House Minority Leader Nancy Pelosi (D., Calif.). (Photo credit: Leader Nancy Pelosi)
In 2009, when a prominent accounting firm released a report describing how Obamacare would drive up the cost of health insurance, supporters of the health-care bill were furious, declaring that only insurance-industry shills would be craven enough to produce such poppycock. After all, President Obama had repeatedly promised that his bill would “bring down premiums by $2,500 for the typical family.” In addition, they argued, Obamacare will spend trillions of dollars on health insurance subsidies, such that the uninsured wouldn’t be exposed to any purported rate hikes. But a new study by two members of the American Academy of Actuaries finds that tens of millions of Americans will be exposed to increased insurance costs, even when one takes the value of Obamacare’s subsidies into account.
The new report, authored by Kurt Giesa and Chris Carlson, was published in the latest issue of Contingencies, the American Academy of Actuaries’ bimonthly magazine. (Actuaries are people who specialize in the design and structure of insurance plans.) Their analysis focuses on Obamacare’s community rating provision, the piece of the law that forces young people to pay dramatically more for health insurance in order to partially subsidize the cost of insurance for older Americans.
80 percent of twentysomething Americans face higher costs
Obamacare’s insurance exchanges were originally designed to subsidize the purchase of regulated, private-sector insurance for those with incomes between 138 percent and 400 percent of the federal poverty level: based on 2012 guidelines, that amounts to between $31,809 to $92,200 for a family of four.
But Giesa and Carlson estimate that 80 percent of Americans below the age of thirty in the individual market will face higher premiums, despite subsidies. “Our core finding is that young, single adults aged 21 to 29 and with incomes beginning at about 225 percent of the FPL, or roughly $25,000, can expect to see higher premiums than would be the case absent the ACA, even after accounting for the presence of the premium assistance.” Fully 80 percent of these twenty-somethings have income above $25,000:
We estimate that almost 80 percent of those aged 21 to 29 with incomes greater than 138 percent of FPL who are enrolled in nongroup single coverage can expect to pay more out of pocket for coverage than they pay today—even after accounting for premium assistance. With a crossover point of about 300 percent of FPL for those aged 30 to 44, we estimate that about one-third of those older than age 29 with incomes greater than 138 percent FPL will see higher premiums even after accounting for premium assistance.
These higher costs on young people are especially significant because about two-thirds of the uninsured population is under the age of 40. Overall, the authors found that “premiums for younger, healthier individuals could increase by more than 40 percent” in the non-group insurance market due to Obamacare’s community rating provision. (A handful of states that already mandate community rating, like Massachusetts and New York, were excluded from the Giesa-Carlson analysis.)
Giesa and Carlson cite the example of a 25-year-old who makes $33,510 a year, for whom Obamacare will increase insurance costs by $783, inclusive of subsidies, with the underlying cost of insurance increasing by 42 percent:
Consider, for example, a 25-year-old person with income at 300 percent of FPL, or $33,510. This person currently could purchase coverage for about $2,400 per year, or 7.2 percent of his or her income. Age band compression and the other changes to the ACA would result in premiums (before premium assistance) increasing by 42 percent to $3,408. As shown in Chart 2, this person at 300 percent FPL will be required to pay 9.5 percent of his or her income, or $3,183, toward the cost of coverage. The cost of his or her actual premium would increase by $783, even with the $225 in premium assistance. (The impact of cost-sharing reduction assistance at these income levels is not relevant because the assistance completely phases out at household incomes above 250 percent of FPL.)
Analysis excludes other cost-raising aspects of Obamacare
What’s especially troubling about the authors’ analysis is that it focuses primarily on community rating, and few of the other aspects of Obamacare that will drive up the cost of health insurance. Ironically, as the chart below shows, insurance costs will still increase on the elderly despite community rating.
