The Affordable Care Act (ACA), which is more affably known as Obamacare, is arguably the hallmark legislation of former President Barack Obama. While it's been controversial since its passage, and remains so today, it's hit its primary target, which is to reduce the aggregate number of uninsured people in the United States.
Before the implementation of Obamacare, data from the Centers for Disease Control and Prevention showed that the uninsured rate was around 16%. Following its implementation, the uninsured dipped to right around 9%. This dramatic cut in the uninsured rate was credited to subsidies that allowed low-income individuals and families the opportunity to afford health insurance, as well as the individual and employer mandates that gave consumers and companies incentive to purchase health insurance, or offer health insurance options to employees.
Image source: Obama White House via Flickr.
Obamacare premiums are set to skyrocket in 2018 -- here's why
But as we know, Obamacare hasn't been perfect. In fact, most consumers are laser-focused on the ACA's premiums, which have been rising at a seemingly pace with each passing year. According to a preliminary analysis from healthcare consulting firm Avalere, silver-tier premiums are expected to rise by an estimated 18% in 2018, up from a 12% increase in 2017. Silver plans are the most popular type of Obamacare plan, accounting for around 60% of plans purchased in a given year. If you're a subsidized consumer or family, you probably won't feel too much of a sting from an 18% increase. However, middle-class consumers who don't qualify for subsidies could be in for a major sticker shock.
Why are Obamacare premium increases suddenly going parabolic? Three front-and-center factors look to be to blame.
1. A possible end to cost-sharing reductions
The first concern for health insurers is there's a gigantic gray cloud overhanging one of the two critical subsidies for low-income households. Cost-sharing reductions (CSRs) are given to qualifying individuals and families earning between 100% and 250% of the federal poverty level. These subsidies are what help lower the cost of copays, coinsurance, and deductibles associated with going to the doctor or receiving medical care. Put plainly, some 7 million people would probably not be able to afford heading to the doctor without CSRs.
Back in 2014, the Republican-controlled House sued Sylvia Burwell, who at the time was the Secretary of Health and Human Services (HHS). The reason for the lawsuit was the alleged improper appropriation of CSR funds. The lawsuit argues that only Congress has the authority to appropriate funding for CSRs, which totals around $9 billion to $11 billion annually, but that it hadn't been apportioning this funding.
Image source: U.S. Department of Homeland Security via Flickr.
In 2016, District of Columbia Judge Rosemary Collyer ruled in favor of the Republicans, but immediately stayed her order with the expectation that the Obama administration would appeal, which it did. That appeal continues to this date, although President Trump has appointed a new Secretary of the HHS, leaving the GOP to essentially continue a lawsuit against itself. President Trump has argued that he would use CSRs as a bargaining chip to get an Obamacare repeal passed in Congress. All Trump would have to do is drop the appeal of Collyer's verdict, and CSR funding would cease.
Health insurers, not knowing what'll happen to this lower-margin but guaranteed income source known as CSRs, have been raising premiums to account for this uncertainty. Presumably, higher premiums will take into account those who receive care but are unable to pay their fair share of costs.
2. Insufficient young adult enrollment via weak SRP guidelines
A second reason Obamacare enrollees should expect to see their premiums skyrocketing in 2018 is that the Shared Responsibility Payment (SRP) isn't working.
The SRP is the penalty individuals are supposed to pay for not purchasing health insurance. It's the financial incentive that's designed to give holdouts a forceful nudge into buying insurance. However, there's a very wide gap between the actual cost of the penalty for not buying health insurance, and the average premium cost for a full year of coverage.
Image source: Getty Images.
The Kaiser Family Foundation estimated that the average household SRP for not purchasing health insurance in 2016 would be $969. For added context, the SRP in 2016 was the greater of $695 or 2.5% of modified adjusted gross income. Comparatively, HealthPocket notes that in 2017, the average unsubsidized bronze-tier premium, the cheapest tier of plans, cost a little more than $3,700 annually ($311 a month). Do the math: $969 versus $3,700. Of course healthy people are going to stay on the sidelines, because they'll save about $2,700.
The reason this is such a big deal is that the SRP was designed to coerce healthy young adults to enroll. Healthy adults visit the doctor less, meaning their premium dollars are crucial to offsetting the higher costs of treating sicker patients. This last point is of particular importance, since Obamacare opened the gates and denied insurers the ability to turn away members with pre-existing conditions. In other words, insurers have been saddled with an influx of sicker patients, while the addition of healthy patients has been tepid, at best.
Insurers need to ensure that they can continue to operate profitability, and one way to do so with an unfavorable mix of patents is to increase premium prices.
3. An insurer exodus
The final factor sort of builds on the first two issues: Insurers aren't sticking around to see what happens.
This year, UnitedHealth Group (UNH +0.94%), the largest insurer in the country, slashed its coverage down to just three states from the 34 it had been operating in back in 2016. Similarly, Aetna (AET +0.00%) and Humana (HUM +2.84%), which regulators denied the right to merge, chose to cut their county-based coverage by almost 70% and nearly 90%, respectively, in 2017. Those cuts are expected to steepen as we head into 2018.
Image source: Getty Images.
Back in mid-February, Humana announced that it would be pulling out of Obamacare's marketplace exchanges altogether in 2018, with Aetna following suit in May. Anthem (ANTM +1.53%), which is the second largest national insurer behind UnitedHealth Group, and a company that was expected to benefit greatly from the expansion of Medicaid, has announced that it'll also be pulling out of a number of markets next year.
In addition, the failure of the risk corridor -- a fund designed to prop up money-losing insurers that priced their premiums too low -- wound up forcing the closure of most of Obamacare's 23 approved healthcare cooperatives. That means a lack of low-cost premium options for consumers.
Add this together, and we have what looks to be an environment with minimal competition, and therefore strong pricing power for those that remain. Avalere has estimated that 41% of all U.S. counties next year will have just one insurer offering plans. That's a recipe for high premiums.
With President Trump eager to see Obamacare repealed and replaced, it's unclear what the long-term holds for the program. However, the near-term dynamics pretty clearly suggest that marketplace customers are going to have to spend a lot more for coverage in the coming year.
