Premium shock: The story isn’t as simple as it seems

About Joanne Kenen

Joanne Kenen, (@JoanneKenen) the health editor at Politico, has been AHCJ’s topic leader on health reform and curated related material at Follow her on Facebook.

You’ve seen lots of stories – and you may well have written some – about how much the cost of insurance is going to rise for younger people in the exchanges next year – the so-called “premium shock” or “price shock.”

This is a fair concern – but be careful that you handle it fairly.

If insurance is too costly, younger healthier people may not sign up for coverage in the exchange, while older sicker ones do. That creates “adverse selection” – a lousy risk pool – followed by a “death spiral.” With a disproportionate number of sick people, costs will go up even more, insurance will be even more unaffordable, so even fewer young healthy people sign up, the cost gets unaffordable for those people that do enroll, the whole exchange idea fails. The end.

Some of the messaging you’re hearing about premium shock is coming from conservative groups who want the Affordable Care Act to fail – or from segments of the industry that want to change the rules.  The law now allows insurers to charge older people only three times as much as younger ones – the so called “age bands.”  Some insurers wanted to make that five to one.

But not everyone concerned about price trends are opposed to “Obamacare.” Some state officials and policy experts, including some who favor the health law, thought it would have been smarter to start with five-to-one age bands and phase down to three to one over a year or two. Noam Levey’s February article looked at these and related concerns. But HHS recently confirmed in a rule that it’s sticking to three to one.

So does that mean premium shock is real? Are we headed for the “death spiral?”

As you write, keep in mind other parts of the picture.

  1. Nobody knows what it’s going to cost yet. (There are two useful calculators to play with, Covering California and one from the Henry J. Kaiser Family Foundation. But there is guesswork built into both of them too – we don’t know exactly who will be selling on the exchanges and what the cost will be.)
  2. The prices you hear about are “sticker” prices – but many people going on to the exchange are going to be subsidized. That includes a lot of these younger adults.  If insurance costs $5,000 but you only pay $2,000 – that is a lot less “shock.” (The calculators, cited above, give you a sense of the subsidies for different income groups.)
  3. Young adults (and certain older ones who meet specific affordability thresholds) can buy a catastrophic plan which will be a lot less expensive (but they can’t get a subsidy for those). Catastrophic coverage, come 2014, will be different than the policies on the market today as they will also cover some preventive and routine care.
  4. There are several mechanisms in place (such as risk corridors) that cushion insurers if they have a disproportionate number of sicker, high-claims beneficiaries.
  5. Don’t forget that there’s an apples and oranges element to this too. Policies may be more expensive – but they will also have better benefits and more consumer protections.  (The CBO has projected that average premiums for a given group would fall 7 percent to 10 percent – if the apples-to-apples comparison is made –but in the post-reform world the benefits and coverage will often be more expansive. People will pay more but get more – although, of course, not everyone wants that.)
  6. Coverage will be more expensive for many young people than it is now – but it will be cheaper for many older ones who can’t buy insurance at all now.
  7. Remember that insurance prices have been going up for years and years. And years.  And years. It’s not all because of the ACA .Here’s a good story from January looking at some of the recent trends from Reed Abelson at The New York Times.

So does that mean there is NO premium shock to worry about and it’s all going to be fine and dandy? No. Some people will pay more and enrollment patterns in the exchanges are a very legitimate source of concern – particularly with so much political controversy and misinformation still out there. But it’s far more complicated than the “prices are soaring, the sky is falling” story you may be hearing – and should not be telling.

For a more detailed, but more technical overview of the factors I’ve mentioned here, see this “policy insight” paper from the Kaiser Family Foundation.

4 thoughts on “Premium shock: The story isn’t as simple as it seems

  1. michael miller

    all good points. one more is that impact is different on women than men. right now young women often pay much more than young men for the same coverage. elimination of gender rating will end that.

  2. Chuck Miller

    Much will depend on where you live. States with small populations will likely pay the most since there’s little competition among insurers and little incentive to join exchanges. If small states have federally run exchanges, then some of the loss of competition will be mitigated by HHS creating its own exchange option (using private insurers) for those states.

    The opposite is true for states with large populations. Applications from private carriers to join the exchange in California have exploded and competition is going to be significant.

    And you’re right, some accounts tend to overlook the subsidies both individuals and small business will receive.

  3. Mark Meade

    Having work in the health field for over thirty years I have seen many changes and watched as unintended consequences have upset the plans of very good intentioned people. Go back to the HMO Act which spurred growth in managed care and generated significant cost control but was done in in by a few bad actors and late-night comedians. PPACA is very similar in many way but far more reaching. The rate spike, which you correctly pointed out, is only part of the story, will have impact far beyond the simplistic predictions of both its proponents and detractors. Yes significant increases at the bottom age brackets will be offset by cuts at the top but due to the nature of health care spending the magnitude of those cuts will be at the miniscule at the top when compared to the increases on the young. Add to that the expanded benefits and new taxes on health plans and the top end rate reductions, in real dollar terms, are all but eliminated, while the young age brackets are additionally burdened. The full impact won’t happen overnight but it will happen. Younger people will reduce or drop coverage while the older segment will find it more difficult to pay for coverage. That old 5 to 1 ration kicking in. Measures to cross subsidize rates will only be short term palliatives as the impact will be system wide. Government support of premiums will become another budget black hole to throw money down as the system verges on collapse. The answer is not what many have suggested a government takeover but what should have been done in the first place. True health care reform is a three part process and must start with cost. Next is quality which must be maintained and improved and then and only then should we consider access. Unfortunately in the rush to fulfill an age old dream of one political party we jumped headlong into access in the hope that everything will sort itself out later. We currently have most sectors of our economy on life support we are about to add health care to that list regardless of the best intentions of those involved. It is troubling to see so many people willing to look beyond the facts and reality to some perceived notion or ideal. Perhaps it a manifestation of New Age thinking that by wishing something will happen it will. It won’t it takes study, hard work and sacrifice for change to occur something all sides of this issue seem to be unwilling to do.

  4. Pingback: Delaying Affordable Care Act not as simple as it sounds | Association of Health Care Journalists

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