How many Americans will pay higher insurance premiums as a result of Obamacare?
That's the question posed by Congress to the Centers for Medicare and Medicaid Services, or CMS. More specifically, Congress required the Chief Actuary of CMS to give an estimated count of the number of Americans who will pay more, and how many will pay less as a result of three sections of the Public Health Service Act that were amended by the Affordable Care Act, commonly known as Obamacare. And now the numbers are in.
11 million examples of paying more
Actuaries with the government agency estimate that around 11 million individuals will pay higher rates because of the health reform law's impact. Six million Americans will pay less as a result of Obamacare.
CMS focused only on the small employer market. That's because the specific sections it was required to research didn't have a big impact on rates paid by employees of larger organizations. Also, the directive from Congress didn't require CMS to evaluate several significant components of Obamacare, including extension of dependent coverage to age 26, the individual mandate, and the employer mandate.
The actuaries found that nearly two-thirds of employees of organizations with 50 or fewer workers will experience insurance premium increases. Their report stated that there was "considerable uncertainty" whether many small employers will opt to eliminate offering health insurance altogether.
What's behind the rate increase for millions of workers? CMS says it's because they paid less than average prior to implementation of Obamacare. The underlying premise is that small organizations with healthier workers were more likely to offer health insurance in the first place -- and enjoyed lower premiums below the average of the broader market.
With Obamacare, though, insurance companies are restricted on how premiums are set. For example, premiums for an older individual can't be more than three times greater than those for a younger person. Premiums for smokers can't be more than 1.5 times higher than for non-smokers. Rates also can't differ because of gender. These and other components in the health reform legislation contribute to potential premium hikes for many -- but they also lower the amounts paid by some.
No estimates were provided as to how large the rate increases could be. However, a study by actuaries with Oliver Wyman used a database with insurance claims from over 6 million people to project average national premium hikes for small employers of 20%.
Two examples for making more
If you're an investor, though, there could be a way to make money from this trend. Actually, there are at least a couple of examples of how it could be done.
Many individuals will probably choose insurance plans with higher deductibles and health savings accounts, or HSAs, to lower their overall costs. This approach provides ample financial incentives for people to take more ownership of their health spending.
One way this increased ownership could manifest itself is through more personal research about ailments before seeking professional medical care. WebMD (WBMD) stands out as a prime beneficiary from this potential scenario. The company is the leading provider of online health content. It has also mounted a nice turnaround since early last year after battling sluggish advertising spending by customers in 2012.
Despite a little softness in the first quarter of 2013, I think WebMD should still be a smart long-term pick. It continues to rank first among online health information sources and is experiencing strong growth from mobile device access. If increasing numbers of Americans look online for medical information to make better choices on health spending, as I suspect they will, WebMD wins.
Pharmacy benefits managers, or PBMs, could present a second way to potentially profit from the move to HSAs and plans with higher deductibles. PBMs' earnings increase when individuals choose lower-cost drugs, especially generics, and when they adhere to prescribed schedules instead of wasting medications. If you're having to pay more out of your pocket up front for prescription drugs (as you would with an HSA plan), these are exactly the types of things you would want to do.
The biggest PBM in the nation, Express Scripts (ESRX), should reap rewards if this scenario plays out. Express Scripts disappointed some investors by reporting earnings last week that met analysts' expectations but also announced declining year-over-year revenue.
That decline doesn't worry me, though. A big factor muddying Express Scripts' numbers of late has been the transition of UnitedHealth Group (UNH -0.36%) to its own OptumRx PBM. Take away the UnitedHealth numbers, and Express Scripts sports some pretty nice growth. The company thinks it will grow earnings by 10% to 20% annually over the next few years.
Millions of Americans will pay more for health insurance under Obamacare if the CMS actuaries are right. They'll pay a lot more if the Oliver Wyman actuaries are right. But smart investors could do well if the reasoning given above is right. And it doesn't require any expertise in math.