The “Average” Obamacare Rate Hike May Be Much Lower than Advertised — and That Indicates More Adverse Selection

Now that we are on the third day of open enrollment, it may be time to puncture the balloon of “tame” Obamacare premium hikes. There has been a drumbeat of positive news about premiums in the Obamacare exchanges. Here are some of the higher profile reports:

  • According to PricewaterhouseCoopers (PwC), seven states and DC (which had announced approved rates by November 4) have an average premium (across metal tiers and ages) of about $344, an increase from 2014 of 3.5 percent. By contrast, the average premium increase across all reporting states is 5.6 percent, and the average premium is $381;
  • According to the Robert Wood Johnson (RWJ) Foundation and the Urban Institute, which reviewed 17 states, six states will have average premium reductions across the carriers’ lowest cost silver plans, 10 will have small premium increases (defined as 5 percent or less) and two will have increases greater than 5 percent;
  • According to the Kaiser Family Foundation, which reviewed the lowest-cost bronze plan and the second-lowest-cost silver plans in 15 states, the average premium for a bronze plan will jump up 3.3 percent, and the average silver premium will drop 0.8 percent.

Good news? Well, not really. First, we have no idea what the “average” change in premium will be until after the dust settles on open enrollment next February 15. A simple average of rates announced prospectively does not tell us much until we see which plans Obamacare enrollees actually choose.

Take Baltimore, for example. The RWJ Foundation and the Urban Institute report that the average decrease for a 40-year old choosing the lowest-cost silver plan will be 1.8 percent (p. 11). However, this ranges from a decrease of 16.1 percent for Kaiser Permanente to an increase of 14.3 percent for CareFirst Blue Cross Blue Shield.

So, the average premium change will be somewhere between these two extremes, or maybe even at them. Maybe everyone will pile into Kaiser Permanente. Or, maybe everyone will pile into CareFirst Blue Cross Blue Shield, despite the premium hikes. Why would they do that? Maybe their experience is that the Blue plan has more access to providers, a more affordable formulary of prescription drugs and lower co-pays and deductibles.

If that is the case, which patients will chose the Blue plan? The sickest ones — that’s who. And if there is one thing we know about insurers’ offerings on Obamacare’s exchanges, it is that plans are designed to attract the healthy and deter the sick from applying for coverage. So, it is more likely that CareFirst Blue Cross Blue Shield suffered unexpectedly high medical claims in Obamacare’s first year and is actually trying to shed applicants with its big premium hike. I am going to stick my neck out and predict that in Baltimore, the actual drop in premiums in 2015 will be in the double digits, as healthy people pile into Kaiser Permanente.

This will be most Obamacare applicants. The most expensive 1 percent of patients account for almost one quarter of health spending, and half of patients account for less than 3 percent of health spending. So, the vast majority of Obamacare “shoppers” will be choosing on premium alone. Look, I focus on Obamacare about 10 hours a day, every working day. I tried to window shop the Obamacare exchange last week, posing as someone earning 250 percent of the Federal Poverty Level (the sweet spot for subsidies). I nearly jumped out the window trying to figure out the cost-sharing subsidies, the network of physicians and hospitals and the drug formulary. It is not worth the trouble: Just choose the lowest premium, already!

So, I have little doubt that in March 2015, we will be hearing lots of stories applauding Obamacare for lowering premiums even more than indicated by these early estimates. This does not show that Obamacare is saving money: It shows that Obamacare’s insurers are getting better at attracting healthy applicants.

Indeed, the preliminary research makes it very clear that new entrants are often the low bidders. Incumbents, who have one year’s worth of Obamacare claims experience, want to shrink market share. These new, low-premium competitors have finely tuned their risk-selection techniques.

The sickest patients will continue to suffer, even worse than they did in Obamacare’s first year.

Comments (8)

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  1. Underwriterguy says:

    John, related to rate increases and first year experience of carriers is the question of the 3Rs, Reinsurance, Risk Corridors and Risk adjusters. Do you have any idea what carriers are expecting from them for the 2014 year? Cigna mentioned an amount in a recent earnings call, but it was unclear if it was paying or receiving. Knowing the status of the 3Rs would give valuable insight into how well 1st year players fared.

    • John R. Graham says:

      I previously discussed and linked to a research note by Carl McDonald of Citi’s equity research team, who made an estimate. Search the blog for his name and you will find it.

  2. Don Levit says:

    It seems to me that savvy shoppers will know the better plans to choose based on their projected claims for the upcoming year
    This puts the advantage into the insured’s court
    Those who believe their claims to be a certain level could theoretically spread the family among 3 insurers with each person using the plan that provides the lowest net cost
    Don Levit

  3. Al Baun says:

    Is it too difficult to admit that you were wrong about sky-high premiums in 2015?

    • allan says:

      John has provided an honest accountability of the plans being offered today. I don’t know why you wish to limit the variables since marketing may lead to a variety of temporary swings in price especially since the government is guaranteeing reimbursements to insurers losing money (a marketing effort).

      If you feel John is unfair then how would you feel if you instead of the taxpayer being responsible for the insurers losses (based upon an artificially low premium) you were?

      Can you tell us the changes, if any, that the insurers with lower prices are making that saves them money or are you satisfied that a pound of $10 coffee has gone down in price when it is now sold in $8 half pound bags?

      • John R. Graham says:

        I’m not sure I wrote there’d be “sky-high premiums in 2015”. I think that the new entrants who are undercutting the incumbents believe that they have better underwriting, and will enroll healthier patients. Time will tell.

  4. H D Carroll says:

    John – I originally responded in a comment to the KFF paper that its supposedly showing that “the average premium for a bronze plan will jump up 3.3 percent, and the average silver premium will drop 0.8 percent” was a rather flawed analysis, with a misleading definition of looking at a grouping of rates to pick the lowest, or second lowest, without taking into consideration that the carrier, benefits, and network were not being “controlled.” They were not comparing “like for like” between the data points they chose for the comparison. Further analysis shows that for three states that contributed the most to the supposed decrease (Colorado, Rhode Island, and Washington state) the 2nd lowest silver plan in each state for 2015 is a totally different carrier to the one for 2014. If you actually were to look at the average increase in premium rates for the same plans for the same carrier from 2014 to 2015, you would find a different situation entirely. Many times, the “new” low-boy on the block wasn’t even around in 2014, which may indicate a totally different strategy to boot. The point is, by pointing out what people can do if they are happy to uproot their “insurance lives” every year and move around and calling that a true picture of the increase in health care costs, they have created a whole new obfuscation of what is really going on. And, just wait till 2016. The “true” pressure on costs arising because of the actual nature of the population in the exchanges is found in the rate increases needed within a carrier for constant plans, not in the ability to jump around. If the net total of carrier experience is a loss subsidized by government subsidies (risk corridors, etc.), I question the sustainability, but then who doesn’t?

    • John R. Graham says:

      Thank you, and I agree. However, I also think that most people will not have the time and energy to figure all that out. So, they will just go for the lowest premium.