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Dr. Pate’s Prescription for Change

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Understanding Why Insurance Premiums Keep Rising

By Dr. David C. Pate, News and Community
November 1, 2016

The name of the legislation, the Patient Protection and Affordable Care Act (“ACA”), could lead to the conclusion that because of its enactment, health care will be more affordable. If you are at or below 400 percent of the federal poverty level and a U.S. citizen, then you are in the group for which health insurance has likely become more affordable.

However, most everyone else has seen – and will see – health insurance premiums and out-of-pocket expenses (deductibles, copayments and coinsurance) increase.

Why is that?

The ACA provides premium tax credits towards the purchase of health insurance for U.S. citizens whose income places them between 100 percent and 400 percent of the federal poverty level, and cost-sharing subsidies for out-of-pocket costs (deductibles, copayments and coinsurance) for people with incomes between 100 percent and 250 percent of the federal poverty level.

For those below 138 percent of the federal poverty level, some states have expanded Medicaid to allow previously uninsured individuals and their families to receive Medicaid benefits. These are the two groups that have more affordable access to care since the enactment of the ACA.

For everyone else, the ACA mandates that individuals have qualifying insurance coverage or else pay a penalty. Qualified insurance coverage under the ACA must offer “essential health benefits,” including preventive and wellness services. These benefits are much more extensive than those in many insurance plans that people had prior to the ACA, and such benefits drive up the cost of the health plan.

Why are insurance premiums for those who don’t qualify for tax credits and subsidies so much higher since the ACA became law?

In addition to the richer benefits, insurance companies are no longer allowed to exclude people from coverage because of pre-existing conditions or charge higher premiums to this group of higher-cost individuals. Insurance companies can set insurance rates only taking into consideration a subscriber’s age, county of residence and whether the subscriber smokes. In Idaho, federal surveys report that 17 percent of adults smoke regularly but less than 3 percent of those who bought coverage on the insurance exchange in 2016 admitted to smoking and paid the tobacco surcharge, which under the ACA can amount to an increase of up to 50 percent in the premium in order to cover the higher health risks and costs of being a smoker.

Because of this, insurance premiums have gone up for everyone so that the total premiums from all the subscribers (‘the risk pool”) will cover the costs of care for sicker individuals whose premiums do not cover the cost of their care.

In addition, the ACA ended the ability of insurance companies to impose annual and lifetime benefit limits, meaning everyone has had to pay more in premiums in order to cover these increased costs to the health plan.

That is why premiums increased after the ACA became law, but why do premiums keep on increasing?

Insurance companies had to set premiums for a population for which they had no prior claims experience, who they could no longer rate (i.e., ask the person about illnesses and charge the person more if they were unhealthy) and yet, try to be competitive in the public health exchanges, knowing that most people would make their selection based upon price.

In most cases, the insurance companies underestimated the cost of insuring this new group of people and in all cases, the insurance companies did not anticipate that the government would change the rules on them after they established their new premiums.

Why did most insurance companies set premiums too low?

Insurance companies did not fully anticipate the amount of pent-up demand for healthcare services in this group of previously uninsured, nor their poorer health status.

Insurance plans prior to the ACA often had waiting periods, a period of time during which one must pay premiums before a claim would be covered for a particular illness. Waiting periods were no longer allowed under the ACA.

Additionally, many of the uninsured had significant healthcare problems that they were not addressing, and/or needed expensive procedures (like joint replacements) that they simply chose not to address while they were uninsured. With insurance coverage, many people began to have these medical and surgical conditions addressed, at high cost to the insurance companies, costs that greatly exceeded what these individuals paid in with premiums.

Some of these newly covered individuals underwent expensive procedures, then stopped paying their premiums, choosing to pay the penalty for not maintaining insurance coverage rather than continuing to maintain coverage and pay premiums.

Insurance companies also hoped to sign up many more young, healthy individuals (the so-called “young invincibles”) whose premiums would not be consumed by healthcare claims and therefore could subsidize the healthcare claims of sicker, older individuals whose insurance premiums would not cover their care. Almost 12.7 million Americans signed up for exchange plans during the most recent enrollment period, far below the 21 million people projected by the Congressional Budget Office. Just 21 percent of these subscribers were between the ages of 18 and 34, a much lower threshold than the 35 percent target that experts believe is needed for a well-balanced risk pool.

There were several reasons that these young healthy individuals did not sign up in greater numbers. First, many did not know about the law, the requirement for insurance coverage and the penalties for not being covered. Secondly, for those that did know, the premiums often were greater than the penalty for not being covered, and given their youth and good health, many decided to take their chances.

