Sticker Shock for Some Obamacare Customers

By Megan McArdle.

"So the proposed 2016 Obamacare rates have been filed in many states, and in many states, the numbers are eye-popping. Market leaders are requesting double-digit increases in a lot of places. Some of the biggest are really double-digit: 51 percent in New Mexico, 36 percent in Tennessee, 30 percent in Maryland, 25 percent in Oregon. The reason? They say that with a full year of claims data under their belt for the first time since Obamacare went into effect, they're finding the insurance pool was considerably older and sicker than expected.

Don't panic, says Kevin Drum. This is just the opening bid in a regulatory dance that will end up somewhere very different: "A few months from now, the real rate increases — the ones approved by state and federal authorities — will begin to trickle out. They'll mostly be in single digits, with a few in the low teens. The average for the entire country will end up being something like 4-8 percent."

He's right, of course, that the proposed rates will not end up being the final rate. Regulators are going to push back on these rates as hard as they can, with some success.

But in the case of the companies cited by the Wall Street Journal, I'd bet they're not going to go down to 4-8 percent. As it turns out, the insurer filings are public information, available on state websites. And in the three cases where I could see supporting data about premium revenue and losses, those losses appear to be large. Moda of Oregon says that its claims were 139 percent of revenue, making for a margin of -61 percent. If I am reading their somewhat confusing table right, Health Service Corporation of New Mexico says it lost $23 million on revenue of $121 million. CareFirst of Maryland says that claims were 120 percent of revenue, which if we add in some money to pay for overhead, amounts to ... less than or equal to what they're asking from regulators. I can't find claims experience data for Tennessee, but that state told the Wall Street Journal that it lost $141 million on exchange plans last year.

Now, this is not the whole story. These are only the biggest insurers in some states. Smaller insurers may price lower in an attempt to grow their business (though if their claims experience matches the biggest insurers, that's going to be a recipe for a quick bankruptcy). And the median request on a list of the biggest insurers in 12 states was more on the order of 10-15 percent, and three states -- Maine, Connecticut and Indiana -- had insurers ask for increases in the low single digits.

That's only 12 states, of course, and none of the biggest-population ones. But even if we assume that the regulators cut the increases in half, that's a median increase of 5-6 percent, with a mean considerably higher than that. Even if you weight by population -- well, actually population-weighting makes that worse, not better, because the states with the lowest rate requests are disproportionately sparse.

Moreover, significant rate increases are what I would broadly expect, because these rates are the first ones set with a full year of claims data, and what we know about the pool is that it is poorer and older -- which would also mean sicker -- than was projected. Initially, HHS was saying that it needed about 40 percent of the exchange policies to be purchased by people age 18-35 to keep the exchanges financially stable. It was 28 percent in both 2014 and 2015, according to HHS data. The CBO had projected about 85 percent of exchange enrollees to be subsidized, falling toward 80 percent as enrollment grew; instead, that number is 87 percent and actually rose slightly from 2014. It would be pretty surprising if rates weren't increasing faster than inflation, or even than general health care cost inflation.

Eyeing the Journal's list, the most obvious pattern is that states are converging on a price somewhere well north of $300 a month for a 40-year-old nonsmoker seeking a Silver plan; the states with the biggest rate hikes all had premiums under $250, and are asking to be allowed to go near or over $300, while the states that asked for low increases were already over $300, and in some cases well over. (Vermont is at $430 -- and asking to go to $476! "Only" an 8.4 percent increase, but wow.) It seems as if states where insurers initially underpriced are now trying to move toward a natural price somewhere between $3,600 and $5,000 a year for a single nonsmoker. If that's the price of providing basic benefits, regulators cannot command it away by fiat; the best they can do is to force insurers out of the market.

I assume that these large insurers are willing to incur some losses in the market for exchange policies in order to stay on the good side of their state regulators and HHS, because overall, those policies are not a large part of their business. But getting those rates down to something more on the order of 10 percent would require some pretty big losses. How long, exactly, will they be willing to carry a product that loses that kind of money? 

The good news is that even if we do see big rate hikes for the next few years, that doesn't mean we need expect them indefinitely. Eventually, insurers will figure out the price of providing these products, and then -- barring a self-selecting "death spiral" -- cost increases will move with the rate of health care cost inflation, rather than wildly gyrating as insurers realize they're losing money. The bad news, of course, is that we don't know how many big increases we might need to get to that price."