Last month, the Manhattan Institute’s Avik Roy — joined by Lanhee Chen, Yuval Levin, and Dan Kessler — set off a firestorm by audaciously challenging the prevailing Obamacare-friendly story about what will happen to premiums when the law’s implementation begins in earnest in 2014. Specifically, Roy and the others disputed the initial news stories coming out of California, fed by state officials, which indicated that the premiums paid by state residents enrolled in the Obamacare exchange would be lower in 2014 compared with 2013. Indeed, according to state officials, the premiums charged by plans in the exchange would be an amazing 2 to 29 percent lower than comparable coverage in 2013. A true Obamacare miracle! The law’s apologists were exultant at the news, and said so in numerous columns and blog posts.
Of course, this never should have been believed by anyone. Obamacare is imposing a minimum benefit for insurance that is in excess of what many consumers purchase on their own today. And the law is imposing many new rules on what insurance companies may and may not take into account when setting premiums. There is no experience anywhere indicating that these kinds of changes will lower premiums. And there’s an abundance of evidence from state experiments indicating that these changes will increase premiums, and probably quite substantially.
So Roy and the others were rightly suspicious of the spin coming out of California and decided to take a look themselves. What they found is that California officials were comparing the Obamacare exchange premiums with small-employer plans, not the existing individual market in the state. This was a completely inappropriate comparison. It is the enrollees in the individual-insurance market who will have little choice but to get their coverage from the exchange next year. Employees of small businesses can still get their insurance outside of the exchange, and do so on a self-insured basis to avoid getting pooled with insurance enrollees outside their firms. But for people in the individual market, there’s no getting around Obamacare.
And for them, a fair reading of the data is that the vast majority of individual-market participants will pay a lot more in 2014 for their health insurance, not less, despite protestations to the contrary by the law’s advocates.
And it’s not going to be a small number of people who pay more. According to the Census Bureau, there were 19 million people under the age of 65 enrolled in directly purchased private health insurance in 2011. The vast majority of these people were buying coverage in state-regulated insurance markets. Health-insurance experts have been warning since the law was debated that these consumers would pay substantially more under the law because of the restrictions on age-rating of insurance premiums and the strong likelihood that the insurance pool in the exchanges will be less healthy than today’s individual-insurance market. (The exceptions are the residents of the few states with tight insurance regulations today, such as New Jersey and New York. Those residents are already paying very high premiums in markets that are largely dysfunctional or nonexistent.) Study after study — by Oliver Wyman, by Milliman, and by the Society of Actuaries — have confirmed the views of the experts, which is that premiums are going up a lot for most people in the individual-insurance market. Looking across these studies, one can expect premium increases, on average, in the range of 30 to 50 percent, depending on the state.
The law’s defenders counter that the new federal subsidies will paper over the premium hikes for some people. And it is certainly true that massive new federal spending will partially obscure the premium increases for the lowest-income households. But that’s not going to help middle-class families or even lower-middle-class families.
For instance, as Kessler reported, the premium for a typical Kaiser Permanente insurance product sold in Oregon and California will go up by about $1,100 per year for a young, healthy male. It will also go up for generally healthy people in their 30s and even 40s because of the restrictions on age-rating. But the subsidy structure in Obamacare will cover these extra costs only for those with incomes below about 250 percent of the poverty line. Individuals with $33,000 in income and no family (about 300 percent of the federal poverty line) will have their premiums subsidized only for amounts in excess of 9.5 percent of household income. If they elect to buy high-deductible insurance coverage like what they are purchasing today, they will have to pay the entire added premium themselves.
This is not news. It is the consensus view of what is likely to happen, and it has been for some time. So why hasn’t the public heard more about this? The answer: fear.
An episode from 2010 can help explain. At that time, several of Obamacare’s insurance rules were about to go into effect in 2011, and insurance companies were preparing their customers for the likely cost increases coming their way. Several of them had issued press releases explaining the reasons for the premium hikes, which the Obama administration found threatening. And so, in September of that year, Health and Human Services Secretary Kathleen Sebelius attempted to suppress the free-speech rights of the industry. She wrote a remarkable letter to America’s Health Insurance Plans — the trade association for health insurers — with this thinly veiled threat: Any plan caught blaming Obamacare for premium hikes could lose its right to do business in the regulated marketplace.
Subtle it was not. And it was certainly remarkable that a cabinet secretary felt free to threaten an entire industry with sanctions if it did not toe the line on the administration’s political messaging. But, sadly, it may have worked because, despite scores of studies all pointing to the same conclusion, the industry has been very reluctant to clearly explain to the public what is about to come its way.
But the day of reckoning is near. This summer and fall, the actual premiums in the Obamacare exchanges will become visible for all to see. As was the case with California, there will be a lot of spin coming from the Obama administration and its allies. But also like California, spin will get them only so far. In the end, those who are enrolled in individually purchased insurance plans will figure out that they are going to pay a lot more, and they won’t be happy about it.
— James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.