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Obamacare Premiums Are Magical Mystery Tour
From Megan McArdle.
"Last week, we finally learned the prices
for the new benchmark plans for Obamacare. The good news: Prices are
falling slightly. The bad news: Contrary to optimistic early reports,
that doesn’t mean that everyone’s costs are falling; consumers will have
to be attentive to make sure that their costs don’t go up. The worse
news: We won’t actually know what effect the Affordable Care Act is
having on insurance prices until 2017, when a bunch of temporary
subsidies for insurers expire.
The important thing to keep in mind
is that when the “benchmark rate” goes down, that doesn’t mean that the
cost of the old benchmark plan has fallen. It just means that whatever
plan is now the second-cheapest "silver" plan on the exchanges is
cheaper than whatever was the second-cheapest plan last year. Industry
expert Bob Laszewski writes:
The
new 2015 Silver baseline plan may have a lower premium than the 2014
Silver baseline plan. But that is almost always because the insurance
company that held that slot in 2014, and almost always got the largest
share of business, significantly increased their rates for 2015.
Then
another insurance company, who didn't write much business and likely
now eager to increase market share, decreased their rates and has become
the 2015 baseline plan. The second company was able to decrease their
rates without much fear because the Obamacare "3Rs" reinsurance scheme
virtually protects them from any material losses.
So, this
headline about the baseline plans decreasing their rates in so many
markets is more about the carriers who sold the most in the first year
increasing their rates while the plans that sold very little business,
and able to fall back on the Obamacare reinsurance scheme, cut their
rates in a no lose attempt to gain business.
OK, why does that matter? That’s market competition for you.
Yes,
but. We don’t know what those new plans look like. Are the networks
narrow? How easy will it be to get an appointment for a doctor? And
remember that the benchmark plans are used to calculate the subsidies,
which means the subsidies are going down. If Laszewski is right, and the
costs of the most popular plans are rising substantially while the cost
of undersubscribed plans is falling, that means that people who want to
stick with their old plans may have to pay substantially more as the
subsidy falls while their premium rises. The Barack Obama administration
has planned to auto-renew anyone who doesn’t go onto the exchanges and
select a new plan. Given these realities, consumers would be foolish to
take that option; they need to go onto the exchanges and select a new
plan, or at least decide whether they’re willing to pay more for what
they have.
What about the rest of us, who are watching but not buying? Should we take cheer from this news?
Actually,
I don’t think we know much of anything yet. No, that’s not quite right
-- we know that rates aren’t rising disastrously this year, which is
great. But I don’t think we can draw conclusions about the future path
of insurance prices, for two reasons.
The first is that these
prices are not being set based on much claims data. As Laszewski points
out, companies began setting these rates just a few months after open
enrollment closed, and because so many people bought in the last few
weeks, that means they had little meaningful idea of what their expenses
would be. The companies that are coming in are looking to gain market
share, not make a profit.
The other reason that we cannot learn much from these data is
that right now, and for the next year, insurers are operating under the
expectation of large subsidies from the Obama administration via the
various reinsurance provisions in Obamacare. Those provisions expire in
2016, and if a Republican takes the White House that year, insurers can
also probably forget about getting favorable regulatory rulings.
Right
now, it’s just not very risky to write a policy that loses a bunch of
money, because your losses are capped at a few percent. Starting in
2017, all that changes. Insurers are going to need to price policies
with the expectation of making money and the fear of losing it.
What
we want to know is what happens when they’re actually in a competitive
market. I can tell a story where the exchanges create transparency and
competitive pressure that drive prices down; I can tell a story where
the subsidies and various regulations drive prices even higher. I can
tell a story where the insurers conclude that this market isn’t worth
the tsuris and leave it to Blue Cross/Blue Shield, with all sorts of
fascinating results.
We won’t know which story is true until 2017 or beyond.
So if
you’re planning to buy the benchmark silver plan this year, whatever it
is, you can safely rejoice. Everyone else should exercise caution.
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