More on Obamacare’s Double Digit Rate Hikes
Yesterday, I pointed out that this blog would have room for nothing else if we discussed every local newspaper’s coverage of how Obamacare’s outrageous 2016 rate hikes were going to hit their community. Well, the House Speaker John Boehner’s office collected and summarized many of the articles, from the Wall Street Journal to the Wichita Eagle; from the New York Times to the Fayetteville Observer.
Insurance expert Bob Laszewski corroborates my conclusion from yesterday: It is surprising that insurers are asking for such “eye-popping” premium hikes while they still have taxpayers’ protection from losses via Obamacare’s risk corridors and reinsurance:
Some will quickly argue that many of these rate increases are subject to regulatory approval and can be rolled back. That’s right. But this year the health plans have hard claim data to show the regulators and a 35% rate increase is hardly going to be rolled back to 5%.
That these big rate increases are coming a year before the “3Rs” reinsurance program is to end, that was supposed to subsidize the health plan’s high claims experience, is not good news.
For example, Blue Cross of Texas commented that it covered 730,833 individuals in 2014 with premium of $2.5 billion and claims totaling $2.1 billion––for a medical loss ratio of 119%. The plan further commented that, after the “3Rs” reinsurance adjustments, they lost 17% to 20% of premium in 2014––that would be more than $400 million. And, they are only asking for a 20% rate increase.
Margot Sanger-Katz of the New York Times, on the other hand, makes the standard Obamacare defensive plea that many of these requested hikes will be rolled back, which Mr. Laszweski and I think is too hopeful. However, she does have a very good point that people will switch out of plans that hike rates too much:
The idea behind the insurance marketplaces set up by Obamacare is that insurance companies can jockey for customers by offering different services and prices. Most customers have a selection of insurance plans, but not every plan has proved popular. Lower-cost plans in certain categories have captured a majority of the markets.
Because customers are flocking to the cheapest plans in a given market, increases to those popular plans matter more than the increases to unpopular plans in the same market. If you bought a plan and face a big rate rise, you will face a hard choice between paying more and switching, which is why proposed increases to very popular products — as seems to be the case in Tennessee — are meaningful. But if a plan without many customers raises its prices, that’s less disruptive. And if there are still cheap, quality plans available, it appears that many customers may be willing to switch if their plan gets too costly.
In a normal market, such behavior would be positive. In Obamacare, however, it signals a deepening of the death spiral, as healthy subscribers seek lower premiums every year, leaving the sick in expensive plans.
I think the insurers’ play is to go for at least the premiums they think will be needed for 2016. Otherwise they’ll start out negotiating from a lower level than they think is needed. In effect, that’s negotiating against themselves. Keep in mind that for 2016, insurers have much more credible enrollment and claims utilization experience than they did last year, on which to set their premiums.
Besides, the risk corridors were never more than an incentive to persuade insurers to participate in the first place, given all the ACA unknowns and negatives from day one. The risk corridor reimbursements were not intended to induce insurers to understate their premiums, nor are they a reason to deliberately understate premiums.
Otherwise – if the insurers’ strategy were to ask for less than they think they need – it could cost them both in 2016 and in 2017:
1) In 2016 if premiums are not adequate the insurers would be obliged to carry their losses until the federales get around to making the risk corridor payments – which in any case would not occur until some time well after the end of 2016. That amounts to an interest-free loan to the federales.
2. In 2017 premiums would have to make up any shortfall from 2016 premiums plus expected 2017 trend. Making up that 2016 shortfall would add to any increase that would otherwise be needed for 2017. And that would force insurers to start 2017 negotiations playing catchup and without the possibiity of any more risk-corridor payments. The last place any health insurer wants to be, is playing catch-up with its premiums.
So I think the insurers’ play is to go for at least the premiums they think will be needed for 2016.
I am mystified by this comment from Bob Lazerski:
“For example, Blue Cross of Texas commented that it covered 730,833 individuals in 2014 with premium of $2.5 billion and claims totaling $2.1 billion––for a medical loss ratio of 119%.”
I think Lazewski mixed up his numerator and denominator. As stated, that’s a MLR of 84% – – not 119%.
No he is not mistaken – it’s been widely reported that they have a huge loss $400 million (more if the risk corridors don’t pick up some of the tab) for a whopping 119% MLR.
He did state it wrong reversing the premium and claims but it is a 119% MLR
“He did state it wrong reversing the premium and claims”
Yes – I found a report from CNBC that confirms what you say. And to be clear it was insurance expert Bob Lazewski who reversed the numerator and denominator – – not John Graham.
Couple side points:
1. You can’t always take at face value what an “expert” may say. Experts can make mistakes too, reporters can misquote experts (or anyone else) and experts can even get it wrong sometimes.
2. The loss was larger than Lazewski states, in fact probably closer to $450 million. The additional loss comes from BCBSTexas operating costs for adjudicating the $2.5 billion in claims.
See how easy to make a mistake? The BCBS Texas loss was probably closer to $650 million – estimating its operating costs as 10% of the $2.5 billion in claims.
I had a look at the source myself: Premium was $2.1 billion and claims $2.5 billion. So, it was a loss.
Obamacare seems to have quite an effect on people: It makes even the best of us lose our ability to write sentences or do division sometimes!
Read a fantastic blog called ACA Death Spiral on this subject. The author has statements from 15 leading insurers on why they are raising rates.