Here's What's Really Going On With Obamacare Premiums

Donald Trump doesn't mention this part.
Joe Raedle via Getty Images

If you follow the news or listen to the Republican presidential candidates, then you’ve probably heard that premiums for some Affordable Care Act plans went way up last year.

But now the Obama administration is saying that, for the vast majority of people buying coverage through, premiums are only 4 percent higher than they were last year.

Can both things be true? Is it possible that some insurers hiked rates, but most people buying through the Obamacare exchanges aren’t paying much more?

Yes. In fact, taken together, the old and new information about premiums provide a nearly perfect illustration of how the Affordable Care Act works.

The new information comes from a report that the Department of Health and Human Services released on Tuesday. The report looks specifically at the insurance policies that consumers bought through, the federally run website serving Florida, Texas, and 36 other states. The report doesn't include people who get coverage through their employers or those who buy it directly from insurers.

Approximately 9.7 million people got insurance through this year. The report divides these people into two categories: those getting federal tax credits to offset the cost of coverage, and those who do not. The tax credits are available on a sliding scale, based on annual income, and phase out completely at four times the poverty line -- which in 2016 worked out to $47,520 for an individual and $97,200 for a family of four.

That’s a decent income in most parts of the country, and it’s why 85 percent of consumers got at least some assistance. They are the ones who, on average, are paying just 4 percent more for their insurance than they were last year.

For that small portion of consumers not eligible for assistance, and paying full price, premiums this year went up by more -- 8 percent, to be precise. But by historical standards, that's hardly outrageous. In the years right before passage of the Affordable Care Act, the average annual increase for individual coverage was more than 10 percent, according to research by MIT economist Jonathan Gruber and the Commonwealth Fund.

So why all the fuss about skyrocketing premiums now?

One reason is that Obamacare critics, like GOP presidential candidate Donald Trump, don't mention the law’s tax credits, which can discount the price of coverage by hundreds or even thousands of dollars a year. In addition, the numbers in the HHS report represent averages. They include some big premium hikes (which the law’s critics hype) as well as some reductions (which those critics largely ignore). And that's not to mention the many gradations in between.

But there’s another big reason for the difference between the early reports and the new HHS data: More than 40 percent of returning customers shopped around, dropped the plans they had in 2015, and decided to pick new ones for 2016. While they could have done so for a variety of reasons, it's likely that most switched in order to save money. In other words, they would have paid more, maybe a lot more, had they stuck with their 2015 coverage.

You could argue, credibly, this is what competition is supposed to look like -- with insurers vying for market share, consumers hunting for bargains, and the whole process putting pressure on the providers of medical care to lower their prices. In the old days, most people couldn’t shop for plans, because lack of standard benefits made it difficult to compare plans and insurers didn’t want to cover people with serious medical problems.

But switching plans can be difficult, particularly for people with chronic disease, because most plans available through the insurance exchanges have limited networks of physicians. Dropping your old plan could mean dropping a longtime doctor -- or having to switch hospitals. (Conversely, if an insurer changes its network, switching plans could be the only way to keep your doctor.)

The big question is what happens next.

When the law first took full effect in 2014, premiums jumped because insurers could no longer pick and choose whom to cover or sell policies with massive gaps in benefits. In other words, insurance became more expensive because the coverage became more reliable and available to more people. But the premiums were still lower than experts had expected.

It has since become apparent that insurers misjudged the market, expecting to attract fewer people with serious health problems -- and more in relatively good health. That's one reason why they started raising rates more quickly last year. Next year is likely to bring yet more significant rate increases, in part because two temporary programs designed to protect insurers during the law’s initial stage are expiring.

But while some insurers have threatened to withdraw from Obamacare marketplaces, and one carrier, UnitedHealth, recently pulled out of Arkansas and Georgia, others remain committed to the program. They say they expect the market to stabilize once they develop a firmer sense of the kind of people buying insurance and the policies they prefer. In the meantime, if premiums keep rising, consumers will probably keep switching, seeking out lower prices from whatever insurers provide them.

That’s how market economies function -- for better or for worse, or maybe some of both.

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