Chris Fleming hosted the Inauguration Edition of the Health Wonk Review this week at Health Affairs Blog, and it's an excellent compilation of articles. The article written by one of our favorite bloggers, Maggie Mahar, about health insurance premiums in 2014 and beyond caught my attention, because that's an issue we've been watching closely for some time. It's a question that's on a lot of minds right now - especially for people who buy their own health insurance and are in the segment of the population that is most likely to experience changes (in coverage, premium, how policies are purchased, etc.) in 2014. Jay and I not only work in the individual health insurance industry, but we're also policyholders - we've have individual health insurance since 2002. We've had two carriers and several plan designs over the last decade, and we've experienced double digit percentage rate increases nearly every year (somewhat offset by the fact that we've been willing to increase our deductible and out-of-pocket limits several times).
We currently pay just over $400/month (for our family of four) for an Anthem Blue Cross Blue Shield CoreShare plan with a $3500 deductible and another $3500 in coinsurance. We know that our rate will go up in the fall - it always does - but how much? How much will prices go up for all of our clients who are covered by all of the biggest health insurance carriers in Colorado?
I don't know the answer to that question. And I don't think that anyone really does. The post Maggie wrote references an article from Bob Laszewski that predicts rate increases of 25 - 50%, with some rates actually doubling, while Maggie's prediction is more along the lines of a price decrease for people who qualify for subsidies, with an average price increase of just over 10% for those who don't (anyone making more than 400% of FPL). The answers seem to change based on who's doing the math, and it would be disingenuous to say that all of the numbers are objective. In general, I've found that the people who support the ACA are more likely to predict small rate increases and smooth sailing next year, while those who oppose the law are likely to predict large rate increases and general doom and gloom.
Here's what I do know.
The MLR (medical loss ratio) has already been in effect for two years. Carriers have had to limit their overhead to 15 - 20% of premiums since January 2011, so any changes in premiums and/or spending as a result of that regulation have already been incorporated into our premiums. Carriers that were unable to meet the requirements have already been weeded out, and we're not likely to see any big changes in the future based on the MLR.
In Colorado, the primary difference between individual and small group health insurance was historically based on underwriting and maternity coverage. In terms of underwriting, small group coverage has long been guaranteed issue: all groups have to be accepted, and no eligible members of a group can be declined or rated up based on health status (there used to be a provision to allow a group's total rate to be factored up or down based on the overall health of the group, but a law was passed in Colorado six years ago to prohibit this practice). This is in stark contrast to the individual market, where medical underwriting is the norm: Denial rates in the individual health insurance market typically exceed 20%, although the figures vary tremendously depending on the carrier and state in question. In addition to the relatively high rate of denials, there is an even higher percentage of applicants who are offered a policy but with a higher premium than the standard rate (a decade ago, the standard practice was to issue a policy with an exclusion on the specific pre-existing condition. This practice has largely disappeared in the Colorado market and has been replaced with rate increases instead). In our own experience, we'd estimate that at least half of our clients are offered policies with a rate increase based on underwriting.
The other difference, maternity coverage, has been equalized to a large degree by the law passed in Colorado in 2010 requiring maternity coverage on all individual policies. Prior to that law, all small group plans covered maternity costs, and nearly all individual plans did not. A few individual carriers offered maternity benefits as a rider, but most of them had stopped doing so by 2010. In the past two years however, individual plans have covered maternity just like small group plans, so that is no longer a difference (prior to that law change, a lot of people cited maternity coverage in the small group market as an explanation for why premiums were so much higher, but the overall difference in premiums between the two markets hasn't changed dramatically since the implementation of the maternity mandate in the individual market).
That brings us back to underwriting. The primary difference between individual and small group plans right now in Colorado is medical underwriting. And let's take a look at premiums. The small group market will be limited to deductibles of $2000 or lower in 2014, so I only looked at policies with deductibles of roughly $2000. And since I checked numerous policies from several carriers with lots of difference plan designs, I'm only going with rough estimates here. For my family, in the individual market, a policy with approximately a $2000 deductible would be somewhere in the $500 - $600/month range. If we were covered under a small group plan, the premiums would be roughly $1000 - $1100/month. [Edit: the provision limiting small group deductibles to no more than $2000 was later removed, but the comparison here is still valid]
It's hard to get around those numbers. Individual and small group carriers have both been required to spend at least 80% of premiums on claims for two years now, and yet premiums in the small group market are roughly double the premiums in the individual market. Both of these markets have higher admin expenses than large group plans, but the small group market is still dramatically more expensive than the individual market - and the difference can't be explained away with admin costs, because they both have the same MLR limitation of 80%. There are still some benefit differences (with slightly richer benefits often found in the group market, even with comparable deductible levels), but the major difference is underwriting. In the individual market, pre-existing conditions are taken into consideration. Applicants with pre-existing conditions either pay more for their coverage or they are denied coverage and have to seek a guaranteed issue plan like CoverColorado.
In 2014, the individual market is going to resemble the small group market in terms of underwriting. Everyone who applies will be accepted. Pre-existing conditions will no longer be a factor. This is undoubtedly a major improvement for all of the people who currently are unable to get individual health insurance or pay large rate adjustments in order to get a plan. And it's arguable that it's also an improvement in general, since the idea behind insurance is to spread risk across an entire population - including the people who are most likely to need the coverage. But it's difficult to see a scenario where it doesn't also translate to significant price increases in the individual market, since the current small group market has prices that are nearly 100% higher than the individual market.
In 2014, the tax penalty for not having health insurance will only amount to $95 per uninsured person (or 1% of taxable household income). That's hardly a deterrent, considering the cost of health insurance (more on this coming soon in another post). My guess is that there may still be a significant number of healthy people who choose not to have health insurance in 2014. On the other hand, a large number of people who have previously been uninsured and are in need of healthcare might opt to take advantage of the new guaranteed issue rules, especially if they qualify for subsidies based on their income.
I've seen a lot of talk about how the subsidies (and tax credits for businesses) will offset the higher premiums starting next year. That may be the case for many people, but the money still has to come from somewhere. Tax credits and subsidies come from tax dollars and/or savings incurred by cutting spending (which often translates to reduced services elsewhere), and we still have to look at total premiums, not just the total amount that will be paid by each individual. Just as it's not fair to compare individual health insurance premiums with just the employee portion of group health insurance premiums (since there's usually a hefty chunk being paid by the employer too), we have to consider the total premium in order to make an accurate comparison.
I think we might see rates go up quite a bit in the individual market next year. For a lot of people, that will be offset by premium subsidies. But we still have to look at the total premiums being collected per person, and I think those numbers are going to be quite a bit higher than they are today.