Double-Digit Premium Hikes Debunk California's "Active Purchaser" Claim

(A version of this Health Alert was published by Orange County Register.)

With some embarrassment, Covered California (the state’s Obamacare exchange where people can purchase health coverage) has announced the average premium hike next year will be 13.2 percent. For many subscribers, the hike will be much greater because of the way federal tax credits discount premiums.

This year, a 40-year-old single person making between $17,820 and $23,760, can buy a Blue Shield Silver level plan with a monthly premium of $318. However, the subscriber only pays $122 while the federal government chips in $196. Next year, the premium will go up 2 percent to $381, of which the subscriber will pay $170, while the government will chip in $211. The total premium will increase by 20 percent ($63), while the subscriber’s net premium will increase 39 percent ($48).

Next year’s premium hikes debunk Covered California’s claim that its power to act as an “active purchaser” gives it an advantage in holding down rate increases. California is one of only four states in which the Obamacare exchange has the statutory authority to act as an “active purchaser,” substituting its own judgement about benefits consumers value for their own. Covered California dictates, for example, a primary-care visit has a $45 co-pay for those with Silver plans; or that a family deductible is $4,500.

According to Peter Lee, Executive Director of Covered California, consumers do not really care about the ability to choose plans with different features. “What’s the difference between them?” In order prevent consumers making choices of plans with different co-pays and deductibles, Covered California only accepted 12 of 32 insurers which initially showed interest in participating in 2014. UnitedHealthcare, the country’s largest insurer, entered Covered California in 2015 but will not participate in 2017.

Commenting on next year’s double-digit rate hikes, Covered California Executive Director Peter Lee blamed the cost of prescription drugs and the end of some federal subsidies for the problem. Neither claim stands up to scrutiny.

Although drug costs have been increasing faster than other health costs, that trend is breaking down. The Milliman Medical Index, prepared by a leading firm of consulting actuaries, reported health costs for employer-based plans experienced the “lowest annual increase in 15 years” this year, at 4.7 percent. Prescription drug spending grew 9.1 percent, down from 13.6 percent in 2015. IMS Health, a leading provider of health market intelligence, forecasts U.S. prescription spending will increase between just 4 percent and 7 percent annually through 2020.

The special subsidies to which Mr. Lee refers are “reinsurance” and “risk corridors.” Under the Affordable Care Act, they were always scheduled to expire at the end of 2016. The law anticipated insurers would have trouble estimating costs for the first three years of Obamacare. So, the politicians who voted for the law allotted an extra $25 billion to reinsure insurers against unanticipated losses from those who are older and sicker. On top of that, they established another subsidy named “risk corridors” that were designed to subsidize health plans whose total medical expenses for all ACA customers overshoot a target amount.

Seeing the exchanges were in trouble, the administration tried to pay insurers more money than Congress had appropriated. Senator Marco Rubio led the fight in December 2015 that ensured the administration obeyed the letter of the law, saving taxpayers almost $2 billion. Their expiration is a red herring, because the challenge of estimating medical costs in the exchanges was supposed to have been solved by 2017, not to have gotten worse.

The real problem is that Covered California’s “market” is designed to fail. As described by the Milliman Medical Index: “The employer market is more stable and people are insured more continuously than in the individual market. The ability to move in and out of the individual market, the fairly limited penalty for lack of coverage compared with premium rates, and long grace periods contribute to adverse selection and less stability in the individual market.”

Obamacare’s critics have anticipated this for six years. Obamacare’s crisis will get worse as these premium hikes continue to drive young and healthy Californians to drop coverage and pay the penalty of $695 or 2.5 percent of income, whichever is greater.

It is time for Obamacare’s supporters, in California and around the country, to admit the individual market can only be fixed by identifying solutions that empower doctors and patients and not the government.