In what must have been a terrible disappointment for Obamacare bashers on the presidential campaign trail, the early returns from California suggest the rate increases next year in the individual and small-group health insurance market will be modest.
The news comes with a caveat for the rest of the country, though. Everything may depend on where you live.
If you live in a state with tough-minded regulators who aggressively monitor and manage competition in insurance markets, you're likely to see premium increases growing no faster than the overall economy—the long-term goal of healthcare reform. California is such a state.
The law setting up California's exchange gave it the power to review every health plan offered on the exchange. Once insurers submitted plans and proposed rates, the state also played an active role in negotiating the final tariffs.
Covered California, the state exchange, used those powers to not only set rates, but to standardize benefits and plan design, making it easier for consumers to understand the terms of the competing policies—never an easy task with health insurance. Standardization made it easier for consumers to shop and switch, which in turn fostered price competition between carriers.
The setup gave the exchange negotiators tremendous power over insurers, who were eager to access 1.3 million individual consumers purchasing plans on the exchange. But insurers weren't exactly helpless, either. Providers wanted access to those consumers just as much as the insurers did, so both parties in their annual price negotiations had an incentive to compromise in pursuit of making competitive offerings. It also created an environment for forging creative partnerships, such as the Vivity alliance in greater Los Angeles.
The result, according to Peter Lee, who runs the California exchange, is that residents will see an average increase of only 4% in 2016—slightly below the rate of growth in the economy when adjusted for inflation. Those choosing high-deductible bronze plans will actually save 4.5%.
Rate regulation and negotiations aren't universal across the country, however. While the federal government now sets an essential set of benefits that must be included in each plan and requires disclosure of the reasons behind any rate increase that exceeds 10%, state insurance departments are given the ultimate task of reviewing those rates.
Not all states take the job seriously. Between 25 and 35 states have the statutory power to roll back a rate increase considered excessive after a review of medical costs in the previous year. Before the Affordable Care Act, few states capped the share of premium revenue that plans could allocate for administration costs and profits. The ACA required that insurers spend at least 80% of premium revenue on medical costs, known as the medical-loss ratio.
A study in the current issue of Health Affairs documented the benefits of a more hands-on approach to rate regulation. Looking at rate increases across the states between 2010 and 2013, researchers from the University of California at Berkeley and the University of Minnesota found that rates increased 7.6% in states with no rate review authority.
Insurers in states that required prior approval of rates and set specific medical-loss ratios, on the other hand, posted an average rate reduction of 2.1% for individual plans. This is more in line with expectations during a period when healthcare costs remained exceedingly tame across the country, largely because of the Great Recession and its aftermath.
The key, of course, is competition. Even in California, markets where there were fewer insurers competing on the exchange will see larger increases next year.
Rate regulation doesn't solve every problem. In California, just as in many of the states where regulators review insurance rates, costs are generally higher than the national average.
That suggests the incremental gains from rate review, both before and after the ACA, are not sufficient to offset the other forces that drive healthcare costs skyward, such as the perverse incentive of fee-for-service medicine, costly new technologies, skyrocketing drug prices, or the market power of dominant providers in some markets.
Still, the lessons are clear and timely given the rapid consolidation of the health insurance industry. Insurers, to fend off the antitrust regulators, are claiming the mergers will lower administrative overhead and reduce costs. More aggressive state-based insurance regulation may be the best way to ensure that it actually happens.