“While our analysis focused primarily on the impact of age band compression,” they write, Obamacare’s requirement that insurers charge the healthy and the sick at similar rates “itself may increase premiums by roughly 17 percent to 20 percent for those who have preferred rates because of lower-than-average health risks. Young adults often qualify for these preferred rates. These increases would be in addition to any premium rate change due to age compression, required increases to benefits, or other factors discussed above.” Indeed, most estimates by insurance pros suggest that the totality of Obamacare will increase non-group premiums for young people by 80 to 100 percent.
Young people are already being hit hardest in the Obama economy. In December, the unemployment rate for Americans aged 20 to 24 was 38.5 percent. Those young people who are fortunate enough to find work have little to no savings, unlike their older peers. And yet it’s these very people who Obamacare forces to subsidize the cost of health insurance for wealthier, older Americans who’ve had decades to earn and save for their health care.
Young people are incentivized to go without insurance
The likely scenario is that young people will defy Obamacare’s individual mandate and go without health insurance, knowing that Obamacare guarantees they can sign up for insurance after they fall ill. “The relatively low penalties associated with the individual mandate make the effectiveness of the mandate uncertain, particularly in the first few years of reform when stability is essential and the penalty can be expected to fall well below the annual cost of the minimum standard of coverage required under the ACA.” This is exactly the point that the authors of the PriceWaterhouseCoopers study made in 2009, the report that was dismissed by progressive bloggers as “deceptive.”
Indeed, today’s reporters profess surprise at recent rate hikes. Last Saturday, Reed Abelson of the New York Times reported that “health insurance companies across the country or seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for insurers.”
In fact, the opposite is true: the authors of Obamacare frequently admitted that the law would do nothing to reduce insurance costs. Instead, they hoped that expanding coverage will help to build a broader political consensus to reduce costs…sometime in the future.
It’s funny. Obamacare’s supporters frequently complain about the usage of the term “Obamacare,” arguing that the “Affordable Care Act” is a more objective, neutral way to describe our new health law. But neutral observers are finding that the President’s health law will make health insurance less affordable. And there will never be any doubt as to which President signed Obamacare into law. As we head into 2014, President Obama’s pie-in-the-sky health-care promises are bound to resume their place at center stage.
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UPDATE: Merrill Matthews and Mark Litow discuss the Giesa-Carlson study in Monday's Wall Street Journal:
Health-insurance premiums have been rising—and consumers will experience another series of price shocks later this year when some see their premiums skyrocket thanks to the Affordable Care Act, aka ObamaCare.
The reason: The congressional Democrats who crafted the legislation ignored virtually every actuarial principle governing rational insurance pricing. Premiums will soon reflect that disregard—indeed, premiums are already reflecting it...
How do we know these requirements will have such a negative impact on premiums? Eight states—New Jersey, New York, Maine, New Hampshire, Washington, Kentucky, Vermont and Massachusetts—enacted guaranteed issue and community rating in the mid-1990s and wrecked their individual (i.e., non-group) health-insurance markets. Premiums increased so much that Kentucky largely repealed its law in 2000 and some of the other states eventually modified their community-rating provisions.
States won't experience equal increases in their premiums under ObamaCare. Ironically, citizens in states that have acted responsibly over the years by adhering to standard actuarial principles and limiting the (often politically motivated) mandates will see the biggest increases, because their premiums have typically been the lowest.
Many actuaries, such as those in the international consulting firm Oliver Wyman, are now predicting an average increase of roughly 50% in premiums for some in the individual market for the same coverage. But that is an average. Large employer groups will be less affected, at least initially, because the law grandfathers in employers that self-insure. Small employers will likely see a significant increase, though not as large as the individual market, which will be the hardest hit.
We compared the average premiums in states that already have ObamaCare-like provisions in their laws and found that consumers in New Jersey, New York and Vermont already pay well over twice what citizens in many other states pay. Consumers in Maine and Massachusetts aren't far behind. Those states will likely see a small increase.
By contrast, Arizona, Arkansas, Georgia, Idaho, Iowa, Kentucky, Missouri, Ohio, Oklahoma, Tennessee, Utah, Wyoming and Virginia will likely see the largest increases—somewhere between 65% and 100%. Another 18 states, including Texas and Michigan, could see their rates rise between 35% and 65%.
