On Tuesday, March 26, the Society of Actuaries released a study that indicates PPACA will cause insurance costs in the individual market to rise by an average of 32% next year. Actuaries are financial risk professionals who use statistics and economic theory to conduct long-range cost estimates for pension plans, insurance companies and government programs, which means that this study is giving the Obama Administration a big headache. As Chief Medicaid Actuary Rick Foster noted that “actuaries tend to be financially conservative, so the various assumptions might be more inclined to consider what might go wrong than to anticipate that everything will work beautifully.”
One important point to make about the cost increases is that the projections do not necessarily reflect what consumers will pay for coverage next year because it does not account for federal subsidies offered through the exchanges. Mind you, that does not mean that costs won’t be increasing, just that for qualified lower-income individuals, their cost-share won’t directly reflect the price increases. Instead, the increased costs will be borne by the federal government and U.S. taxpayers, via the cost of PPACA’s premium tax credits for individuals making up to 400% of the federal poverty level who do not have access to qualified employer-sponsored coverage. The study also noted that the impact will likely vary across states. For example, the actuaries predicted that there will be 13.9% drop in New York’s individual market to an 80.9% increase in Ohio.
In creating the study, the Society used the Health Benefits Simulation Model (HBSM), a micro-simulation of the U.S. healthcare system that models all kinds of health policies ranging from narrowly defined individual insurance market policies to larger publicly-funded policies such as those offered through the Medicaid program. The model, developed in 1989, has been used by past Administrations planning for healthcare reform, by federal and state agencies predicting health coverage costs and impacts and by the Obama Administration and the Congressional Budget Office during the development of PPACA. The Society of Actuaries’ paper indicates that rates are going to rise due to the amount of people with preexisting conditions who will be entering the insurance market. However, “the actuaries' projection is modeling the market three years in, after the initial tumult has subsided and also after a major program meant to tamp down prices in the beginning years has expired” says PoliticoPro.
Unsurprisingly, the Obama Administration has already come out with a critique of the study, claiming that the actuaries spent too much time focusing on one aspect of the law (those with preexisting conditions entering the market) and not on the cost relief strategies included in the law or the potential price-cost saving impact of state insurance exchanges that are set to begin open enrollment October 1, 2013.This point was also reaffirmed by the chief actuary who put this study together, as he admitted that the study did not attempt to estimate the effect of subsidies, insurer competition and other factors that could offset cost increases. Instead, the goal of the study was to look at the underlying cost of medical care in the U.S.
Secretary of Health and Human Services Kathleen Sebelius, in a White House Briefing on Tuesday, noted that some of the high cost health insurance plans are “so skimpy” that they cannot be compared to the comprehensive coverage that will be offered under PPACA. She also noted that because insurers will not be submitting their exchange bids until April 1, we will not have a solid idea as to what premiums will look like until late summer. According to the study, however, most states will see a double digit increases in the individual insurance markets. The Secretary did admit that for “these folks will be moving into a really fully insured product for the first time, and so there may be a higher cost associated with getting into that market....But we feel pretty strongly that with subsidies available to a lot of that population that they are really going to see much better benefit for the money that they’re spending.”