If you thought that the end of the open enrollment period would mean an end to the bifurcation of opinions surrounding the Affordable Care Act, better known as Obamacare, then you have another thing coming.
While total enrollment in state and federally run health exchanges in the first year handily topped the lofty expectations set forth by the Department of Health and Human Services in Sept. 2013 of 7 million enrollees, the end result doesn't appear to be shrinking premiums as some had hoped.
We have seen some rare instances in Washington state with Molina Healthcare (NYSE: MOH ) and in Connecticut with Healthy CT where premium decreases were proposed, but this had more to do with these insurers venturing into the individual market for the first time ever and getting their feet wet in 2014. For more established insurers the rate proposals for 2015 have been trending higher, and in some cases they've been all over the map.
Three big concerns insurers have in 2015
There are a number of concerns that are pushing premium proposals higher for 2015.
To begin with, a recent Gallup poll would imply that a non-optimal number of sicker young adults signed up in 2014. Insurers were counting on a good number of healthier young adults signing up in order to counteract the higher costs often associated with treating elderly and terminally ill patients. However, we're still not sure how often these younger adults will actually visit the doctor, so the jury's still out on whether this is truly bad news for insurers.
Secondly, rising prescription drug costs are exacting their toll on insurers. Few drugs have created as much of an uproar with insurers and consumers alike as Gilead Sciences (NASDAQ: GILD ) oral hepatitis C drug Sovaldi which delivers a remarkably high sustained virologic response rates in patients after 12 weeks of treatment (i.e., no detectable levels of disease), but costs a whopping $1,000 per day! Simply put, the costs of Sovaldi and a number of other drugs, both orphan and non-orphan, are straining health-benefits providers.
Finally, Obamacare tax rates are heading higher in a number of states in 2015. Last year more than a dozen states received federal funding to help build and maintain their state-run health exchange. In the coming year this federal funding stops, meaning states are now responsible for raising the funds required to maintain their exchange. As I noted last month, Rhode Island has plenty of its federal funds still squirreled away, so this isn't a big deal. But, residents and health insurers in Colorado could be in for a rude awakening with the state announcing a $1.25 per member fee on individual and small-group health-plan whether or not they were purchased through the state's exchange, and imposing a 1.4% fee on premiums paid through the state's exchange. The reasoning behind these fees is to narrow its funding gap to operate its health exchange.
Price hikes in this state could make your jaw drop!
Thus far we've seen a number of states where insurers have proposed sizable increases for the upcoming year.
In New York, MetroPlus, one of the low-cost leaders in the state, submitted a proposal asking for as much as a 28% increase in plan pricing. By a similar token, CareFirst, the dominant insurer in Maryland, proposed premium increases of 23% to 30% last month. As The Washington Post pointed out, CareFirst proposed a 25% increase in 2014 but only wound up receiving about half of its requested hike from Maryland's Insurance Commissioner.
But next to what residents in Indiana might face, these potential premium hikes look reasonable. According to the Indianapolis Business Journal in May, Physicians Health Plan of Northern Indiana is requesting an average price increase of 46% with its maximum plan increase coming in at a jaw-dropping 59%! Physicians Health Plan cited an unfavorable number of older enrollees and a higher morbidity (i.e., disease) rate associated with those patients as the reason it requested such a large hike in premiums.
Indiana's other insurers also issued proposals that were all over the map. Anthem BlueCross BlueShield, operated by WellPoint (NYSE: ANTM ) , offered up an average premium boost of 9.7% which was more or less in line with its previous expectations. Centene (NYSE: CNC ) , a provider of Medicaid-based health benefits that's begun dipping its toes into the individual market, also confounded its members with an average proposal that calls for an 8.8% decrease in premiums, but which ranged from a decrease of up to 15.5% for some plans to an increase of as much as 53% for others. MDwise, the fourth and final insurer in the state, requested a mammoth 35% premium hike!
Is it time to sound the alarm?
I'll be the first to admit that some of these increases sound downright scary, and they're certainly fuel for the fire to those who oppose Obamacare. However, we should also keep a couple of factors in mind which may bring these astronomical price hike proposals back to reality.
First of all, keep in mind that these initial rate proposals are nothing more than estimates sent to the Office of the Insurance Commissioner in each state. Insurers obviously want to price premiums as high as possible to beef up their margins, but Insurance Commissioners rarely allow double-digit premium hikes to sneak by without some negotiation and reductions. The ACA was created with the expectation that regulators would take an especially close look at insurers requesting double-digit increases, so expect these proposals to dip from their starting point.
Also, we're beginning to witness a number of larger insurers that held out of most individual markets in 2014 expanding into new states. National insurers like UnitedHealth Group (NYSE: UNH ) had the opportunity to largely observe from the sidelines last year. With a year under its belt UnitedHealth has noted its intent to offer health plans in Washington state, Connecticut, and Maryland so far, with the expectation that its moat of opportunity could expand further. As competition within a state increases premium prices should fall. With only four insurers operating in Indiana any additional insurers that choose to offer plans in the state could wind up drastically lowering prices.
Lastly, I don't believe it's time to sound the alarm for the same reason I alluded to earlier: we just don't have enough data yet to determine how often these new enrollees will visit their doctor. Young or old, sick or not, the key factor for insurers is how often its members visit the doctor. If this figure proves less than expected it could result in a flattening of premium price trends. Conversely, if the demographics of young enrollees really are proven unfavorable and these newly insured young adults visit their doctors regularly, it could result in substantial premium hikes. But, we just don't know which way the pendulum will swing as of yet.
With Obamacare exchanges set to open in a shade over four months we're going to soon have some answers, but don't be surprised if these sticker shock premiums aren't anywhere near their initial proposals when all is said and done.
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