Get ready, because the 2017 enrollment period for Obamacare -- officially known as the Affordable Care Act -- is right around the corner.
Slated to begin on Nov. 1, 2016, the enrollment process for Obamacare could come with a big shock this year -- a sticker shock. Based on early rate request indications from individual state press releases, and an analysis conducted by the Kaiser Family Foundation of 14 major cities in mid-June, the average Obamacare healthcare premium in the U.S. could be headed higher by at least 10% in 2017.
It's hard to pick out a single culprit, as nearly every state that's reported insurer rate hike requests thus far has an average or weighted increase north of 10%. One standout is Arizona, where the two largest insurers in the state, Blue Cross Blue Shield (BCBS) of Arizona and Phoenix Health Plans, which insure 113,400 of the state's 152,600 Obamacare members, are requesting respective premium increases of 64.9% and 60%. In Tennessee, BCBS of Tennessee, which enrolled roughly 222,800 of Tennessee's 304,300 Obamacare members in 2016, is requesting a 62% premium hike in 2017. Once more, BCBS of Illinois, which controls 70% of the Illinois Obamacare market, is asking for a 50.2% premium hike. Humana (HUM -1.41%) isn't much better, either, with a 46.3% rate hike request on the table in Illinois.
In virtually every state a big premium hike appears likely.
This is why your Obamacare premium is likely to soar in 2017
However, the reason for these substantial premium increases may not be so readily apparent -- though consumer frustration with rising premium costs certainly is. Here are the four reasons why your Obamacare healthcare premium is probably going up by at least 10% next year.
1. Not enough young adult enrollment
The first big problem for Obamacare is that it hasn't attracted the most sought after customers: healthier young adults. Since young adults are less likely to go to the doctor, or to need expensive medical care, their premiums are used -- and needed -- to offset the costs to treat older and often sicker individuals. Although young adult enrollment improved in 2016 from the previous year, there are still not enough young adults enrolled in Obamacare to make a favorable difference for insurers.
Two factors explain the weakness in young adult enrollment. To a lesser extent, the "invincibility" factor is playing a role. Young adults who feel healthy and/or don't visit their doctor regularly would just as soon not be insured. Reaching this "invincible" crowd of young adults could prove tough for Obamacare.
But I believe the bigger factor is that the Shared Responsibility Payment, or SRP, isn't an adequate incentive to coerce young adult enrollment. The SRP is the penalty you pay for violating the individual mandate and not buying health insurance. In 2014, the SRP averaged only $150 per noncompliant person based on data from H&R Block. In 2016, the Kaiser Family Foundation believes the average SRP could rise to $969. While a lot higher, $969 is still far less than the cost of the cheapest bronze marketplace plan in any given state. Until the SRP is more closely reflective of annual bronze-level plan costs, a sizable number of young adults could stay on the sidelines.
2. Obamacare enrollees are sicker and costlier
Secondly, insurers have discovered that Obamacare enrollees tend to be both sicker and costlier than most other types of enrollees.
According to a study conducted by the Blue Cross Blue Shield Association in April, after analyzing the medical claims of roughly 25 million employer-based group members, the average cost per member was $457 a month through the first nine months of 2015. Comparatively, analyzing 4.7 million individual Obamacare enrollees produced a monthly cost of $559 over the first nine months of 2015. That works out to a 22% increase over employer-based membership.
The reason insurers are coping with substantially higher costs for Obamacare enrollees is actually pretty easy to understand. Prior to Obamacare's implementation, insurers had the ability to handpick who they'd insure. This meant people with pre-existing conditions, who were potentially costly for insurers to treat, could be legally denied coverage. However, under Obamacare insurers aren't allowed to deny coverage based on pre-existing conditions. When Obamacare became the health law of the land, Americans who'd been ostracized from the healthcare network for having pre-existing conditions flooded back in, leading to adverse selection for insurers. Compounded with too few young adults enrolling, this has led to high medical costs, and even losses, for many insurers operating on Obamacare's marketplace exchanges.
3. The risk corridor was a failure
Thirdly, the risk corridor proved to be an utter failure.
The risk corridor represented a type of risk-pooling fund among insurance companies operating on the Obamacare marketplace exchanges. Here's how it worked: Insurers that were excessively profitable would be required to put some of those excess profits into a fund. In turn, insurers that were losing excessive amounts of money because they priced their premiums too low would be able to request funds from this risk corridor in order to stay afloat. In effect, the risk corridor was designed to promote competition, especially among new insurers in the individual market, and give insurance companies a year or two to find the sweet spot when it came to pricing their premiums.
Unfortunately, the risk corridor ran into plenty of issues. Just $362 million wound up being added because most insurance companies weren't overly profitable. In contrast, insurers wound up requesting $2.87 billion from the risk corridor to cover big losses. With only 12.6% of requested funds being paid out, many smaller insurers were forced to close up shop, including 16 of Obamacare's 23 approved healthcare cooperatives, or co-ops. Co-ops are run by the people, for the people, and they're a nice low-cost alternative to perceived-to-be profit-hungry national insurers. With these low-cost options disappearing at an alarming rate, insurance premiums have begun to adjust higher.
The other risk corridor issue stems from the federal government purportedly changing its stance on funding the risk corridor. In an ongoing suit against the federal government, insurance provider Highmark contends that the federal government initially offered to fund the risk corridor even if excess profits from insurers didn't meet loss request demands. The government supposedly changed its stance on this point, and instead ran the risk corridor as a budget-neutral program, meaning the only money paid out is what was collected from overly profitable insurers.
Long story short, the failure of the risk corridor decimated the low-cost co-ops and discouraged new entrants into the individual market.
4. There are fewer choices among insurers
The final reason your premiums are soaring relates to a declining number of insurer options to choose from. As noted above, the failure of the risk corridor has eliminated more than two-thirds of the available healthcare cooperatives, and there may be more failures to come. But it's not just low-cost options that are bowing out.
UnitedHealth Group (UNH 0.14%) announced earlier this year that it could lose up to $500 million from its Obamacare plans in 2016. This comes after more than $400 million in losses from its Obamacare plans in 2015. Finding Obamacare to be more trouble than it's worth, UnitedHealth is departing from 31 of the 34 marketplace exchanges in 2017. Obamacare only accounts for a small single-digit percentage of annual revenue for UnitedHealth, but leaving the exchanges should have a positive impact on its margins. Of course, it'll also leave hundreds of thousands of people on the hunt for a new health plan in 2017.
Humana is following a similar path. The national insurer recently announced that it would be reducing its individual coverage from 19 states to just 11, at most, in 2017. But this superficial figure doesn't tell the real story. In terms of counties, Humana is scaling back from offering coverage in 1,351 counties in 2015 to just 156 in 2017. That's a nearly 90% decline, and it's all on account of Humana dealing with excessive losses tied to Obamacare.
Just last week Aetna (AET) also went on the offensive following word that U.S. regulators plan to fight its attempted takeover of Humana. Originally, Aetna planned to expand its Obamacare offerings. That was assuming its merger with Humana went through, and the new entity took advantage of substantial cost synergies. With that merger possibly not happening, Aetna's new stance is to hold off on expanding, or potentially even cut its offerings.
The end result is this: competition is decreasing, which is bad news for the consumer, and insurers are losing money and needing to hike premiums in order to offer a sustainable product over the long-term.
Most states are still negotiating with the initial rate requests for 2017 in the hope of pushing them lower and making healthcare insurance more affordable. However, if I were a betting man, I'd suggest there's a better than 50-50 shot that we're going to witness Obamacare premium inflation top 10% as an average across the country in 2017.