Editor's note: A previous version of this article appeared incorrectly citing rate increase requests for Blue Cross of Idaho. The author and The Motley Fool regret the error.
No one is a fan of a steep recession, because -- among other things -- it often means little to no wage growth, job losses, and tightened spending habits. But if there's one "good" that often comes out of a recession, it's the pressure that's put on the prices of goods and services.
In typical supply and demand models, higher demand yields a higher price. During a recession, as you'd expect, demand for many items drops, and prices or price increases are much tamer. Since the Great Recession, premium increases for health insurance, for example, have been rising at a slower pace than at any time over the past five decades.
The other thing that may be playing a role (although it's frankly too early to tell) is the Patient Protection and Affordable Care Act, or PPACA. Perhaps known better by its shorthand, Obamacare, this law was designed to lower the rate of uninsured people in the U.S. by creating a mandate requiring Americans to purchase health insurance, and by removing the criteria by which insurers could reject consumers -- such as preexisting conditions. Additionally, the creation of a transparent marketplace exchange where health plans in each state could be compared on as level a playing field as possible was implemented to help rein in long-term costs.
However, it appears that external forces could come into play in 2016 that could push what you pay per month for insurance higher by 10% or more.
Could your premium increase by 10% or more?
Earlier this past week the Obama administration released its first glimpse of the plans (and insurers behind them) that are seeking a minimum 10% increase in 2016. Under Obamacare, any proposed premium rate increase of 10% or more has to be justified by the insurance company. Often, because rate proposals need to be submitted to each individual state's Office of the Insurance Commissioner, the final rate is lower than the proposal since the insurer and the Insurance Commissioner's office meet in the middle.
While there isn't a way to view aggregate nationwide increases yet, and these are just a representation of the highest increases Americans can expect, there are nonetheless some hefty increases projected in some large states.
My home state of Washington has 26 plans requesting increases of 10% or more. Two of these plans were already reviewed, and a 19.9% increase was accepted.
In Texas, 22 health insurance plans are seeking increases of greater than 10%, including Time Insurance Company, a subsidiary of Assurant (NYSE: AIZ). Time is asking for increases ranging from 47.5% to as high as 64.8% for its individual plans, which is enough to put a dent in most consumers' budgets.
Pennsylvania currently has 51 requests to boost premium plans by 10% or more in 2016. It probably shouldn't come as a surprise, but Assurant's Time Insurance Co. is again the high-water mark, with requests for an increase of 61% from its 2015 rate for select plans.
Last year was Assurant's first foray into the individual markets after sitting out the initial Obamacare rollout, and the fairly obvious lesson to take from its price hike requests is that it didn't have a very good bead on what type of demographic it expected to sign up in 2015. Looking at all 50 states, Assurant's Time Insurance Co. led in requesting the largest premium hike in a number of states.
Why are premium prices expected to soar?
One of the most common reasons you'll see insurance companies requesting premium rate hikes in 2016 is the rise of expensive targeted therapies and specialty medicines.
Gilead Sciences' (NASDAQ: GILD) Harvoni, for example, provides a functional cure for genotype 1 hepatitis C -- a disease that affects an estimated 180 million people worldwide per the World Health Organization. Genotype 1 comprises about 70% of all cases. Harvoni may be convenient and a major step forward in both quality of care and efficacy, but it also costs $1,125 wholesale per once-daily pill for what's often a 12-week treatment course. That works out to $94,500 out of pocket for insurers and/or consumers for a typical course of treatment. Gilead has struck a handful of long-term supply deals recently that resulted in substantial discounts for the pharmacy-benefit managers and insurers involved, but the growing focus on targeted and specialized therapies could make it tough for insurers to control rate hikes moving forward.
Another big issue is whether the law's individual mandate is really doing the trick.
The mandate, in summary, requires consumers to purchase health insurance or face a penalty on their taxes. In 2014 the penalty was the greater of $95 or 1% of your annual modified adjusted gross income. In 2015 the penalty jumps to the greater of $325 or 2% of your modified AGI, and in 2016 it'll hit the greater of $695 or 2.5% of modified AGI.
In 2014, based on data from H&R Block, the average penalty was just $178. By comparison, the average bronze level plan across the country ran $307 in 2015. Comparing the two -- nearly $3,700 in premium costs, not including deductibles, versus a few hundred dollars in penalties -- demonstrates why young adults who are desperately needed to help offset the costs of sicker enrollees are probably not signing up as quickly as anticipated.
Things to keep in mind
Though it would appear that insurers have reasonable justifications for increasing their costs at a more sizable rate than in 2014 or 2015, there are some questions left to be answered.
For starters, as was mentioned above, insurers will have to justify their increases before their rate hikes are approved. In some instances, insurers' exorbitant requests will be merited; however, the prior two years of rate negotiations have demonstrated that this is rarely the case, and the final rate request is often lower than the initial proposed increase.
Also, consider that the release of data from the Obama administration doesn't include single-digit rate hikes or declines. This was merely a list of the double-digit premium increases and decreases on a state-by-state basis. Releasing the data this way can dramatize things a bit and make these increases appear worse than they really are.
According to Forbes, which interviewed a number of analysts, a high-single-digit increase is the most likely scenario across the nation in 2016. While that might seem unpleasant, this isn't out of line with the historical norm when it comes to health plan premium increases.
Whether a high-single-digit price hike is going to lead to better profitability for insurers and investors in the healthcare sector is a completely different story -- and one that'll definitely have to wait to be answered until King vs. Burwell is decided by the Supreme Court later this month.