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Are Premiums Lower Than We Think?

Experts argue that health insurance premiums are lower than perceived, because most went down significantly when the Affordable Care Act was enacted. (Rob Kunzig/Morning Consult)

Insurance premiums for Affordable Care Act individual policies may not be as expensive as presumed when compared to rates before the law took effect, a recent analysis suggests.

The analysis, released last week by Health Affairs, argues that though premiums are increasing, they’re actually lower than they would have been before the Affordable Care Act was implemented in 2010.

That’s because the “average premiums in the individual market actually dropped significantly upon implementation of the ACA,” the analysis says.

“The big premium increases we’re seeing now really are more just a sign of plans trying to make up for really, really guessing too low originally,” Loren Adler, associate director at the Center for Health Policy at the Brookings Institution who co-authored the analysis, said in an interview. “They are just making up for that, whether it was a mistake or a purposeful strategy to build customers originally.”

Many insurers are requesting double-digit hikes in several states this year, and some, including UnitedHealth and Humana, are pulling out of most exchanges altogether, citing profit losses on the exchanges.

Rising premiums are perhaps the most visible indication to consumers of how the insurance industry is faring a few years into the implementation of Obamacare. Premium increases will be finalized this fall, and the fourth open enrollment period will launch just before the November election.

But while Adler says the individual market has transformed since the health law took effect, Brian Blase, a senior research fellow at the Mercatus Institute, says the market is still a “disaster area” that’s largely been propped up by the law’s reinsurance program.

The reinsurance program, which transfers funds to plans with higher-cost enrollees to encourage insurers to keep premiums for such plans low, isn’t adequately accounted for in the Health Affairs analysis, Blase said. The reinsurance program is ending this year, which could be another reason for rising premiums, he said.

“Reinsurance payments were much more generous than insurers thought,” Blase said, helping to keep premiums down during the first few years of the exchanges. While the payments have decreased over three years, they’ve still been larger than initially projected, he said.

Premiums were initially pushed down by the increased size of the market and the growth of healthy people who were previously uninsured but later purchased policies, the Health Affairs analysis says. That runs counter to the notion that premiums would increase because plans were required by law to be more comprehensive.

Because individual plans are a higher quality than they were prior to 2010, consumers are now getting more for less, Adler and co-author Paul Ginsburg wrote in their analysis.

Instead, insurers are now focusing on offering narrow networks on the individual exchanges, the authors wrote. Such plans are attractive to price-conscious consumers on the exchanges.

“If we’re providing an adequate network, and obviously the federal government is chipping in a fair bit of this money, it’s not unreasonable for the government to say whether they’re using narrow network told to save money,” Adler said.

Insurers could seek to spread out major rate increases over two years, Adler said in the interview, while acknowledging that 2017 seems to be the first year that insurers are setting rates on the exchanges with the same type of data they generally have when setting rates in the group markets.

“This is really the first year where it looks like we really are going to see where all the horror stories look like they’re going to come true in terms of premium increases,” Adler said. “If they can claim it is claims-based and they are basing this on health costs, they can increase premiums however much they want to get back to a sustainable level.”

Blase said the premise that premiums significantly dropped in 2014 was incorrect, suggesting that the analysis by Adler and Ginsburg conflicts with his own research.

working paper from June that Blase co-authored showed losses for insurers selling individual qualified health plans in 2014, and that they were driven by substantial medical claims.

“Insurers, however, seem to have underestimated just how expensive the population enrolled in individual QHPs would be,” the paper reads. “The substantially higher average premiums were still not high enough to cover the cost of insuring enrollees overall, as too few relatively healthy people were part of the individual QHP risk pool in 2014.”