One of the little-understood aspects of the Affordable Care Act, aka Obamacare, is that before it was passed, a handful of states — New York, New Jersey, Vermont, Massachusetts, and Rhode Island — already had nearly identical insurance regulations to those at the heart of the new federal law. They also had some of the highest insurance premiums in the country.
Now that Obamacare implementation is drawing near, it will level the playing field for health insurance nationally — by making insurance much more expensive in the rest of the country, too.
In a recently released report, the Society of Actuaries (SOA) estimates that the average medical-claims cost in the individual insurance market — the actual cost of treating a person — will increase by an average of 32 percent once Obamacare is fully implemented. Some states will see much greater increases.
A portion of this increase will be due to the fact that the law requires richer benefits, but most of the increase is due to two key regulations. One, called guaranteed issue, requires insurers to offer coverage to people regardless of their health status. The second, community rating, limits how much insurers can charge older, sicker enrollees compared with what they charge younger ones.
The two regulations will drive up the costs of treating the vast majority of those who are currently uninsured. Health insurers have been warning about Obamacare’s “sticker shock” for months. Recently, Vermont became the first state to announce preliminary rates for individual insurance plans for 2014, submitted by Blue Cross Blue Shield and MVP Health
. The average “silver” plan — to which government subsidies are pegged (Obamacare mandates that subsidies must be based on plans that cover 70 percent of a person’s expected health-care costs) — is slated to cost $441 per month for individual coverage. In 2010, that plan cost $401 per month, according to the Kaiser Family Foundation
. But with only a 10 percent increase over four years, are insurers’ concerns about sticker shock warranted?
As it turns out, the reason Vermont doesn’t see much of an increase is because it’s already paying high rates — and everyone else will soon be paying much more. Wisconsin and Ohio, for instance, will see costs jump 80 percent because of the new regulations, and because many sicker enrollees will enter the individual market in those states.
But Vermont still doesn’t have much to crow about. Post-Obamacare, premiums in Vermont will continue to increase, because the uninsured will be buying richer coverage while paying new administrative fees and taxes that Obamacare lumps onto health coverage (to mention just a few things).
November’s election dampened the likelihood of the law being “repealed and replaced,” as Republicans would like, anytime soon. Still, the administration is desperate to quell the negative press associated with the law, and savvy members of Congress should use the opportunity to propose Obamacare patches that limit cost increases and mitigate the law’s worst excesses.
Right now, subsidies under the law are tied to health plans that provide expansive coverage even for those who don’t need it (the young and healthy). Even though basic, catastrophic plans will be available under Obamacare, they will not be subsidized; the younger crowd is therefore likely to opt for more expensive coverage.
A better approach would be to tie subsidies for those 35 and younger to the second-cheapest catastrophic plan bundled with a health-savings account to cover basic expenses. This would help keep coverage affordable and would reduce unnecessary health-care utilization, while still giving everyone access to coverage for major medical problems.
Community rating aims to dampen age discrimination by limiting the premium impact of age to no more than a three-to-one ratio for adults. That requirement should be either scaled back, phased in over time, or completely repealed. This would help keep costs down for younger and healthier applicants.
Because of community rating, premiums for the young will increase more than they have to, discouraging younger people from entering the insurance market. Tying subsidies to catastrophic coverage and loosening community rating for younger populations will encourage more people to purchase less expensive coverage, lower the cost to taxpayers, and allow the administration to save face (and perhaps even reduce the deficit).
Ideally, all subsidies should be tied to catastrophic plans and health savings accounts, but that’s a fight for another day. For now, policymakers should focus on making insurance more affordable, rather than hitching the nation’s insurance costs to its most expensive products.
Vermont, New York, and other liberal, high-cost states were never the right models for health-care reform. The best approach was always to tackle costs first (by, for instance, setting growth caps on government health-care spending), combined with targeted reforms (such as high-risk pools) for the relatively small number of uninsured with serious preexisting conditions.
Policymakers may get that rarest of opportunities: a chance to correct a bad law before it takes effect. We’ll see if they seize it.
— Paul Howard is director of the Manhattan Institute’s Center for Medical Progress. Yevgeniy Feyman is a research associate with the Manhattan Institute. They are authors of the report “Rhetoric and Reality — The Obamacare Evaluation Project: Cost.”