Obamacare May Be Getting More Expensive, But It's Still Cheaper Than Predicted

Premiums remain below what the forecasters thought they would be.

Premiums for Obamacare insurance are rising more quickly this year than they have in the past. But, on average, the coverage remains cheaper than what the government’s own forecaster had predicted it would be by this point.

That’s the conclusion of two new independent reports, by scholars at the Brookings Institution and at the Henry J. Kaiser Family Foundation. The finding is likely to surprise people who have read all the headlines about skyrocketing premiums in the Affordable Care Act’s exchanges, to say nothing of those consumers who are weighing whether to pay the higher prices next year or to seek out cheaper alternatives for coverage.

But the two facts ― premiums rising faster this year, premiums remaining below initial projections ― are not mutually exclusive.

In fact, the latter probably helps to explain the former.

Here’s why. By design, the Affordable Care Act rewrote the rules for non-group insurance ― that is, coverage for people who buy private insurance on their own rather than through an employer. The law prohibited insurers from denying coverage to people with pre-existing conditions and required that all plans included a basic set of benefits. Those benefits include payment for services like prescription drugs, mental health and maternity care.

These new rules were bound to make coverage more expensive, since it meant that, once the law took effect, insurers could no longer avoid paying bills for people who needed a lot of medical care.

But how much more expensive plans would become was something of a mystery. Forecasters at the Congressional Budget Office, in their evaluations of the legislation that President Barack Obama eventually signed, made their best guess. It turns out they were overly pessimistic.

Both reports focus on the average price of the second-lowest silver plan, which the law treats as a benchmark. (Silver plans cover roughly 70 percent of the typical person’s medical bills.) Loren Adler and Paul Ginsburg, the two Brookings researchers, determined that the price in 2016 was actually 20 percent below what CBO had predicted it would be. Larry Levitt, Cynthia Cox and Gary Claxton from the Kaiser Foundation used a different methodology and concluded that 2016 premiums for the typical plan were 12 percent below what CBO had expected.

And while neither study looked at 2017 premiums, Kaiser’s researchers pointed out that premiums are likely to remain below CBO expectations even after taking the 2017 increases into account.

One reason premiums have come in below expectations could be that competition among insurers, which are eager to sign up customers, is keeping premiums in the exchanges low. As Adler and Ginsburg from Brookings note, “ACA marketplace premiums have beaten projections by significantly more than other areas of health care spending, therefore implying that the marketplaces have been particularly effective in driving low premiums.” Another reason is that overall health care spending has been rising slowly in the last few years, which may or may not have something to do with the health care law’s effects.

All of this would be good news. It would suggest that the law is working more or less as intended, and maybe even better than intended. Among other things, it would help explain why the total cost of the Affordable Care Act is coming in well below projections, thereby reducing the federal deficit.

But the reports also suggest a third factor, one that has even some of the law’s promoters worried. It’s pretty clear that insurers made a significant mistake in 2014, setting initial premiums too low to cover the expenses of their newly insured populations. That would explain why so many have incurred significant losses in their first two years of business, why some are pulling back severely on their Obamacare offerings, and why so many of the rest are furiously raising premiums now. Basically, they are trying to play catch-up.

This explanation is probably little comfort to people who must pay significantly more if they want to keep the same coverage next year. They understandably care a lot more about how premiums affect their pocketbooks than how premiums measure up to CBO projections.

Then again, the number of people in that situation is also smaller than it may seem. The vast majority of people buying coverage through the exchanges benefit from tax credits that insulate them from price increases, partly or wholly. (This is a big reason the law has reduced the number of uninsured Americans to a record low.) In addition, customers able and willing to switch plans can usually find cheaper options, and maybe even save money ― although switching can mean changing doctor and hospital networks, and that’s no small thing to people with chronic health conditions.

To be clear, this year’s premium increases represent a real cause for concern, as it suggests insurers are struggling to attract enough healthy customers to make their products actuarially sound. But the findings of the two reports suggest that the increases may be part of what the Kaiser researchers describe as a “one-time market correction.” If that’s the case, the markets will stabilize ― quite possibly, at roughly the levels the CBO expected all along.

“There is no guarantee that insurers currently losing money on marketplace business will be able to stem those losses with premium increases,” the Kaiser researchers warn. But so far, they say, “the fact that premiums are coming in lower than expected when the ACA passed suggests some cause for optimism.”

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