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January 30, 2013

The Most Ominous Sign Yet Health Insurance Premiums Will Explode

  Forbes

Now comes the most ominous sign yet health insurance premiums are going way up: Most health insurers in the individual market have stopped guaranteeing a person’s premiums for a year.  And as one commentator quipped: they aren’t doing it because they expect to be lowering people’s premiums.

Traditionally in the individual market, where people buy their own (i.e., non-group) health coverage, applicants sign a contract and the insurance company guarantees that premium for a year.  I’m told that about 12 percent of individual applicants would write a check for the year’s premium, rather than being billed monthly.

No more.  Health insurers started sending out notices in January informing insurance brokers and agents that the companies will no longer guarantee that premium rate.  From now on it’s month to month.

As one benefits company explained:

“After carefully evaluating its individual market and rates, Aetna decided to discontinue its offer of an initial 12-month rate guarantee.

“This change applies to policies with a January 15, 2013 or later effective date, in all states where plans are sold.

“Existing members who are currently in a rate guarantee period will not be affected.  The rate guarantee language has been removed from all marketing materials including the state-specific booklets and rate sheets.”

Thus, an individual buying health insurance for his family thinking he can afford the coverage might be forced to cancel it within a few months because of premium increases.

Why the change?  It is all the uncertainty imposed by the misnamed Patient Protection and Affordable Care Act, or ObamaCare.  It has thrown so many unknowns into the mix that actuaries don’t know how much to charge.

As one health insurance broker told me, “Any health insurance actuary would be fired for trying to set a premium for a whole year because no one knows how much it’s going to cost.”

Why the uncertainty?  Because Democrats crafting ObamaCare ignored virtually every actuarial principle.  ObamaCare requires insurers to accept anyone who applies; they can’t charge more for major medical conditions; and they require insurance to cover lots of things that many people wouldn’t choose for themselves.

As retired actuary Mark Litow and I have written elsewhere, health insurance premiums in the individual market will double for some people in some states—and that’s only in the near term.

Now, contrast health insurance with the life insurance market, where people also buy their own policies.  There you can buy a policy with a level premium for five or 10 years or more.  Of course, one reason that market is so stable is that President Obama hasn’t tried to fix it.

Moreover, these premium fluctuations will wreak havoc on the government’s efforts to provide subsidies to families with incomes up to 400 percent of the federal poverty level.  The subsidies cover a portion of the cost of health insurance, up to a maximum out of pocket for the family.  The amount of the subsidy is based both on the cost of coverage and income—which will lead to an IRS heyday of snooping, but that’s a topic for another day.

There has been a lot of head scratching over how to deal with the fact that a family’s income can vary significantly within a year, up or down, in ways no one predicted at the beginning of the year.  So how does the government determine the correct level of subsidy?

Now add to that mix that premiums can also vary significantly—though only going up, not down.

And if you think this is all someone else’s problem because you have good employer-based coverage, you may be in for a surprise.  While the individual market has been relatively small (about 19 million people, according to the Employee Benefit Research Institute) compared to those with employer-based coverage (about 156 million), most honest analysts expect millions of employers to drop coverage and dump their employees into the individual market.

Economic and political uncertainty stifled the economy in Obama’s first four years; but that uncertainty pales when it comes to the uncertainty being experienced in the health insurance market.  Millions of Americans will soon discover that health coverage was never so expensive as when Obama decided to make it affordable.


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