health care system through individual and employer mandates, along with program subsidies. This in turn could have significant impact insurance premiums.
Another reason for rising insurance costs looms – the PPACA mandate for community rating premiums with no pre-existing exclusions. Under PPACA, insurers will not be permitted to charge drastically different premiums to individuals with chronic conditions, even if the cost differential is due to anticipated costs of care. While some states already have modified community rating premiums, many do not. According to a recent Wall Street Journal article, some experts are predicting states such as Arizona, Arkansas, Georgia, Idaho, Iowa, Kentucky, Missouri, Ohio, Oklahoma, Tennessee, Utah, Wyoming and Virginia will experience the largest premium increases, as much as 65-100%. An additional 18 states, including Texas and Michigan, will likely see rate increases between 35-65%.
The PPACA mandate of richer benefit plans that offer additional services is also increasing costs. The minimum acceptable qualified health plan for 2014, also known as a Bronze Level plan, will have to cover 60% of the anticipated costs of benefits, and is required to cover services known as essential health benefits. These additional services necessitate higher costs to insurers, and in turn, to covered individuals.
While some of the increasing costs of medical care will be alleviated by federal government subsidies to qualifying individuals, consumers most likely will see an additional tax increase to pay for those subsidies, as well as fees associated with state and federal health benefits Exchanges. Age bands are also being utilized to manipulate premium costs. As part of this provision, young people will pay significantly more than actuarially anticipated costs to defray some of the expenses incurred with the care of older individuals. Even with this additional source of funding, it is not clear how long the federal government can defray some of these higher expenses.
Certain states are already calling for huge increases in premiums to cover some of these costs. In California, Aetna has proposed a rate increase of 22%, Anthem Blue Cross 26% and Blue Shield of California 20%. Florida and Ohio also have seen increases of at least 20% for some policy holders. Many of these proposed rate hikes have been approved by state regulators. Some states, such as New York, have maintained the ability to hold rate increases to under 10%.
However, not all of the evidence is pointing to skyrocketing medical costs in the near future. Several studies indicate health care costs have slowed in recent years, including a recent report by PricewaterhouseCoopers. “Health care spending in the United States has slowed considerably since 2009,” the report states. PricewaterhouseCoopers predicts medical costs will increase 7.5% for 2013, representing “the fourth year in a row of relatively flat growth.”
Absorbing Higher Costs
Many believe insurers have no choice but to pass on the costs of PPACA and its multitude of tax penalties to the consumer, in large part because PPACA did not address some of fundamental issues that lead to over-utilization and lack of personal accountability. To that end, Robert Zirkelback, a spokesman for America’s Health Insurance Plans (AHIP), says, “There’s a massive new health insurance tax that starts in 2014. For policies that are sold in 2013 and extend into next year, there’s going to be taxes imposed…As a result, like all taxes, they will be reflected in premiums charged.”
At the same time, many consumer advocates are taking issue with any attempt to pass the costs on to consumers. Some, including California insurance commissioner Dave Jones, have called for a federal provision that would give regulators the ability to deny excessive tax rates. And others, like Mr. Jones, argue that the premium hikes may not justifiably be passed on to the consumer. “California state law requires that premiums bear a relationship to the insurance sold to a particular customer,” Jones states. “In this case, what’s happening is that Anthem Blue Cross is collecting from customers…a fee that Anthem Blue Cross doesn’t have to pay until 2014.”
The Need to Expand the Insurance Risk Pool
One of the underlying goals of PPACA is to add more covered lives to the risk pool. However, National Association of Insurance Commissioners (NAIC) officials have pointed out that rate hikes could force young, healthy Americans to accept the tax/penalty instead of obtaining coverage. In a letter to the Centers for Medicare & Medicaid Services (CMS), the NAIC wrote, “States need as much flexibility as possible under the law to work with issuers to address this problem.”
Balancing the needs of maintaining a healthy insurance market with the public policy goals of providing affordable coverage to all Americans is an important goal. The reality is that PPACA is not a silver bullet in accomplishing both goals. With the individual and employer mandates going into effect next January, government officials, consumer advocates and industry representatives will need to work together to navigate the best pathway going forward. Clearly, a one-size-fits-all approach will not work. States need to have the flexibility to identify local solutions that can keep a check on healthcare inflation while expanding coverage to as many residents as possible.
Please visit www.healthcareexchange.com for blog posts, polls, surveys and numerous resources, or www.benefitmall.com to view previous Legislative Alerts.
The views expressed in this post do not necessarily reflect the official policy, position, or opinions of BenefitMall. This update is provided for informational purposes. Please consult with a licensed accountant or attorney regarding any legal and tax matters discussed herein.