Many have written asking how the Affordable Care Act, also known as Obamacare, will impact health insurance premiums. The answer to that question often depends on the political viewpoint of the person answering the question. For those of us who have spent our whole careers working with the insurance industry, the answer to that question is much more straightforward than one might hear from a politician.
The provisions in the Affordable Care Act will increase the cost of insurance. However, this higher cost will be offset by new federal subsidies for individuals who earn less than 400 percent of the federal poverty level.
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Why does the Affordable Care Act raise insurance premiums, and who will be hit the hardest? Individuals who earn more than 400 percent of the federal poverty level and who are younger than age 50 will see the largest increases to their health insurance premiums. (For example, a family of four can earn up to $94,200 in 2013 and still be under 400 percent of the federal poverty level.)
Let’s explain why the Affordable Care Act raises health insurance premiums for some. The Affordable Care Act raises insurance premiums in the individual insurance market for the following reasons:
- Insurance companies no longer can restrict coverage for individuals with pre-existing conditions.
Historically, insurance companies have been able to deny coverage to individuals with pre-existing health problems. Because of their previous health problems, it is reasonable to expect individuals with pre-existing conditions will submit more claims than those who have no pre-existing conditions. Since health insurance premiums are always a function of the level of medical claims, the increase in claims will result in higher insurance premiums, driving up premium rates for everyone. Think of it this way: What if a law was passed that required auto insurance companies to provide insurance after a car crash? These purchasers of car insurance would probably have a very high rate of claims. Since insurance companies don’t print money in their basements, they would have to raise premiums on the whole group in order to avoid going out of business. It is a good thing that people who have had trouble finding insurance because of a pre-existing condition will be able to buy insurance, but it does come with a cost.
- Insurance companies may not have an underwriting ratio larger than 3 to 1 for their oldest clients.
Prior the enactment of the Affordable Care Act or ACA, states have had flexibility on the rules that they apply to insurers. One rule that varies from state to state is the age ratio that insurance companies apply to their members. For example, let’s say Blue Shield of California offers a $1,000 deductible plan to 25-year-old members at a rate of $100 per month. Under the ACA, Blue Shield of California may only charge their oldest members $300 per month for the same plan. Currently that ratio in some states can be as much as 7 to 1. The practical effect of this rule will be to increase the rates for younger Americans and decrease the rates for older Americans. Since different carriers in different states have widely varying ratios, for some this change will be significant, while for others who are already near the 3 to 1 ratio, the effect will be minimal.
- The Affordable Care Act defines “essential benefits” and requires insurance carriers to cover them.
The Affordable Care Act prescribes — at a federal level for the first time in our history — what a plan must cover. As you can imagine, most of these requirements act to expand the definition of what is covered. For example, many individual insurance plans have strict limits on mental health coverage or chemical dependency treatment. The ACA mandates that insurance companies must cover inpatient mental health, inpatient chemical dependency treatment, prescription drugs, preventive care services and a long list of other items. Of course, like I said before, insurance companies don’t print money in their basements so the cost of these added services is paid through monthly premium charges.
- Insurance companies will be covering an entirely new population, some whom have never had insurance before.
Individuals who do not have insurance utilize, on average, 50 percent less medical care than those who have insurance. There are many people who don’t currently have coverage who will be covered in the future because of the ACA’s requirement that all Americans carry health insurance. Insurance companies do not know the exact makeup of this population. The actuaries who build the rating models typically do not like unknown variables and will estimate the costs of this population in a manner that protects the insurance company. While this factor will cease to be an issue as all Americans eventually are covered, it is significant in the first few years following the full implementation of the ACA.
- The imposition of new federal and state taxes on insurance plans.
The ACA imposes a number of new taxes on insured plans. They are:
- The reinsurance assessment of $7.19 per person per month
- The comparative effectiveness research fee of $2 per person per year
- The insured tax of 1.9 percent of premium
- The exchange tax of 1 to 5 percent (depending on your state)
These new taxes will be reflected in insurance plan premiums. On average, these taxes will add between 6 and 11 percent to the price of health insurance plans.
I’ve outlined five factors that will drive up health insurance premiums. You will find large variations from state to state as Obamacare is rolled out. However, it is safe to say that the average individual health insurance plan will cost 10 to 50 percent more after Obamacare is fully implemented.
Those who do not qualify for a Federal subsidy and who don’t have an employer plan will be hit hard — there is no way around this fact. However, if one does qualify for a subsidy, the story is much better as the federal government will shoulder the high cost of premiums. For an explanation of how the federal subsidies work for those who qualify, view our information on premium tax credits.