Image source: The White House via Flickr.
Starting tomorrow, the marketplace exchanges for the Affordable Care Act, better known as Obamacare, will open for business, allowing millions of consumers to shop for health insurance within their state for the 2016 calendar year.
One noticeable change headed your way: higher prices
There are a lot of noteworthy changes coming up this year for Obamacare, including a 15-day earlier start time (although the enrollment period is still three months long), the full implementation of the employer mandate as of Jan. 1, 2016, and a dramatic increase in the penalties associated with violating the individual mandate. However, these changes all pale in comparison to the price jumps that quite a few consumers will absorb in the upcoming year.
Following the first two Obamacare enrollment periods, the premium price hikes were very modest and well below the historical average for premium inflation that we've witnessed over the previous five decades. But in 2016, things are changing.
Based on data from the Washington Examiner, 231 insurers requested double-digit percentage premium price hikes for 2016, as opposed to just 121 in 2015. Furthermore, the magnitude of the hikes will be much greater in the upcoming year. A whopping 126 plans aimed for a minimum 20% premium hike, 61 plans attempted to justify a 30% premium boost, 26 policies are targeting a 40% price jump, and a dozen plans actually requested a 50%-plus premium jump for 2016.
All of this spells one thing: potential pain for you, the consumer.
Image source: Flickr user B. Rosen.
The real reasons behind Obamacare's rising premiums
We've heard a lot of plausible reasons why Obamacare premiums could be on the rise in 2016, but when we look past the politics and at the dynamics behind Obamacare, it becomes crystal-clear that three events are leading to the price hikes we'll see in 2016.
1. Medical loss ratios are simply too high
First, as chronicled by the Urban Institute, whose analysis is funded by the Robert Wood Johnson Foundation, medical loss ratios for insurers are on the rise. A medical loss ratio (MLR) is simply the percentage of premium dollars insurers spend on patient care relative to the total premium dollars taken in. An MLR of 100% would imply that all premium dollars flowing in are being spent on patient care. An MLR below 100% represents a profit for insurers, as it indicates they're not spending all of their premiums received on patient care, whereas an MLR above 100% implies a loss for the insurer, which would be spending more on medical care for its members than it brings in through premiums.
In 2010, well before Obamacare was the law of the land, just 21 states had an MLR of 80% or higher. But under Obamacare, insurers are required to spend a minimum of 80% of their individual premium revenue on patient care and quality improvements. By 2014, all 50 states had an MLR of at least 80%, as required by Obamacare. The Urban Institute lists the average MLR of all insurers at 92% in 2014.
Image source: Department of Health and Human Services.
However, 10 states (and Washington D.C.) actually had average MLRs of more than 100% in 2014, meaning insurers in these states, as a whole, were losing money. For the curious, these states are Hawaii, Illinois, Kansas, Massachusetts, Minnesota, Montana, New Mexico, Oklahoma, Oregon, and Pennsylvania.
Running at a loss -- or even near a loss with an average MLR of 92% (which is substantially higher than it was in the pre-Obamacare period) -- gives insurers ample reason to build buffers by hiking their premium prices. It's also a reason why residents in the aforementioned 10 states could witness some of the heftiest price hikes of all in the upcoming year.
2. Not enough young adults are enrolling
The second major problem Obamacare is experiencing is that not enough younger adults are enrolling for health insurance. Young adults are vital to the success of Obamacare because they are healthier and less likely to need expensive medical care. Thus their premium payments help offset the high costs insurers incur when treating older and sicker patients.
Obamacare was designed to appeal to young adults in two primary ways. The first was allowing transparent, easy-to-understand comparisons of health plans in an online setting. The millennial generation is all about convenience, and providing health coverage options that are easier than ever to understand at the click of a button should have attracted this group.
Image source: Flickr user Sebastiaan ter Burg.
However, officials didn't expect the Obamacare rollout in late 2013 to encounter so many technical glitches. Millennials -- and young adults in general -- tend to be turned off when conveniences (i.e., software) aren't working correctly. In other words, Obamacare may have wasted its only opportunity to attract younger adults in late 2013.
The other appeal to young adults is the individual mandate. The mandate essentially requires individuals to purchase health insurance or face a penalty for not buying health insurance. In 2014 the penalty was akin to a slap on the wrist at the greater of $95 or 1% of an individual's modified adjusted gross income (MAGI). In 2016, this figure is jumping to the greater of $695 or 2.5% of MAGI. Even with these inflated penalties, which could very well result in tax penalties of $1,000 or more for some consumers, the cost of purchasing healthcare for a year is often much higher, even when the tax benefits are included.
According to Bloomberg, the average nationwide silver premium in 2015 was $307 per month, or close to $3,700 per year. Given that the individual mandate penalties cost nowhere near the cost of a full-year Obamacare plan, most young adults would prefer to take their chances with the penalty and save their money.
3. The Congressional Budget Office estimates were way off from the start
Finally, the original enrollment estimates from the Congressional Budget Office that forecast how many consumers would ultimately enroll in Obamacare have proven to be widely inaccurate.
Image source: Flickr user Sebastiaan ter Burg.
The latest estimate from the CBO is that 10 million people will be enrolled in Obamacare by the end of 2016, up around 10% from its prediction of 9.1 million enrollees by the end of 2015. However, in its original estimates prior to the launch of the Obamacare exchanges in October 2013, the CBO had predicted that 21 million people would be enrolled in Obamacare. The CBO noted years after its first estimate that its projections of who was uninsured prior to the implementation of Obamacare were simply too high from the start, and it then adjusted them lower.
National insurance providers set their premiums based on the expectation that they would be splitting around 20 million people within the first couple of years. But the CBO's estimate has been more than halved, and many insurers simply aren't seeing the enrollment and profitability boosts they expected based on the premium prices they had set. The only way to make up for the estimate shortfall to is to garner more profits out of existing policies through higher price points.
Although Obamacare has indeed played some role in lowering the uninsured rate and in coercing insurers to spend more of their premium dollars on patient care, it may not ultimately be successful in keeping premium cost inflation down, despite marketplace transparency and increased competition within states.
Insurers generally still maintain strong pricing power for their policies, and they'll do what's necessary to ensure that profits continue to flow to their bottom lines. With the aforementioned flaws currently in place, it's plausible that we could be on the precipice of returning to the higher annual premium inflation norms we witnessed in prior decades. But only time will tell.
