Get ready for health insurance premiums to double.
That's the verdict from Elise Verbeck at The Hill, a prominent political website. She reported recently that health industry officials project that parts of the country will see their premiums shoot up by 100%, especially areas with higher numbers of elderly and sicker residents.
If these predictions prove to be accurate, many Americans could be hit hard financially. But will the health insurers leaking the gloomy forecasts be in trouble themselves?
Although The Hill's story referred to anonymous sources, at least one health insurance insider has gone on the record that some rates will skyrocket. In December, Aetna (NYSE:AET) CEO Mark Bertolini stated in an interview with CNBC that some people would likely pay twice as much with the Affordable Care Act, commonly referred to as Obamacare.
While health insurance premiums have risen steadily in the past, there are several reasons why the increases could be even steeper in the future. At least one stems directly from the way Obamacare was constructed. Insurers receive federal subsidies in the form of reinsurance and risk corridor payments if their losses are too high -- but only in the first three years of the health reform legislation. That could be an incentive for the companies to price premiums lower during year one but increase rates later.
Insurance industry officials say that the biggest reason for soaring premiums in 2015, though, stems primarily from Obamacare's early website woes and continuing changes to how the law is being implemented. A particularly significant change was the Obama Administration decision to allow individuals whose previous health insurance had been canceled to keep their old plans. This 180-degree turn sparked an outcry from health insurers that had established rates assuming those individuals would buy insurance meeting all of Obamacare's more stringent requirements.
Toil and trouble?
Does the exasperation and frustration of health insurers mean that they could face financial troubles in the days ahead? Probably not.
Those reinsurance and risk corridor payments from the federal government provide a safety net for the first three years. Insurers might lose money on their individual insurance products, but the losses won't be catastrophic thanks to Obamacare's cushion.
Humana (NYSE:HUM), for instance, stated that it expects to lose money on its Obamacare plans and receive between $250 million and $450 million to offset those losses. Still, the big insurer stuck by its 2014 earnings outlook of $7.25 to $7.75 per share, which means at least $1.1 billion in profits. That's not a figure likely to cause despair.
For some health insurance companies, losing money in the individual insurance market amounts to barely a blip in the big picture. Cigna (NYSE:CI) is a prime example. The company's management commented that they don't see the launch of Obamacare as a "watershed moment"-- mainly because individual insurance doesn't make up a large amount of Cigna's business.
Remember also that many insurers always have an alternative just in case the individual market proves too unattractive under Obamacare. Aetna's Bertolini said that pulling out of Obamacare "is an option that we will pursue if we need to if the program doesn't settle down." He was clear that this was a last resort, but that Aetna could make the decision on a state-by-state basis.
Fire burn and cauldron bubble
Perhaps the surge in premiums won't happen at all. The White House disputes that premise that rate increases will be greater than in the past.
Health and Human Services Secretary Kathleen Sebelius told the House Ways and Means Committee that increases will be "far less significant than what they were prior to the Affordable Care Act." Following the story reported by The Hill, federal officials cited independent studies that question whether premiums will actually increase significantly.
Which perspective is more credible -- that of Sebelius or of health insurance industry insiders like Bertolini? Take your pick. Either way, there doesn't appear to be any reason for investors holding positions in health insurance stocks to fret over the prospects of Obamacare premiums doubling. For those Americans with individual health insurance, worries might be harder to hold back.
The specter of skyrocketing premiums appears to be an issue that will brew for several more months. Insurers have to submit their 2015 rates in late spring.
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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.