Ready or not, in just a shade over two months enrollment for the Affordable Care Act's fourth year will open. However, the 2017 enrollment season appears to be markedly different from the three preceding years.
The dynamics of Obamacare, as the ACA is more commonly known, have pushed some of the market's largest players to the sidelines. UnitedHealth Group (NYSE:UNH) is reducing its coverage from 34 states in 2016 to just three in 2017, while Humana (NYSE:HUM) and Aetna (NYSE:AET), whose merger was thwarted by federal regulators, are reducing the number of counties they'll be offering coverage in next year by a respective 88% and 69%. The result is the average consumer is likely to have far fewer plan choices in the upcoming year, which is expected to lead to a substantial rise in average premiums.
What's causing insurers to abandon Obamacare?
To begin with, adverse selection is crushing insurers, while at the same time they're struggling to enroll healthier young adults. Adverse selection describes the process by which sicker individuals were among the first to enroll, leaving insurers with a less-than-desirable mix of new patients who are proving quite costly. Remember, prior to Obamacare insurers were allowed to pick and choose their customers and turn away those with pre-existing conditions. That's no longer the case with Obamacare.
On the other hand, younger adults are enrolling in greater numbers, but their overall participation is nowhere near what insurers need. The culprit here may very well be the Shared Responsibility Payment, or SRP. The individual mandate, which is the actionable component of the ACA, states that individuals need to buy health insurance or pay a penalty come tax time. The SRP is the official name of that penalty, and in 2016 it's the greater of $695 or 2.5% of your modified adjusted gross income. The Kaiser Family Foundation predicts 2016's SRP will average $969. The SRP was intended to encourage young adults to enroll, but when full-year premium costs for even the cheapest plans are typically $2,400 or higher, most are choosing the cheaper route of paying the penalty. In other words, insurers are being hindered by adverse selection and low healthy adult enrollment figures.
The failure of the risk corridor is another reason why competition has faltered. The risk corridor was designed to collect money from overly profitable insurers on Obamacare that would be redistributed to those insurers that were losing excessive amounts of money. The idea was to create a sort of risk-pool among insurers to both protect them against adverse selection, as well as from pricing their premiums too low. It was also believed that the added financial protection of the risk corridor would encourage new entrants, thus promoting competition that would keep premium inflation in check.
Unfortunately, the risk corridor was a disaster. There weren't many overly profitable insurers on the ACA, so just 12.6% of the $2.87 billion in requested funds from insurers was paid out. To date, 16 of Obamacare's 23 approved healthcare cooperatives have closed up shop, or announced their intention to close by year's end, further reducing competition.
These approved rate hikes are mostly scary
Altogether, these factors have been a recipe for increased premium prices in 2017. But by how much has been the question. With insurance commissioners in seven states signing off on rate requests, we've got some semblance of an answer -- and hint: it isn't good.
Courtesy of ACASignUps.net, here are the average weighted increases for these seven states thus far. Note, "average weighted" refers to the average percentage increase in 2017 based on all current Obamacare enrollees within a state. Enrollment could obviously go up or down, and consumers could switch plans, which may alter the final average weightings when all is said and done.
- Kentucky: weighted average increase of 24.5%
- Oregon: 23.8%
- New York: 16.6%
- Mississippi: 15.8%
- Arkansas: 9.4%
- Vermont: 7%
- Rhode Island: 1.3%
I know what you're probably thinking, "Let's give the insurers in Rhode Island a round of applause for keeping premium inflation under control!" While Rhode Island definitely stands out as a positive for the program, it also had just 34,670 enrollees in 2016, representing 0.27% of the nearly 12.7 million people who initially enrolled this year. Thus its 1.3% increase is going to have very little weighting on the national average.
On the other end of the spectrum, New York had 271,964 enrollees in 2016, Oregon had 147,109, Mississippi had 108,672, and Kentucky had 93,666. Combined, these four states with approved double-digit percentage rate hikes in 2017 enrolled nearly 5% of the nearly 12.7 million people by the end of 2016's open enrollment period. Therefore, at least in the early going, these states are going to have a larger effect on the average rate request rating.
According to ACASignUps, the weighted average of the seven states that have finalized their rates thus far leads to an increase of about 17%. Mind you, we still have California, Florida, and Texas to come, which had 12.4%, 13.7%, and 10.3% of all respective Obamacare enrollees in 2016. However, insurers in these states are requesting weighted average increases of 13.2%, 17.7%, and 35.1%, respectively.
What you can do to save money on Obamacare
It's looking increasingly likely that Obamacare's 2017 premiums are set to soar at the fastest pace we've witnessed premiums rise in more than a decade. This means you as the consumer needs to do everything in your power to help reduce what you pay for health insurance.
If you're an Obamacare consumer, the smartest thing you can do in the upcoming year is shop around. Far too many people automatically reenroll in their plan from the previous year, and what they may not realize is that the cheapest plan in the prior year may not be the cheapest plan this year. Or, if a consumer's plan is still is the lowest cost, the coverage options may have changed. Consumers need to remain vigilant about comparing plans in their region to ensure they're getting the best value possible.
For people making between 100% and 250% of the federal poverty level, it's extremely important that you consider purchasing a silver-tier plan. What consumers may not realize is that there are two types of subsidies available to low-income consumers. The first you're probably familiar with, the Advanced Premium Tax Credit, or APTC. The APTC is a subsidy available to consumers earning between 100% and 400% of the federal poverty level that helps lower your out-of-pocket monthly premium costs. But, there's a secondary subsidy known as cost-sharing reductions, or CSRs, which are open to individuals and families earning between 100% and 250% of the federal poverty level. CSRs help lower the costs associated with copays, coinsurance, and deductibles. But the only way you can get CSR assistance is by purchasing a silver-tier plan.
Though premiums appear to be on the rise in 2017, keeping just these two things in mind can have a big impact on what you'll pay for access to healthcare next year.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends UnitedHealth Group. 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.