Is ObamaCare Causing Health Insurance Premiums to Rise?

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The full title of the legislation commonly known
as ObamaCare is the Patient Protection and Affordable Care Act.
It’s often described using just the last three words — the
Affordable Care Act — and “affordability” was at the
heart of the White House’s
argument for the law. But so far, there are few signs that
health care will become more affordable as a result of the law.
Indeed, it increasingly looks as if the opposite could be true —
that ObamaCare may be causing higher premiums rather than
preventing them. Over the weekend, The New York Times
published a report noting that health insurers across the
nation are both “seeking and winning double-digit increases in
premiums” — this despite the fact that “one of the biggest
objectives of the Obama administration’s health care law was to
stem the rapid rise in insurance costs for consumers.”The Times reports that health insurers have
successfully raised rates by at least 20 percent in Ohio and
Florida, increases that it says add several hundred dollars to the
monthly cost of insurance. And in California, three insurers have
requested increases of more than 20 percent for individuals who do
not receive employer-sponsored insurance and small businesses. The
story describes those two groups as “particularly vulnerable” to
high rate increases.The Times isn’t the first to report big health
insurance increases coming down the pipeline. Aetna’s CEO
warned last month that small and individual group markets were
likely to increase by an average of 25 to 50 percent, and suggested
that some policyholders might see their rates double.What’s going on? Why are these rates going up?A big chunk of the Times article focuses on the law’s
insurance rate review provision, which gives the federal government
the power to review but not reject health insurance rate
increases.Some state insurance regulators already have the power to reject
rates, however, and the Times suggests that the
double-digit rate increases  “[demonstrate] the striking
difference between places like New York, one of the 37 states where
legislatures have given regulators some authority to deny or roll
back rates deemed excessive, and California, which is among the
states that do not have that ability.”So is the problem that ObamaCare did not grant new powers to
reject rate increases? California health insurance commissioner
Dave Jones offers an explicit endorsement of this theory, saying
that the lack of new authority to reject health insurance rate
increases is a “huge loophole in the Affordable Care Act.”Jones might have
rejected higher rates in California if given the chance, and it’s
true that some states, Massachusetts in particular, have used their
rate authority aggressively. But the power to reject rates has not
always stopped double digit increases in other states. In fact,
according to a 2011
Congressional Research Service report on health insurance rate
review policies in the states, both Ohio and Florida have “prior
approval” requirements in place in their individual, small, and
large group markets. In contrast to California’s “file and use”
rules, which allow regulators limited power to disapprove a filing
if an insurer is found to not be in compliance with some other
regulation, prior approval rules mean that “insurance companies
must file proposed rate changes and the state has the authority to
approve, disapprove or modify the request.” And yet according to
the Times, both states have seen premium increases in
excess of 20 percent.Perhaps there’s another explanation? For example: Might
ObamaCare’s new rules and regulations being playing some role in
the increases? There’s good reason to think the law itself is at
least partially responsible.It’s seems likely, for example, that ObamaCare’s new coverage
mandates have contributed to some of the increase in the individual
market: Consulting firm Aon Hewitt
estimates that those premiums have gone up about 5 percent as a
result of the law.That explains some of the increase. But not all of it. Which is
why those looking for another culprit should consider the
possibility that a provision intended to help consumers get better
value for their money is actually costing them higher premiums.That provision, often referred to as the 80/20 rule, sets
mandatory medical loss ratios (MLRs) for health insurers. The MLR
is an accounting requirement which says that insurers have to spend
at least 80 percent of their total premium revenue on medical
expenses, leaving just 20 percent for administrative costs,
marketing, and other non-medical expenditures. Any insurer that
fails to meet this target must issue rebates to customers. This
year, insurers
rebated about $1 billion.The MLR provision creates two incentives for insurers to jack up
health insurance premiums. One is the plain fact that with profit
and administrative costs capped as a percentage of premium revenue,
the easiest way to generate larger profits is to charge higher
premiums.The other is that the rebate requirement means insurers may need
to charge higher up-front premiums in order to protect themselves
from the risk of a bad year. As Scott Harrington, a professor in
the University of Pennsylvania’s Department of Health
Management, explained
in a November 2012 paper, that’s because health insurance claims —
and thus MLRs — fluctuate significantly between years. Harrington’s
paper, which got funding from a health insurance trade group,
argues that the annual variation, and the resulting uncertainty,
creates a problem for insurers: If claims are low in a given year,
they end up rebating the difference to the customer because of the
MLR rule. If claims are unexpectedly high, however, they end up
eating the difference. Insurers thus have a incentive to protect
themselves by charging high premiums at the outset, and then paying
those premiums back in rebates should claims come in at low or
expected levels.Is the MLR rule causing the higher premium requests? It’s hard
to say with certainty, but it fits the bill in many ways:
Harrington’s analysis suggests that the high up front premiums
should be concentrated in the small-group and individual markets,
which is exactly what the Times reports. No matter what,
it’s clear that ObamaCare isn’t resulting in lower premiums. And
for many people, in the years after the law, premiums aren’t just
going to up up a little. They’re going to rise a lot. 

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Is ObamaCare Causing Health Insurance Premiums to Rise?

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