What Factors Are Causing 2016 Premium Increases

In 2015, premiums for policies sold on the public insurance exchanges rose well above the rate of inflation or GDP, but not at an alarming pace.  For 2016, the projected increases are far higher, and will be very painful if actually paid.  Opponents of the reform law have used these increases as further evidence the law isn’t working, while proponents try to minimize the actual impact.  In truth, the real increase in premiums paid won’t be known until people make their purchasing decisions, if any, and the weighted comparison of premiums for purchased plans in 2016 can be made to those in 2015.  It is clear that premiums, both on and off the exchanges, appear to be rising more rapidly.  The Society of Actuaries gives a reasoned examination of what is causing those increases.   (SOA Report)    Since payment of medical claims is, and is required to be, the vast bulk of spending of premium dollars, it makes sense that an increase in medical claims cost is the overwhelming source of rate growth.  And what is causing that medical cost increase?  Some is unit price and some is utilization.  Prescription drugs, while only roughly 15% of total health spending, are experiencing hefty growth in new drug prices and some generic prices.  And the newly insured seem to using health services at a faster pace than originally thought.

The report also fingers a reduction of reinsurance from the federal government which was designed to stabilize costs over the first few years of the exchanges and is being phased out.  The reinsurance program is estimated to have reduced claims costs in 2014 by 10% to 14%, and that will likely shrink to 4% to 6% in 2016.  (This program was basically one of the bribes to health plans to get them to participate on the exchanges and to offer plans at lower than realistic premiums.  It in essence was also a hoodwinking of the public about the real cost of those insurance plans, which they are now seeing.)  The health needs of the population being insured also affects premiums.  If everyone is in the pool, and you get an average sample of that pool in your plan membership, premiums are basically just an average of the population’s expected costs.  But if not everyone participates, and the group that does purchase has greater or lesser health needs than the overall population, that affects premiums as well.  And, gee, what a surprise, the healthiest people are trying to find ways to avoid spending money on health insurance so the enrolled members had higher health needs and costs than the plans projected.  Experience from 2014 and the first part of 2015, as well as uncertainty about future insured pool makeup, is causing insurers, many of who are losing money on the exchange plans, to raise rates rapidly.

Insurers have tried to adapt to the exchange challenges by narrowing networks and adopting other restrictive benefit policies, but there is pushback on some of these.  If, as usual, the regulators adopt their usual attitude of saying you have to pay for everything with few management restrictions, we can expect further premium growth.  What is absolutely clear is that the Administration and the Congress that passed the reform law absolutely misled, if not lied to, the public when they said the law would lead to lower health insurance costs and slower premium growth.  They knew or should have known that this wasn’t the way things were going to work.  And now the public gets to eat the unpleasant consequences of their legislative folly.