Components of Premium Increases

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Affordable Care Act (ACA) >> ACA Impact Analysis >> ACA Impact on Costs >> Impact on Private Health Insurance Premiums >> Components of Premium Increases (last updated 4.2.17)

Overview

In approximate order of their magnitude on average premiums, the following lists the largest contributors to higher premiums (in some cases the impact will vary considerably by state due to large differences across states in the regulation of non-group and small group insurance markets).  It should be noted that these increases represent permanent increases in the cost of coverage even though most impacts occur only once in time. Thus a 1 percent increase in premiums occurring in 2010 does not disappear but instead becomes a permanent part of the base rate for premiums going forward.  A number of the figures cited are based on a survey of 26 health plans covering 32 million individuals conducted by Aon Hewitt in 2011 that reported average premium impacts of several key ACA provisions in the non-group, small group and large group market.

Guaranteed Issue

The ACA guaranteed issue (GI) requirement forces insurers to take all comers, including those with pre-existing conditions.  Based on analysis of state health insurance regulations, researchers at the Council of Economic Advisors  estimate that GI requirements in the non-group market raises the price of an individual policy by 114.5%, while premiums for family policies rose 94.2%.

Modified Community Rating

The modified community rating requirement prohibits carriers from using health history or health status in setting premium rates.  Researchers at the Council of Economic Advisors  estimate that pure community rating requirements raises the price of an individual policy by 20.3%; it raises the price of a family policy by 27.3%.

The ACA does permit premiums to vary by age to a limited extent. Prior to ACA, all states already had imposed restrictions on the non-group and small group markets that limited age variation to 5:1, meaning the oldest plan members could not be charged more than five times the premium charged to the youngest plan members. The ACA compresses this further to 3:1, meaning that premiums will rise for young plan members and decline for older members.

  • An Oliver Wyman study projected that this requirement would increase premiums 45% for those age 18-24 years old and 35% for those 25-29. However, if this resulted in younger members electing to drop coverage, premiums for remaining plan members would go up even more than this.
  • Actuary Greg Fann, at Wakely Consulting Group (5.9.14), provides illustrative calculations for 24-year- olds and 64-year-olds for different metal tiers using a plan with an 80% medical loss ratio, showing that at 275% of poverty:
    • 2nd Lowest Cost Plan. 24-year-olds would pay the same premiums for the 2nd lowest cost Silver coverage as 64-year- olds once subsidies were taken into account ($231 monthly); prior to subsidies, 24-year-olds would pay premiums equal to 2.2 times their expected claims costs while 64-year-olds would pay premiums equal to 1.1 times expected claims. However, after subsidies, net premiums paid by 24-year-olds still would be 2.2 x expected claims (because they would not qualify for subsidies) while 64-year-olds would pay a premium 71% below claims.
    • Lowest Cost Plan. For a hypothetical “lowest cost” plan costing 10% less, premiums would be inverted: 24 year olds would pay $208 and 64 year olds would pay $162.

Elimination of Pre-existing Conditions for Children Under Age 19

This is a sub-component of the guaranteed issue requirement which became effective in 2010 (elimination of pre-existing conditions for adults does not begin until January 1, 2014). The Aon Hewitt survey cited above reports the average premium increase would range from 0-0.2% in the large group market, 0-3% in the small group market and 0-5.8% in the non-group market (Fig. 11).

Essential Health Benefits

All non-grandfathered plans in the non-group and small group markets must cover essential health benefits starting in 2014. In the non-group market, this requirement is expected to increase premiums by as little as 0.13% (RI) to as much as 33% (ME); most states will experience single-digit rate increases.

Minimum Actuarial Values

With the exception of catastrophic plans that can be purchased (without subsidies) only by individuals under age 30, all plans in the exchanges must starting in 2014 have a  minimum actuarial value (AV) of 60% (meaning the plan will pay 60% of covered expenses for a typical individual covered such so-called “Bronze” plans). 51% of the plans in the non-group market prior to these ACA requirements had an AV below the “Bronze” level, with 1 in 8 plans having an AV between 35% and 49%. As a rough approximation, a plan with an AV of 40% would need to raise its premiums by 50% to attain a 60% AV standard (60/40=1.5 x current premium levels).

