One of the big unanswered questions about Obamacare is what will happen to health insurance premiums over the next several years. Since the law's coverage expansion kicked in last year, there have been persistent rumors and reports that health insurers were knowingly under-pricing their offerings, testing the waters and, perhaps, attempting to gain market share early on. Initial premium prices were, unavoidably, set with little real data on the people who would enroll, and thus without a strong indication about the expenses that plans could expect incur.
In addition, health insurance plans were given a backstop during the early years of Obamacare's coverage expansion in the form of a trio of risk mitigation programs, including the law's risk corridors, a three-year program, often labeled an insurer bailout, designed to cover a portion of insurer losses should spending go beyond expected level. (Insurers whose costs were lower than expected would help defray the cost of the program by paying into the system, in theory making the system more or less self-supporting.) The hope was that this would give insurers some leeway to keep premiums from rising too much, at least initially.
The question all these variables raised was what would happen to premiums once data came in about the health characteristics of the newly insured, and once the risk corridor backstop expired.
But now there's a new variable: The risk corridors, if operated in a budget neutral manner as the administration has suggested, may be seriously underfunded. An S&P analysis released at the end of last week warns that the risk corridor program could be "significantly underfunded if the government enforces budget neutrality." (The federal government has pledged neutrality, and a provision in the 2015 "cromnibus" set limits on where the feds can go for extra funding.)
That's because, in order for the program to remain budget neutral in the way that it was intended, there have to be enough insurers have to be more profitable than expected to balance out the insurers that are less profitable than expected. And that doesn't appear to be happening. The S&P report estimates that Obamacare's risk corridors "will not receive adequate monies from insurers with profitable exchange business to pay insurers that have unprofitable exchange business." Basically, at current cost and premium levels, Obamacare's insurance plans can't yet support themselves.
So the question now is: What happens if there's not enough money to make the risk corridor payouts?
One possible answer is…nothing, or not much, anyway. Some insurers appear not to be building risk corridor payments into their expectations at this point. And, as the Pittsburgh Tribune-Review notes, the Department of Health and Human Services is thinking about the program's financing on a three-year basis rather than a year at a time. So if business improves and insurers pay into the system later, HHS says, "it expects to cover shortfalls in the first year from gains in later years of the three-year program," although the S&P analysis appears to be skeptical.
But it's also possible that the end result will be higher premiums. As one S&P analyst told the Tribune in an earlier story, "there is a likelihood that premiums will go up" if the payments aren't made.
You could perhaps argue that the real problem is holding the risk corridors program to a revenue neutral standard. But that is both a tacit admission that insurers can't really survive under the law without additional government funding, and, at best, a temporary solution given that the program was set to expire after three years anyway.
Meanwhile, there are hints that some insurers may already be looking at big rate hikes for next year. In Oregon, all but one of the insurers who have submitted rate proposals for next year are asking for significant rate hikes, reports local paper The Bulletin:
The largest proposed increase comes from Time Insurance Company, which had 582 individual market enrollees as of last month. The second-largest hike comes from PacificSource Health Plans, which wants to raise premiums by nearly 43 percent. PacificSource has about 9,100 individual market enrollees. LifeWise Health Plan of Oregon, with 37,000 individual market enrollees, wants to raise premiums by 38.5 percent.
Most individual market enrollees will be affected by the rate hike proposed by Moda Health, which has far and away the largest number of enrollees: more than 101,000. Moda wants to raise premiums by 25.6 percent. If approved, that means a 40-year-old single smoker in Bend would pay $319 for a silver plan.
The Kaiser Foundation plan, with 15,500 enrollees, requested a small decrease in rates.
These are, of course, unsubsidized rates, so most individuals would only pay a portion of the full rate. But even still, those who chose to stay with the same plan would be paying somewhat more in many cases, and taxpayers would be on the hook for any increase in subsidies.
Why are insurers pushing for such big hikes? In part because rates are negotiations with regulators, and there's a general expectation that increases will be moderated through the rate regulation process. But as the story also notes, this is the first time that insurers operating under the law have access to a full year's worth of claims data—which suggests that insurers may have discovered that their beneficiaries are more costly to cover than expected.
These are early signs, and all of this is subject to change as more information comes in. Overall, last year's Obamacare rate hikes were not nearly as large as initially feared. Still, this is not a promising set of early indicators. And taken together, they highlight some of the complexities inherent in Obamacare, and the potential difficulties in restraining the growth of health insurance premiums under the law. At minimum, they suggest that there's a lot we still don't know about the law and how it will develop over the years.