The “Average” Obamacare Rate Hike May Be Much Lower than Advertised — and That Indicates More Adverse Selection

Now that we are on the third day of open enrollment, it may be time to puncture the balloon of “tame” Obamacare premium hikes. There has been a drumbeat of positive news about premiums in the Obamacare exchanges. Here are some of the higher profile reports:

  • According to PricewaterhouseCoopers (PwC), seven states and DC (which had announced approved rates by November 4) have an average premium (across metal tiers and ages) of about $344, an increase from 2014 of 3.5 percent. By contrast, the average premium increase across all reporting states is 5.6 percent, and the average premium is $381;

  • According to the Robert Wood Johnson (RWJ) Foundation and the Urban Institute, which reviewed 17 states, six states will have average premium reductions across the carriers’ lowest cost silver plans, 10 will have small premium increases (defined as 5 percent or less) and two will have increases greater than 5 percent;

  • According to the Kaiser Family Foundation, which reviewed the lowest-cost bronze plan and the second-lowest-cost silver plans in 15 states, the average premium for a bronze plan will jump up 3.3 percent, and the average silver premium will drop 0.8 percent.

Good news? Well, not really. First, we have no idea what the “average” change in premium will be until after the dust settles on open enrollment next February 15. A simple average of rates announced prospectively does not tell us much until we see which plans Obamacare enrollees actually choose.

Take Baltimore, for example. The RWJ Foundation and the Urban Institute report that the average decrease for a 40-year old choosing the lowest-cost silver plan will be 1.8 percent (p. 11). However, this ranges from a decrease of 16.1 percent for Kaiser Permanente to an increase of 14.3 percent for CareFirst Blue Cross Blue Shield.

So, the average premium change will be somewhere between these two extremes, or maybe even at them. Maybe everyone will pile into Kaiser Permanente. Or, maybe everyone will pile into CareFirst Blue Cross Blue Shield, despite the premium hikes. Why would they do that? Maybe their experience is that the Blue plan has more access to providers, a more affordable formulary of prescription drugs and lower co-pays and deductibles.

If that is the case, which patients will chose the Blue plan? The sickest ones — that’s who. And if there is one thing we know about insurers’ offerings on Obamacare’s exchanges, it is that plans are designed to attract the healthy and deter the sick from applying for coverage. So, it is more likely that CareFirst Blue Cross Blue Shield suffered unexpectedly high medical claims in Obamacare’s first year and is actually trying to shed applicants with its big premium hike. I am going to stick my neck out and predict that in Baltimore, the actual drop in premiums in 2015 will be in the double digits, as healthy people pile into Kaiser Permanente.

This will be most Obamacare applicants. The most expensive 1 percent of patients account for almost one quarter of health spending, and half of patients account for less than 3 percent of health spending. So, the vast majority of Obamacare “shoppers” will be choosing on premium alone. Look, I focus on Obamacare about 10 hours a day, every working day. I tried to window shop the Obamacare exchange last week, posing as someone earning 250 percent of the Federal Poverty Level (the sweet spot for subsidies). I nearly jumped out the window trying to figure out the cost-sharing subsidies, the network of physicians and hospitals and the drug formulary. It is not worth the trouble: Just choose the lowest premium, already!

So, I have little doubt that in March 2015, we will be hearing lots of stories applauding Obamacare for lowering premiums even more than indicated by these early estimates. This does not show that Obamacare is saving money: It shows that Obamacare’s insurers are getting better at attracting healthy applicants.

Indeed, the preliminary research makes it very clear that new entrants are often the low bidders. Incumbents, who have one year’s worth of Obamacare claims experience, want to shrink market share. These new, low-premium competitors have finely tuned their risk-selection techniques.

The sickest patients will continue to suffer, even worse than they did in Obamacare’s first year.

NCPA Health Care Blog

John R GrahamJohn R. Graham is a Senior Fellow at the Independent Institute as well as NCPA. As an expert on individual choice and limited government control over medicine, Graham speaks frequently on health reform on radio and television, and at meetings in the United States, Canada, and Europe.