The Affordable Care Act, or Obamacare, has significantly reduced the percentage of people living in America without health insurance, but the cost to insure the uninsured is about to get a lot more expensive next year, especially in Tennessee, Oklahoma, Montana, Colorado, and Hawaii. Insurance premiums in those states are expected to increase at a rate that is more than three times the average 10% increase nationwide.
Insurers adjust their models
As we enter the third year of Obamacare's marketplaces, there's no debate that healthcare reform has been a big win for the nation's health insurers.
Despite worries to the contrary, opening up the marketplace to low income and difficult to insure Americans has swelled insurer sales and increased their profit.
For example, revenue at UnitedHealth Group (NYSE:UNH), the largest U.S. health insurer, soared by 27% year over year to $41.5 billion and sales at Anthem (NYSE:ANTM), the second largest insurer, increased by 7.6% to $19.8 billion in the third quarter alone.
Meanwhile, net income increased by $100 million at UnitedHealth Group and by $30 million at Anthem in the quarter versus a year ago.
Net income is, however, growing at a much slower clip than revenue because the margin insurers earn on exchange plans is lower than the margin they earn on other plans, such as employer-based health insurance.
There are multiple reasons why exchange plans are less profitable than nonexchange plans, but one big reason is that insurers had to guess how many older, less-healthy people and younger, healthier people, would sign up for their plans.
Insurers also likely erred on the side of caution when pricing their plans in order to capture market share.
However, now that insurers can more accurately refine their models based on their real-world experience over the past two years, they're beginning to right-size premiums to bring margins back in line with other markets.
According to Kaiser Family Foundation, monthly health insurance premiums will increase the cost of the second-cheapest silver-level plan by 10.1% in 2016; a significant increase given that overall inflation in the U.S. was nonexistent in the year ending this past September.
States hardest hit
Among residents that will be hit hardest by insurers' rising premium prices next year are those who are living in the Western United States.
Health insurance plan premiums on the second-lowest priced silver medal plan will increase by 33.6% in Montana, 32.2% in Colorado, and 31% in Hawaii.
Also affected will be people living in Tennessee, where premiums on plans will climb 38.4%, and Oklahoma, where prices will grow by 34.7%.
Surging monthly premiums won't affect everyone equally because federal subsidies that reduce the out-of-pocket cost for people earning between 100% and 400% of the federal poverty level remain in place.
According to Kaiser's researchers, after factoring in the net benefit of federal subsidies, the amount paid by people receiving subsidies will actually fall by between 1% and 2% in three of these five states. Residents receiving subsidies in Tennessee and Hawaii will pay an increase of 1.5% and 1.7%, respectively.
That means that its higher-income earners, such as those who are self-employed, who live in those states and rely on the marketplaces for their health insurance will really feel the pinch next year.