Behind those rising rates

A new study from the Society of Actuaries predicts that individuals and families who already buy their own health insurance plans will face huge premium hikes when the exchanges created by the Patient Protection and Affordable Care Act open for business later this year. Rising claims from the pent-up demand of the newly insured, coupled with new mandates on what the policies must include, will lead to double-digit premium hikes in at least 43 states.

The study backs claims by the nation's health insurers that the increase in the exchange plans could be as high as 30% more than existing plans. Their preferred solution: Roll back the small tax on everyone's insurance premiums, which is slated to raise about $100 billion over the next decade to subsidize the insurance purchases of people earning less than 400% of the poverty level; eliminate some of the 10 essential health benefits that must be included on every insurance plan sold on the exchanges; and increase the allowable ratio that older people pay compared to younger people to 5:1 from 3:1.

What's going on here? Is the word affordable in the law's title a misnomer?

It's important to underscore that the higher premiums apply only to people who already purchase plans in the individual insurance market. That's fewer than 15 million people out of the 160 million or so who have private health insurance. Their ranks are slated to double if reform succeeds in getting the uninsured to buy policies.

Before reform, the word most frequently attached to this marketplace was dysfunctional. Individuals or families who purchased insurance on their own paid the highest premiums for comparable coverage. Many bought plans only to discover they didn't provide adequate support when they actually needed them. And the insurance companies that specialized in selling the plans often took 30% or more of the premiums in overhead and profits.

The reform law ended all that by setting minimum standards for coverage, which was only partially offset by capping the maximum that could be spent on overhead at 20%. The new rules inevitably drive up premiums because a policy that is worth something costs more than a policy that doesn't provide coverage when you need it.

The maximum limit on how much insurers could charge older workers was lobbied into the law by the powerful seniors lobby in Washington. That's great for them, but it raises premiums for younger people on the exchanges because older people tend to use more healthcare.

During the public debate leading up to the U.S. Supreme Court decision upholding the individual mandate, there was a lot of talk about young people's civic responsibility to buy insurance. Unfortunately, there was very little discussion about the social wisdom of sanctioning another intergenerational transfer that benefits the old. That only increases the political vulnerability of the reform law when individual rates rise.

It still isn't clear if the predictions of the actuaries and insurers will pan out. Some of the increase will be offset by other elements in the reform law. Competition on the exchanges should drive down rates. As many as 60% of the people using the exchanges—families earning less than $90,100 a year and individuals earning less than $44,200 a year—will be given tax subsidies.

Even America's Health Insurance Plans, the lobbying group for the insurance industry, notes that the premium increases will vary widely by state. Many increases will be in the single digits, and some states won't see any increases at all.

Legislators shouldn't act hastily as the Senate did a few weeks ago in approving a resolution in favor of repealing the medical device tax. There may be cause to adjust some of the new insurance regulations, particularly the age ratio. But let's see what actually occurs in these new marketplaces before repealing taxes that could destabilize the financial underpinnings of the entire healthcare reform law.

Merrill Goozner is editor of Modern Healthcare.