Is ObamaCare Causing Premiums to Rise?

By Peter Suderman, Reason - January 8, 2013

The full title of the legislation commonly knownas ObamaCare is the Patient Protection and Affordable Care Act.It's often described using just the last three words "” theAffordable Care Act "” and "affordability"� was at theheart of the White House's argument for the law. But so far, there are few signs thathealth care will become more affordable as a result of the law.Indeed, it increasingly looks as if the opposite could be true "”that ObamaCare may be causing higher premiums rather thanpreventing them. 

Over the weekend, The New York Times published a report noting that health insurers across thenation are both "seeking and winning double-digit increases inpremiums"� "” this despite the fact that "one of the biggestobjectives of the Obama administration's health care law was tostem the rapid rise in insurance costs for consumers."�

The Times reports that health insurers havesuccessfully raised rates by at least 20 percent in Ohio andFlorida, increases that it says add several hundred dollars to themonthly cost of insurance. And in California, three insurers haverequested increases of more than 20 percent for individuals who donot receive employer-sponsored insurance and small businesses. Thestory describes those two groups as "particularly vulnerable"� tohigh rate increases.

The Times isn't the first to report big healthinsurance increases coming down the pipeline. Aetna's CEO warned last month that small and individual group markets werelikely to increase by an average of 25 to 50 percent, and suggestedthat some policyholders might see their rates double.

What's going on? Why are these rates going up?

A big chunk of the Times article focuses on the law'sinsurance rate review provision, which gives the federal governmentthe power to review but not reject health insurance rateincreases.

Some state insurance regulators already have the power to rejectrates, however, and the Times suggests that thedouble-digit rate increases  "[demonstrate] the strikingdifference between places like New York, one of the 37 states wherelegislatures have given regulators some authority to deny or rollback rates deemed excessive, and California, which is among thestates that do not have that ability."�

So is the problem that ObamaCare did not grant new powers toreject rate increases? California health insurance commissionerDave Jones offers an explicit endorsement of this theory, sayingthat the lack of new authority to reject health insurance rateincreases is a "huge loophole in the Affordable Care Act."�

Jones might haverejected higher rates in California if given the chance, and it'strue that some states, Massachusetts in particular, have used theirrate authority aggressively. But the power to reject rates has notalways stopped double digit increases in other states. In fact,according to a 2011Congressional Research Service report on health insurance ratereview policies in the states, both Ohio and Florida have "priorapproval"� requirements in place in their individual, small, andlarge group markets. In contrast to California's "file and use"�rules, which allow regulators limited power to disapprove a filingif an insurer is found to not be in compliance with some otherregulation, prior approval rules mean that "insurance companiesmust file proposed rate changes and the state has the authority toapprove, disapprove or modify the request."� And yet according tothe Times, both states have seen premium increases inexcess of 20 percent.

Perhaps there's another explanation? For example: MightObamaCare's new rules and regulations being playing some role inthe increases? There's good reason to think the law itself is atleast partially responsible.

It's seems likely, for example, that ObamaCare's new coveragemandates have contributed to some of the increase in the individualmarket: Consulting firm Aon Hewitt estimates that those premiums have gone up about 5 percent as aresult of the law.

That explains some of the increase. But not all of it. Which iswhy those looking for another culprit should consider thepossibility that a provision intended to help consumers get bettervalue for their money is actually costing them higher premiums.

That provision, often referred to as the 80/20 rule, setsmandatory medical loss ratios (MLRs) for health insurers. The MLRis an accounting requirement which says that insurers have to spendat least 80 percent of their total premium revenue on medicalexpenses, leaving just 20 percent for administrative costs,marketing, and other non-medical expenditures. Any insurer thatfails to meet this target must issue rebates to customers. Thisyear, insurers rebated about $1 billion.

The MLR provision creates two incentives for insurers to jack uphealth insurance premiums. One is the plain fact that with profitand administrative costs capped as a percentage of premium revenue,the easiest way to generate larger profits is to charge higherpremiums.

The other is that the rebate requirement means insurers may needto charge higher up-front premiums in order to protect themselvesfrom the risk of a bad year. As Scott Harrington, a professor inthe University of Pennsylvania's Department of HealthManagement, explainedin a November 2012 paper, that's because health insurance claims "”and thus MLRs "” fluctuate significantly between years. Harrington'spaper, which got funding from a health insurance trade group,argues that the annual variation, and the resulting uncertainty,creates a problem for insurers: If claims are low in a given year,they end up rebating the difference to the customer because of theMLR rule. If claims are unexpectedly high, however, they end upeating the difference. Insurers thus have a incentive to protectthemselves by charging high premiums at the outset, and then payingthose premiums back in rebates should claims come in at low orexpected levels.

Is the MLR rule causing the higher premium requests? It's hardto say with certainty, but it fits the bill in many ways:Harrington's analysis suggests that the high up front premiumsshould be concentrated in the small-group and individual markets,which is exactly what the Times reports. No matter what,it's clear that ObamaCare isn't resulting in lower premiums. Andfor many people, in the years after the law, premiums aren't justgoing to up up a little. They're going to rise a lot. 

Peter Suderman is a senior editor at Reason magazine.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time.

Marshall Gill| 1.8.13 @ 9:38AM |#

health insurers across the nation are both "seeking andwinning double-digit increases in premiums"� "” this despite the factthat "one of the biggest objectives of the Obama administration'shealth care law was to stem the rapid rise in insurance costs forconsumers."�

Intentions do not necessarily produce their desired results?Unpossible.

Red Rocks Rockin| 1.8.13 @ 10:10AM |#

You mean adding a bunch of people to the health insurance rollswith pre-existing conditions, while extending and expanding SCHIP,resulted in cost increases for everyone else? Who could have seenthat coming?

Auric Demonocles| 1.8.13 @ 10:14AM |#

That is unpossible.

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