Is ObamaCare Causing Health Insurance Premiums to Rise?

The full title of the legislation commonly known as ObamaCare is the Patient Protection and Affordable Care Act. It's often described using just the last three words — the Affordable Care Act — and "affordability" was at the heart of the White House's argument for the law. But so far, there are few signs that health 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 than preventing them. 

Over the weekend, The New York Times published a report noting that health insurers across the nation are both "seeking and winning double-digit increases in premiums" — this despite the fact that "one of the biggest objectives of the Obama administration's health care law was to stem the rapid rise in insurance costs for consumers."

The Times reports that health insurers have successfully raised rates by at least 20 percent in Ohio and Florida, increases that it says add several hundred dollars to the monthly cost of insurance. And in California, three insurers have requested increases of more than 20 percent for individuals who do not receive employer-sponsored insurance and small businesses. The story describes those two groups as "particularly vulnerable" to high rate increases.

The Times isn't the first to report big health insurance increases coming down the pipeline. Aetna's CEO warned last month that small and individual group markets were likely to increase by an average of 25 to 50 percent, and suggested that 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's insurance rate review provision, which gives the federal government the power to review but not reject health insurance rate increases.

Some state insurance regulators already have the power to reject rates, however, and the Times suggests that the double-digit rate increases  "[demonstrate] the striking difference between places like New York, one of the 37 states where legislatures have given regulators some authority to deny or roll back rates deemed excessive, and California, which is among the states that do not have that ability."

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

Jones might have rejected higher rates in California if given the chance, and it's true that some states, Massachusetts in particular, have used their rate authority aggressively. But the power to reject rates has not always stopped double digit increases in other states. In fact, according to a 2011 Congressional Research Service report on health insurance rate review policies in the states, both Ohio and Florida have "prior approval" requirements in place in their individual, small, and large group markets. In contrast to California's "file and use" rules, which allow regulators limited power to disapprove a filing if an insurer is found to not be in compliance with some other regulation, prior approval rules mean that "insurance companies must file proposed rate changes and the state has the authority to approve, disapprove or modify the request." And yet according to the Times, both states have seen premium increases in excess of 20 percent.

Perhaps there's another explanation? For example: Might ObamaCare's new rules and regulations being playing some role in the increases? There's good reason to think the law itself is at least partially responsible.

It's seems likely, for example, that ObamaCare's new coverage mandates have contributed to some of the increase in the individual market: Consulting firm Aon Hewitt estimates that those premiums have gone up about 5 percent as a result of the law.

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

That provision, often referred to as the 80/20 rule, sets mandatory medical loss ratios (MLRs) for health insurers. The MLR is an accounting requirement which says that insurers have to spend at least 80 percent of their total premium revenue on medical expenses, leaving just 20 percent for administrative costs, marketing, and other non-medical expenditures. Any insurer that fails to meet this target must issue rebates to customers. This year, insurers rebated about $1 billion.

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

The other is that the rebate requirement means insurers may need to charge higher up-front premiums in order to protect themselves from the risk of a bad year. As Scott Harrington, a professor in the University of Pennsylvania's Department of Health Management, explained in a November 2012 paper, that's because health insurance claims — and thus MLRs — fluctuate significantly between years. Harrington's paper, 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 the MLR rule. If claims are unexpectedly high, however, they end up eating the difference. Insurers thus have a incentive to protect themselves by charging high premiums at the outset, and then paying those premiums back in rebates should claims come in at low or expected levels.

Is the MLR rule causing the higher premium requests? It's hard to say with certainty, but it fits the bill in many ways: Harrington's analysis suggests that the high up front premiums should 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. And for many people, in the years after the law, premiums aren't just going to up up a little. They're going to rise a lot.