Why did Obamacare premiums increase so much?

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Colin LalleyContent Director, Home & Auto InsuranceColin Lalley is the content director for home and auto insurance at Policygenius, where he leads our property & casualty editorial teams. His insights have been featured in Inc. Magazine, Betterment, Chime, Credit Seasame, Zola, and the Council for Disability Awareness.

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No one knows what’s going to happen with Obamacare, aka the Affordable Care Act (ACA), now that President-elect Trump is in office. But considering the fact that no changes will come before 2018 and you need health insurance right now (you’re already shopping, right? Open Enrollment ends January 31st!), that doesn’t affect your immediate future. What does affect you is the fact that premiums have increased in every state. Why is it happening, and what does that mean for Open Enrollment? Let’s take a look.

What’s going on with health insurance premiums?

In short: they increased. In some cases, by a lot. If you’re shopping on the health insurance marketplace in Tennessee, for example, you’re facing premiums increases averaging 56%. The national average is a 22% increase, despite the concentrated efforts of some states to provide cheaper premiums, as is the case with the Kansas health insurance exchange.

On the bright side, most people shopping on the exchange for health insurance won’t feel these increases all that much. Since 83% of shoppers are eligible for government subsidies, the actual impact of premium increases is minimized. Still, it’s not great for Obamacare as a program that premiums are going up.

This is happening all over the country, so the question isn’t really, "What?" as much as it is "What next?"

Some experts think this was a one-time "course correction" that we won’t see again; prices were too low (as we’ll talk about in a bit) and the market adjusted. Others fear that this could be the start of a "death spiral": premiums increase, so people drop out to avoid paying, so premiums increase to make up for the lack of people paying, so more people drop out...In case the term "death spiral" wasn’t a hint, this is bad.

Part of knowing what’s next is knowing why premiums have increased. There are four theories – not all of them necessarily mutually exclusive – that tell that tale.

Why are premiums increasing?

The reason for health insurance premium spikes isn’t cut and dry. Here are the four main non-Trump factors that are endangering Obamacare.

Premiums were lower than expected at launch

In 2014 – the first year of Obamacare – ACA marketplace premiums were between 10% and 21% lower than premiums in 2013, according to the Brookings Institution. This was a new system based on new rules and guidelines; prices were low because enrollment was needed, protections (that we’ll speak to further down) were in place, and no one knew exactly what to expect.

Even then, premiums continued to grow at a slower-than-expected rate: 2016 premiums were 20% below projections.

This reason aligns well to the "course correction" theory. Prices were low, insurers figured out what they needed to be charging, and although this is a huge jump for a lot of people, it’s just to get the market back to where it should be to make it sustainable. It’s (very) painful now, but future stability should allow people to budget more appropriately in the future.

Enrollment is half of what was expected

Here’s how health/any type of insurance works: a lot of people buy into the insurance, and everyone pays premiums. This is called the risk pool. Then, when someone needs to use their insurance and the insurer has to pay, they’re covered thanks to all of the premium payments of the people who aren’t using it.

This speaks to another of Obamacare’s problems. While 22 million people were expected to enroll up to this point, only 10.4 million actually have. Fewer people entering the system makes it harder to leverage the risk pool to cover the costs. All that, and it doesn’t help that the people who are enrolling aren’t necessarily the people the insurers want (i.e., the ones who need health insurance the most).

This has also lead to health insurance carriers leaving states. For example, Blue Cross and Blue Shield of North Carolina is offering health plans throughout the state, but UnitedHealthcare and Aetna are pulling out, while Cigna is only offering plans in the more populous counties around Raleigh and Durham.

Enrollees are sicker than expected

With Obamacare, you don’t have as many people buying in as expected, and that problem is exacerbated by the fact that the ones who are enrolling are sicker than expected. So the same people paying premiums are largely the same ones using their insurance. Again, if you don’t have the large risk pool to cover costs, you get what we’ve had over the past year: insurers pulling out of different marketplaces.

As Larry Levitt of Kaiser Family Foundation says, "it’s really only now that insurers have good data on who enrolled and how much it cost." This speaks strongly to a "course correction," and goes along with the fact that premiums were lower than they should have been; now that insurers know how much it costs to insure the type of people who are applying, they know that insurance was actually way too underpriced.

It’s also important to know that that the federal reinsurance that carriers had in place ends in 2017. Basically, because of the uncertainty around how Obamacare would work, and new regulations like needing to cover people with preexisting conditions, carriers received reinsurance from the government to cover exactly what was happening (providing low-cost plans for high-cost enrollees). That protection is coming to an end, so insurers are raising their prices since they’ll soon be on the hook for more of the cost.

The individual mandate is too weak

As you might have heard, the ACA made health insurance mandatory. How do you enforce that? With a penalty, or individual mandate. If you don’t buy health insurance, you pay the higher of 2.5% of your household income or $695 per person ($347.50 for people under 18), whichever is higher.

But in the grand scheme of things, that’s not that much. The Department of Health and Human Services says that 70% of shoppers on the exchange can find a plan for under $75. If you pay that each month, that’s $900.

Let’s assume that you’re young, relatively healthy, and only paying for yourself; using a penalty calculator, we can see that if you’re making $45,000 a year, you’d be on the hook for a $866.25 penalty. It’s cheaper to not be insured. (We’ll put aside the fact that even for minor doctor visits, that number shoots up by a lot if you don’t have health insurance. But people who don’t buy health insurance probably aren’t thinking that far ahead.) And the real problem is that the crowd for whom it could be cheaper to pay the penalty than buy health insurance is exactly the crowd that insurers need as customers: young, healthy people who will pay for but not use their insurance often, who can offset the cost of the high-use customers.

Some people argue that a stronger penalty – a higher fee or possible jail time, like in Switzerland – is needed to get the economics of Obamacare to work. Whether this will go anywhere with a new administration in the White House, or if it can cure Obamacare’s ills, remains to be seen.

How to avoid the premium hike

Regardless of why it’s happening, or what the future of Obamacare holds, what matters to you is how you can avoid these premium increases. To get coverage without breaking the bank, do these three things:

  • Plan your budget. The average consumer spends about 5% of their annual budget on health insurance premiums. This is a good benchmark, because allows for some wiggle room for your out-of-pocket costs (like the deductible) in your overall healthcare budget. Look at your past healthcare consumption and your future expectations and determine what kind of plan you need. Are you relatively young and healthy, taking few trips to the doctor? Look at low-premium, high-deductible plans. Do you have a condition that requires tests and doctor visits, or are you expecting to get pregnant or to need a surgery? A high-premium plan can help you cover costs in the long run.

  • Apply for a federal subsidy. Since 83% of shoppers are eligible for a health insurance subsidy, there’s a good chance you’re in that crowd. And since 2.5 million shoppers who are eligible for a subsidy aren’t applying for one, there’s a good chance you’re in that crowd, too. Use Kaiser Family Foundation’s subsidy calculator to see if you’re eligible and be sure to apply for one when shopping to significantly reduce your costs.

  • Shop around. Did you know that off-exchange plans provide the same consumer protections as the plans you’ll find on Healthcare.gov and state marketplaces, but the fewer regulations mean you might be able to find a cheaper plan that still fits your needs? Shop on a private exchange like PolicyGenius to see every plan that’s available and make the best choice.

Start shopping today to get health insurance before this year's enrollment period ends – as of now, no one knows what will happen beyond that!

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