It seems that no sooner did we close the chapter on the first year of enrollment in the Affordable Care Act, which is more commonly known as Obamacare, that it's time to turn to the next chapter which includes insurers preparing their premium proposals to their individual states' Office of the Insurance Commissioner.
Source: StockMonkeys.com, Flickr.
In the very early going we've received some interesting surprises as they relates to 2015's insurance premium proposals. In my home state of Washington, Molina Healthcare announced a proposal that would see its members' premiums fall by nearly 7% in 2015. Similarly, in Connecticut Healthy CT proposed dropping rates for its average plan by nearly 9%, with the premium for one of its plans falling by as much as 21%.
While a pleasant surprise for consumers, for both Molina and Healthy CT this past year represented their first foray into the individual health insurance market, so there's an accelerated learning curve that they're quickly having to adjust to. Even larger insurers are dealing with many unknowns as a number of factors that help to determine policy pricing are still playing out.
In addition to a handful of lower premium requests, we're also seeing a number of insurers dipping their toes into different states. Honestly, I was disappointed by UnitedHealth Group's (UNH +1.07%) decision to pull out of a number of large-state individual exchanges last year as it preferred to stick to the sidelines and assess consumers' reactions to the ACA. With a year of data now under its belt UnitedHealth appears ready to make its move into unchartered waters.
Source: Vic, Flickr.
Thus far, UnitedHealth has already filed to enter Washington and Connecticut, and I would assume more states will be on the way. This is important as transparent competition among insurers for citizens is one of the primary allures of the ACA in that it should help make health insurance plans cost-competitive. In other words, more competition is better for the consumer.
Of course, no one really expected that health care premiums were going to go down when the ACA was implemented. Instead, the primary goal of the ACA was to help spread the rising costs of pharmaceutical products and hospital care across as many people as possible to help control medical price inflation.
In 2015, however, it's a highly unexpected cost that has largely flown under the radar which could be responsible for an increase in your health plan premium.
The unexpected reason your premium may rise
According to a report this past week from Modern Healthcare, many state-run health exchanges get to turn their attention this year away from building their exchange to how they plan to fund their exchange.
Out of the 50 states, 16 received in excess of $100 million last year to help pay for costs associated with building their health exchange, with $4.7 billion in cumulative federal funds being doled out based on figures from the Kaiser Family Foundation. This year, though, state-run exchanges are on their own as to how they plan to fund their operations, leaving regulators the unwelcome task of figuring out how to raise millions in funds.
Source: White House on Flickr.
Rhode Island, for example, only used $54 million of its federal funds last year and still has $86 million left over since its exchange operated with minimal issues, so funding its exchange isn't a big concern at the moment. However, a number of other states that built their own exchange aren't as lucky.
Minnesota's state-run exchange, for instance, racked up $127 million in costs to build and maintain last year, of which 98% of its total costs were covered by federal grants. In 2015, Minnesota's exchange is expected to cost around $40 million to maintain. But, only $5 million of its funding will come from federal grants with another $22.2 million from Medicaid funding. This means the state has to figure out a way to come up with the additional $11.7 million shortfall. Minnesota's answer was to raise the premium tax on plans sold through its exchange from 1.5% to the state mandated maximum of 3.5%, meaning potentially higher insurance plan prices if insurers pass along these fees.
In perhaps an even more drastic measure to raise funds, Colorado announced a $1.25 per member fee on individual and small-group health plans whether or not the plan was purchased through the state's exchange! On top of this, Colorado also imposed a 1.4% fee on premiums paid for through the state's exchange in order to narrow its exchanges' funding gap.
Insurers' dilemma
As if life wasn't hard enough for insurers in regard to dealing with constant public backlash over policy pricing while also trying to keep their plans compliant with the beefed up regulations of Obamacare, they'll now have to decide whether or not they want to eat what could be millions in tax hikes related to funding the health exchange in the state they're operating in, or if they'll ultimately boost their prices and pass along these tax hikes to consumers.
Obviously, this is a tricky scenario.
Source: Ano Lobb, Flickr.
By eating a few million in higher tax costs larger insurers may be able to narrow the pricing gap with smaller insurers who choose to pass along the tax hikes to their members. Narrowing that price gap could allow these national insurers to use their brand-name power to lure in new members, which would more than offset absorbing a state-imposed premium fee. This could be a path that WellPoint (WLP 0.56%) could choose in Colorado. With Colorado implementing two separate fees to collect funds for its state exchange that it anticipates will cost $66 million to operate next year, WellPoint, which is already profitable from its Obamacare enrollees, could choose to eat this fee and attempt to undercut competitors offering similar plans. Such a move could result in WellPoint adding more members than other insurers in this state and positively impacting its bottom line over the long run.
Conversely, an insurer that's already losing money from the ACA may be less willing to absorb these fees and could choose to pass them along to consumers in the form of higher premium costs. Take CIGNA (CI +0.00%), which in late April had its CEO tell investors that it expects to lose money on its Obamacare plans this year, even with enrollment figures for 2014 surpassing expectations from the Department of Health and Human Services by 1.1 million people. As CIGNA notes, younger enrollees have only recently begun paying their premiums, but their medical utilization rates (i.e., how often they'll need medical care, go to the doctor, and so on) are yet to be determined. Ultimately, this could push a company like CIGNA to raise its premiums, which may only prolong Obamacare-related losses if its peers choose to absorb these costs.
Only time will tell
With Oregon and Nevada joining the ranks of the federal exchanges this coming year, higher costs associated with running a state-run exchange could affect consumers in about a dozen states, including California, New York, Minnesota, Washington, and Colorado, just to name a few populous states. What remains to be seen is how insurers will react to a number of these states imposing fees on a percentage of premiums collected. There are clear advantages and disadvantages to either route that insurers take, but the financial impact on consumers and insurers is certainly bound to turn heads no matter what insurers decide to do.
