It's been a little over a year since the Patient Protection and Affordable Care Act was officially implemented and U.S. citizens were required to purchase health insurance or face a penalty come tax time.
Obamacare's two main goals
The goals of this healthcare reform law, which you probably know better as Obamacare, are twofold. First, it's designed to encourage people to enroll for health insurance and lower the number of uninsured people in the United States. Uninsured people are a strain on the healthcare system, from hospitals to insurers, so getting more people involved helps spread the cost of medical care across a greater percentage of the population. That leads to the second point: controlling medical cost inflation. Obamacare is designed to help increase competition among insurers by making the process of shopping for health insurance more transparent.
Through two full enrollment periods Obamacare appears to be decisively taking care of the first point. Nearly 12 million people enrolled through a state-run exchange or Healthcare.gov for the 2015 calendar year, well ahead of tempered Department of Health and Human Services estimates of 9.1 million by year's end. Even with some expected attrition throughout the year from non-payees, Obamacare will have notably lowered the uninsured rate in the U.S.
The second point, though, leaves much to be desired still. Although healthcare premiums have been rising at a slower rate over the past five years than at any time over the previous five decades, this has more to do with pricing pressure caused by the Great Recession than Obamacare making the health insurance process more transparent.
Five reasons your health insurance premium may be on the rise
In actuality, it looks as if health insurance premiums could potentially be in for a healthy price hike in 2016. Here are five reasons why.
1. Targeted therapies are pressuring insurers
To begin with, a new trend in targeted therapies, known also as personalized medicine, is hurting insurers. Instead of focusing on one-size-fits-all therapies for chronic diseases, biopharmaceutical companies are aiming their research and development dollars at rare diseases and/or lesser-common diseases that have specific genetic markers.
There are two reasons drug developers have recently seized the opportunity to focus on targeted therapies. First, there's little competition among rare diseases and gene-targeted therapies. Secondly, it allows these drug developers to set astronomical price tags on these drugs in order to ensure they recoup their development costs -- and not just for the approved drug, but for other clinical and preclinical therapies that didn't make the grade.
For example, recently approved PD-1 checkpoint inhibitors Opdivo from Bristol-Myers Squibb and Keytruda from Merck both work to enhance the immune systems' ability to recognize and attack cancer cells, which often go undetected. However, both drugs come with an annual wholesale cost of $143,000 and $150,000, respectively. Admittedly, insurers are possibly getting some discount from these levels, but it's still difficult for insurers to support paying these targeted therapy costs profitably, so they may choose to boost premium pricing across the board.
2. The individual mandate penalty isn't encouraging enough people to enroll
The primary purpose of the individual mandate, the actionable component of the PPACA, is to encourage healthy young adults (whose premium payments are direly needed for Obamacare to work) to enroll. Having these individuals sitting on the sidelines, especially when they're less likely to go to the doctor anyway, isn't helping insurers spread their medical costs around.
The individual mandate institutes a penalty on U.S. citizens come tax time if they were without health insurance for more than three months during a calendar year. In 2014, this penalty was the greater of $95 or 1% of a taxpayer's modified-adjusted gross income. In 2015, the penalty soared to the greater of $325 or 2% of modified-AGI.
However, based on data from H&R Block, the median penalty during 2014 for those without insurance was just $178. This works out to less than one month's payment if an individual had purchased the lowest level of insurance on an Obamacare exchange, known as a bronze plan. In other words, unless the penalty for not having insurance approaches the cost of purchasing insurance for the full year, it's cheaper for non-purchasers to continue to simply pay the penalty.
Not to mention, the IRS' hands are tied when it comes to penalty collection. The IRS can't garnish wages or seize property, thus its only means to get you to pay is to take money out of your refund if you're owed one, or to ask nicely.
3. Risk corridor funding gaps are hurting insurers
According to a recent report from Standard & Poor's, and as reported by FierceHealthPayer, the risk corridor payments designed to protect insurers who simply aren't doing as well as others may wind up hurting rather than helping insurers.
The risk corridor is a program put in place to collect funds from some of Obamacare's best-performing insurers and funnel it to insurers who are losing significant amounts of money on enrollments. If you're wondering how an insurer can lose money after more than 11 million people enrolled over the past two enrollment periods, it pretty much comes down to the makeup of their new members. Too many sick enrollees and the scales tips toward higher medical costs and losses for the insurer. With a new state-level adjustment risk added last year by the Department of Health and Human Services, the risk corridors budget is now neutral, and many insurers who are due payments from the program aren't collecting or getting paid.
More than half of insurers included in S&P's report neither made a payment to the risk corridor program nor received one. Some insurers didn't even post receivable payments on their financial statements because they frankly don't expect to be able to collect money from the program.
It's believed that struggling insurers that aren't receiving these payments, especially smaller insurers, could be forced to propose hefty premium increases just to make up the difference.
4. Insurers still maintain some degree of pricing power
Fourth, it's important to realize that despite becoming part of a transparent marketplace exchange, insurers still maintain some degree of power when it comes to setting the pricing of their plans.
Prior to Obamacare, the checks and balances on premium increases simply weren't there. It wasn't uncommon for insurers to hit consumers with a double-digit percentage increase in their health insurance premium rates within a state or region if its costs were higher than expected.
Under Obamacare, insurers are required to submit their premium rate proposals to their states' Office of the Insurance Commissioner for review. From there some "bargaining" between both sides ensues and a rate is often set that's between what the Office of the Insurance Commissioner would like, and what the insurer would prefer.
But, insurers still control what states they operate in, thus they maintain the upper hand on overall insurance plan "supply." In states where there is little competition among insurers, it's not out of the question that insurers could propose hefty increases, even with the new Obamacare checks and balances in place. While insurers may have given up some of their power when transitioning to Obamacare, they are far from helpless. Expect them to use their clout to help health insurance rates move higher in 2016.
5. Inflation is taking its toll
Finally, don't forget that inflation plays a role too. Regardless of targeted therapies increasing insurers' medical costs, the average cost of most healthcare goods is on the rise -- be it expensive diagnostic services or the needles used in IVs.
Generally speaking, as long as the Consumer Price Index, one of the more common gauges of inflation, is rising, there's a good chance that health insurance premiums will need to rise as well, at least to match inflation. If there's one piece of solace that readers can take here, it's that overall inflation levels have been pacing well below their historic average since the Great Recession.
Keep your eyes peeled
Consumers will also want to keep their eyes peeled for the upcoming King vs. Burwell ruling from the Supreme Court next month, which could have a definitive effect on premium pricing in 2016. Obviously we'll have to watch and wait to see whether prices do indeed rise in 2016 -- insurers just submitted their 2016 pricing this past week -- but my personal belief is we can expect a noticeable uptick in health insurance premiums in 2016, so prepare accordingly.