Health Insurance Tax

  • An Oliver Wyman study (2011) estimated this tax will increase premiums by 1.9 to 2.3% in 2014 and 2.8 to 3.7% by 2023. In a subsequent analysis, the firm estimated that over the next decade, the HIT will cost the average individual $2,171 and family $5,140 in additional premiums.
  • “This week three big insurance companies in Massachusetts announced they lost money in the first quarter, thanks to ObamaCare’s new taxes and fees. Blue Cross Blue Shield of Massachusetts reported a $59.3 million loss after it had to pay $73 million toward financing ObamaCare. Pilgrim Health paid $22.9 million in ObamaCare taxes, leading to a loss of $17.3 million. And the Tufts Health Plan would have broken even if not for ObamaCare. The main cost imposed on these insurers is ObamaCare’s ‘health insurance tax,’ which is based on a company’s market share. This year, the tax will cost the industry a total of $8 billion, and the burden will go up from there…’This is going to be passed on in higher premiums.'” (Investor’s Business Daily, 5.16.14)

Exchange Usage and Administration Fees

Plans on federally-facilitated exchanges must pay 3.5% of premiums in 2014. State operated exchanges are similarly allowed to charge user fees to consumers, WV estimates this cost could range from $5 per member per month to as much as $45, i.e., $540 annually in 2014, falling to about half these levels by 2016. Thus, depending on enrollment levels and the actual cost of various exchange activities, carrier administrative costs would have to range from 0.6% to 6.09% in order for the exchange to be budget neutral.

Preventive Health Services Without Cost Sharing

These standards apply to all non-grandfathered health plans. On average DHHS estimates this will increase premiums by 1.5%, which the agency expects plans to pass along to its members. The Aon Hewitt survey cited above reports the average premium increase would range from 0-1% in the large group market, 0-2% in the small group market and 0-3.5% in the non-group market (Fig. 11); some carriers reported expected premium increases as high as 15%.

Contraception Mandate. According to an IMS study, “The ACA provision ensuring a zero out-of-pocket cost for preventive tests and treatments and for contraceptives has dramatically reduced out-of-pocket costs for women in particular, saving them approximately $483 million in out-of-pocket costs in 2013 for contraceptives alone.” This figure represents the incremental savings associated with the incremental increase in prescriptions for hormonal contraceptives (24 million) in 2013 compared to 2012.  Thus, the average savings per prescription was about $20.  There are 62 million women in traditional child-bearing ages (15-44); this figure increases to 75 million if women 45-50 are included. This implies incremental savings of $4 per woman of child-bearing age.

Elimination of Annual/Lifetime Limits

The Aon Hewitt survey cited above reports the average premium increase would range from 0% to just under 1% in the large group market, about 0-0.8% in the small group market and about 0-2.2% in the non-group market (Fig. 11). Some carriers reported premium increases as high as 5%.

Dependent Coverage to Age 26

The Aon Hewitt survey showed that the average premium impact would be 0%, but the average premium increase would range from -0.5% to +1% in the large group market, -0.5% to +2% in the small group market and about -0.8% to +3.5% in the non-group market (Fig. 11).

Reinsurance Assessment Fee

This 3-year tax (2014-2016) is to fund a reinsurance program to reimburse insurers who have a disproportionate share of high-risk cases; it will be $63/member of fully-insured and self-insured health plans.

Patient-Centered Outcomes Research Institute Fee

This also will be assessed on fully-insured and self-insured plans for the years 2013-2019; the fee amounts to $1 per person per year for plan years ending between 10.1.12 and 9.30.13, $2 per person for plan years ending between 10.1.13 and 9.30.14, with the fee adjusted in subsequent years by the increase in per capita national health spending.

Analysis

  • Milliman. “Obamacare caused premiums to rise for various reasons, chief among them being the vast new regulations the law imposed on insurance markets. A new analysis from Milliman backs this up. The study provided estimates of the average impact that various Obamacare regulations had on premiums. These estimates are reflected in the chart below.” (Daily Signal, 3.23.17)

  • ‘This Has to Stop’: Premium Costs Climb Higher because of High Utilization of Medical Care, Fees From Obamacare. “‘This has to stop,’ said Scott Stevens, a health insurance consultant in Omaha… Stevens also said fees and taxes associated with the Affordable Care Act are driving up premiums, which are the fixed fees that individuals or employers pay for a policy. He said one tax in particular, the health insurance providers fee, is forcing premiums up. The tax on insurers aims to help cover the cost of federal subsidies for Obamacare policies that provide insurance to lower-income people without prior coverage. The tax is not placed on self-funded plans. Other fees include one to fund the Patient-Centered Outcomes Research Institute and one called the transitional reinsurance fee, which helps offset the costs of high-risk individuals. The latter fee expires at the end of the year. There is a moratorium next year on the health insurance providers fee, and some hope to have it permanently repealed.” (Omaha.com, 7.14.16)

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