Nearly one week ago, marketplace exchanges around the country opened for business for a third time under the Affordable Care Act.
Big changes for Obamacare in 2016
The Congressional Budget Office expects Obamacare's third enrollment period to yield a total of 10 million enrollees. This figure is a 2016 year-end estimate, and it factors in attrition rates due to consumers failing to make their premium payments and/or dropping out sometime between the end of the open enrollment period on Jan. 31, 2016, and the end of the year, Dec. 31, 2016. Overall, it would represent a 10% improvement in total enrollment over the 9.1 million the CBO projected by the end of 2015.
But Obamacare enrollees this year are in for quite a few surprises, the first of which is an earlier open enrollment start time. Last year's elections were considered too much of a distraction, thus the delayed Nov. 15, 2014, kickoff to open enrollment. This year, open enrollment begins and ends 15 days sooner (Nov. 1, 2015 through Jan. 31, 2016). Consumers who purchase health plans through their employer may also notice some changes as the employer mandate goes into full effect for businesses with 50 or more full-time equivalent employees. And, of course, the cost of choosing to remain uninsured will become even more expensive, with individual mandate non-compliance penalties rising once again.
However, the biggest change, and the one that will likely strike a chord with select consumers, is the biggest jump in premium inflation that we've witnessed this decade.
Is Obamacare's affordability in question?
For millions of Obamacare enrollees, premium price hikes will be mostly negligible. The reason is that somewhere in the neighborhood of 85% of enrollees typically qualify for some form of subsidy. Based on the 2015 federal poverty level (FPL), consumers earning between 100% of 400% of FPL can qualify for Advanced Premium Tax Credits to help offset the cost of their monthly premium payments. Likewise, individuals making between 100% and 250% of FPL may be eligible for cost-sharing reductions that help lower the cost of copays, coinsurance, and deductibles should they need medical care.
Yet, for the millions of consumers who don't qualify for financial assistance, Obamacare isn't looking nearly as affordable as once advertised, especially with significant price hikes going into effect this year.
Based on data from the Department of Health and Human Services, the price of the average silver plan (which are chosen about 60% of the time) around the country is rising by 7.2% in 2016. Compared to premium inflation in the 1970s through the 1990s, this year's increase is still fairly modest, believe it or not.
However, two separate research studies that examined bronze and silver plan prices across the country came to a very different conclusion. According to HealthPocket.com, which examined the more than three dozen states that rely on HealthCare.gov to handle their marketplace exchange, the prices of the cheapest plans on the market (bronze plans), which cover 60% of qualifying medical expenses and also boast the highest deductibles, are slated to rise by 11% in 2016. Bronze plan deductibles are also rising by 11% to an average of $5,731. HealthPocket.com found that silver plans' prices are set to rise nationally by 10%, with average deductibles growing by 6% to $3,117.
A second, similar study was put out by Avalere Health. Based on Avalere's findings, the average cost of a bronze plan in states covered by HealthCare.gov is slated to rise by a whopping 16%! Silver plans, on the other hand, are expected to see a 13% increase in monthly cost. For middle-class consumers without financial assistance, we could be talking about hundreds of extra dollars a year going to pay health premiums.
Of course, it should be noted that price increases varied wildly by state. In Avalere's study, the average lowest bronze premium in Ohio is slated to rise by just 4%. Comparatively, in Alaska, where there are fewer plan operators and access to medical care and equipment may be more remote, average lowest bronze premium costs are rising by a sickening 46% to $809 per month in 2016.
Why Obamacare premiums are soaring in 2016
Truth be told, there's a plethora of reasons why Obamacare premiums are rising so dramatically this year.
To begin with, young adult enrollment doesn't appear to be as strong as insurers would have liked to see. Young adults are less likely to go to the doctor or reach their full deductible limit, meaning they usually help insurers offset the costs of treating elderly and terminally ill patients. For now, it looks as if the penalties associated with individual mandate non-compliance aren't steep enough to encourage young adults to enroll.
Another problem is that there are a lot of novice insurance players that aren't on solid footing yet. Players like Molina Healthcare (NYSE:MOH) and Centene (NYSE:CNC) are new entrants into the individual market as of 2014, and they're still feeling out their cost structure. Likewise, the emergence and failure of a number of cooperatives in various states after just two years could mean wild price fluctuations in premium prices for those markets.
Estimates from the CBO regarding total Obamacare enrollees in 2016 were also way off from the very first estimate years back that suggested Obamacare would enroll 20 million people in 2016. The CBO simply underestimated how many people were already insured through their employer prior to the start of Obamacare. With fewer opportunities for customers floating around, insurers need to boost their pricing to ensure they earn a profit.
Lastly, medical loss ratios for insurers have simply been too high. Under Obamacare, insurers are required to spend a minimum of 80% of their collected premiums on patient care and quality improvements. Doing so, though, hasn't left much of a buffer for some insurers, and it's provided more than enough impetus to boost premium prices in order to remain profitable and provide that buffer.
Insurers walk a tightrope
As we head into the heart of open enrollment season in 2016, it's really anyone's guess as to whether insurers will wind up netting more in profits than in prior years.
On one hand, higher premium prices should, theoretically, allow insurers' medical loss ratios to fall closer to 80% and away from the 92% average that was recently identified by an Urban Institute study. But insurers have to walk a tightrope and ensure they don't scare away members with higher price points. I can only imagine what consumers in Alaska who don't qualify for financial assistance must be thinking right now.
Although investors will want to closely monitor Obamacare enrollment for signs of strength or weakness in insurers, we should continue to keep in mind that insurers generate most of their revenue and income from employer-based plans and government-sponsored care. In other words, we're likely talking about nothing more than a low-single-digit percentage of revenue dependent on Obamacare plans at the moment.