What changes did the government impose after the insurance companies set their premiums that caused increased financial losses to insurance companies?

As noted above, the government changed the rules.

Insurance companies counted on signing up the “young invincibles” once insurance coverage was mandated. Because of their youth and good health, many who did have insurance coverage prior to the ACA had catastrophic health insurance plans with very low premiums, high deductibles and limited coverage. These catastrophic plans did not qualify under the ACA, and insurers assumed that many people would choose insurance plans on the public insurance exchanges that would help subsidize the healthcare costs of older individuals who also would sign up on these plans.

After pushback about President Obama’s “If you like your health care plan, you can keep it” promise, the government created an exception that would allow states to “grandfather” these insurance plans for a period of years so that the penalty would not be imposed and “grandmothered” ACA non-compliant health plans that many had purchased after the enactment of the ACA but prior to the regulations that spelled out the minimum health benefits (the so-called ‘transitional plans”).

Many young people kept these plans, continued to pay relatively low insurance premiums and did not enter the public exchanges. Therefore, the risk pools for the ACA plans were not well-balanced.

In addition, the government encouraged insurance companies to offer low premiums by establishing three types of reimbursement, in essence an insurance for insurance companies if they signed up more than their fair share of sicker, higher-cost individuals, but then later withdrew funding for a significant portion of this program. That in turn led to significant insurance company financial losses and, some would argue, the collapse of 12 of the 23 insurance co-ops created under the law.

With the reduction in program payments, many insurance companies suffered huge losses, resulting in the need to substantially increase insurance premiums. Additional parts of this program expire at the end of this year, which has resulted in further insurance premium increases for next year.

What else has contributed to the rising cost of health insurance since the ACA?

In addition to everything else discussed here, new, extremely expensive drugs have become available.

Hepatitis C offers an example. The CDC estimates that 3.2 million people in the U.S. have chronic hepatitis C infection. The blockbuster drugs that for the first time offer the potential for cure from this infection cost on the order of $84,000 for a course of treatment. Many of the people who would benefit from this treatment are in the group of people who were previously uninsured and now have coverage through the insurance exchanges. The cost of treatment far exceeds the premiums these patients would pay.

Pharmaceutical costs have risen for other reasons, as well. Certain pharmaceutical companies have significantly raised the prices of medications that are not new drugs, for example.

Are there any reasons to be optimistic? Will insurance premiums stabilize? Is it possible to rein in healthcare spending?

Yes to all three questions. 

One reason to be optimistic is that the officials of one of the largest insurers, Anthem, recently indicated that the company remains on target to post a slim profit on its public exchange business in 2016. And while some health insurers have announced their departure from the health exchanges in some areas of the country, we are not seeing others leave the marketplace in droves.

Another positive development is that the government is curtailing special enrollment periods. An Oliver Wyman study indicated that the medical claim costs for individuals who signed up during these special enrollment periods were 10 percent higher, on average, than those for individuals who enrolled during the open enrollment periods. Those who enrolled during special enrollment periods were also 40 percent more likely to drop their coverage during the year, depriving insurance companies of future premiums to offset these higher claims costs.

Another positive will be the fact that grandmothered plans must end by the end of 2017. This could increase the participation in the public exchanges by healthier, younger individuals.

Public outrage and increased government inquiry already appear to have reduced the rate of pharmaceutical price increases. We may see state or federal legislation, and perhaps some state enforcement actions, that may further act to mitigate otherwise unbridled price increases.

With the increase in the penalty for not having qualified health insurance coverage, the hope is that more young, healthy individuals will enter into the public exchanges. Further, it is reasonable to expect some of the pent-up demand for high-cost procedures to plateau as people are on the exchanges for a longer period of time.

In addition, insurers have found that they can better manage costs through employing narrow networks, and consumers seem perfectly willing to trade an open network for lower premiums. Narrow networks offer the opportunity to address the fragmented and poorly coordinated care structure that characterizes many of the large, open networks.

As insurance companies move away from fee-for-service payments to aligned performance incentives through these narrow networks that can share health records, better coordinate care and manage care transitions, I have no doubt that the true value of a health system can be demonstrated in better health, better care and lower costs.  

About The Author

David C. Pate, M.D., J.D., is president and CEO of St. Luke's Health System, based in Boise, Idaho. Dr. Pate joined the System in 2009. He received his medical degree from Baylor College of Medicine in Houston and his law degree from the University of Houston Law Center.