Four takeaways: California’s 13% exchange premium increase

July 28, 2016

Given what will occur in California, what should executives be aware of? What does the future hold for exchanges nationwide? Experts weigh in.

California's Obamacare premiums are set to rise an average of 13.2% for 2017, according to Covered California, the state's Obamacare exchange.

That’s up from approximately 4% in each of the last two years.

Peter V. Lee, executive director, Covered California, said in a statement that the increase reflects the cost of medical care for consumers, not excessive profit.

“Under the new rules of the Affordable Care Act (ACA), insurers face strict limits on the amount of profit they can make selling health insurance,” Lee said. “So, while all plans are experiencing different cost pressures, we can be confident their rate increases are directly linked to healthcare costs, not administration or profit, which averaged 1.5% across our contracted plans.”

Additional reasons for rate increases, according to Covered California, include:

  • A one-year adjustment due to reinsurance, a funding mechanism in the ACA designed to moderate rate increases during the exchange’s first three years. The American Academy of Actuaries predicts that this will add between 4% and 7% to premiums next year.

  • Some consumers enroll in health insurance only after they become ill or need care.

  • The escalating cost of healthcare, especially specialty drugs.

  • Some consumers using healthcare services who were unable to obtain it before the ACA was passed.

Given what will occur in California, what should executives be aware of? What does the future hold for exchanges nationwide?

Key takeaway #1: Higher rates in California foreshadow higher rates nationwide

WhislerCompared to others, California has been viewed as a state with better than average premium increases. “But if premium rates rise 13.2% in California, as indicated, I think we will see a lot of other states’ premiums going up materially more than that,” says Jim Whisler, principal, Deloitte, Minneapolis, Minnesota. He’s heard that California has a healthier risk pool than many other states, which also factors into his opinion.

 

 

Next:Key takeaways #2, #3, #4

 

Key takeaway #2: This could be a one-time correction due to significant changes in 2017

PearsonCalifornia is seeing larger increases in its premiums in 2017 than in previous years, which is consistent with what the rest of the country is experiencing, says Caroline Pearson, senior vice president, Avalere Health, Ann Arbor, Michigan.

She believes a one-time correction to rates is necessary in order to stabilize the market and enable it to remain robust. “Insurers are losing a lot of money in the exchange marketplaces,” she says. “We need rate increases to make health plans profitable in order to have ongoing participation and competition.”

Pearson says two significant changes are set to occur, which have resulted in the need for a one-time correction-the risk corridor and reinsurance programs will end this year. “Risk corridor programs have not been paying out,” she says. Furthermore, when the reinsurance program ends, that will have a one-time immediate financial impact on health plans. “It’s likely to have a bigger impact than anticipated due to lower enrollment in the exchanges than expected,” she says.

Key takeaway #3: Higher than expected healthcare costs are to blame

Because enrollment in the exchanges is low and the current mix of enrollees is sicker than what was anticipated, healthcare costs are higher which drives the need for higher insurance premiums, Pearson says. “Exchanges need to draw more people into the market in order to try to get a healthier population mix and be able to maintain competitive premiums,” she says.

Key takeaway #4: Subsidies will continue to protect many consumers from huge increases.

Despite expected increases, Pearson says the vast majority of consumers will be insulated from exchange premium increases due to federal subsidies that limit how much enrollees have to pay for premiums. “Even if premium rates go up, subsidies will commensurate with those rate increases,” she says.

Karen Appold is a medical writer in Lehigh Valley, Pennsylvania.