The cost of health coverage under Obamacare remains one the biggest mysteries of the nation’s health care overhaul.
But nagging cost questions will slowly be answered this summer as insurers and state officials set 2014 health plan rates for people who buy coverage outside of work or purchase it through small employers.
Those two coverage areas – the individual and small group markets – face the biggest rule and cost changes next year, when the main provisions of the Affordable Care Act finally kick in.
Early rate proposals around the country are a mix of steep hikes and modest increases. The numbers will change in coming months as state and federal regulators use their new authority under the health care law to review rate-hike requests of 10 percent or more and insurers vary their rate proposals based on competitors’ prices.
The new rates and rules for individual and small group coverage won’t directly affect roughly 84 percent of Americans with job-based health insurance – about 125 million people. But the changes will resonate throughout the health insurance universe and will go a long way toward shaping, and possibly changing, public opinion about Obamacare.
“This is a very, very big deal,” said Doug Holtz-Eakin, the president of the American Action Forum, a conservative research center. “The implications are enormous for the future of American health insurance, and its importance is not best measured by the fraction of people currently covered in the small group or individual markets.”
About 24.5 million people have small-group coverage through companies with 50 or fewer employees, according to federal estimates.
Just 15.4 million people purchase individual coverage, according to the nonpartisan Kaiser Family Foundation, a nonprofit health care research center. But that number will increase substantially next year, when premium tax credits become available to help people buy individual coverage through the new online insurance “exchanges” in October.
The individual, or "non-group," market is the most troubled sector. It’s known for high customer dissatisfaction and turnover, high coverage denial rates, lean benefits and premiums that are subject to frequent increases.
The health care law will engineer a complete makeover of individual coverage next year through a series of revisions that are designed to make newly issued policies more generous, accessible, affordable and transparent.
The new rules guarantee access to individual coverage regardless of current or past health problems, require each plan to cover at least 60 percent of costs and limit annual out-of-pocket costs such as co-payments and deductibles.
They also require beefed-up mandatory benefits, limit the amount that older plan members may be charged, outlaw annual benefit-spending limits and no longer allow insurers to vary rates based on a person’s gender, occupation or medical claims history.
Small group plans face the same changes, but they’re more likely to already meet some of the law’s new requirements, such as guaranteed access to coverage. So rate changes in small group plans won’t be as significant as those in the individual market, experts say.
The health law’s “individual mandate” requires all Americans to have health insurance beginning next year or face a fine. The law will bring insurers 25 million new customers over the next decade, according to federal estimates.
The law also requires that all individual and small-group health plans in 2014 cover 10 “essential health benefits,” including substance abuse services, pediatric dental and vision care, mental health treatment and other services often excluded from current policies.
Individual and small group policies that were in effect before the measure was signed into law in March 2010 – known as "grandfathered plans" – aren’t required to meet some of the new rules and consumer protections. Consumers in those plans who want the new protections will have to reinsure under new policies next year.
Premiums: Higher for some, lower for others
Experts say those improved benefits and the guaranteed availability of coverage will increase average premiums for healthy people in the individual market next year.
Those in poor health with the same coverage, however, very likely will see lower rates, on average, as their once-higher premium burden is redistributed among all enrollees. The law prohibits insurers from segregating higher- and lower-cost members into separate risk pools.
A provision that prohibits women from being charged more than men solely because of their sex will shift costs between men and women to eliminate gender variances in states that currently allow it.
New age-rating restrictions that limit older plan members from being charged more than three times as much as younger ones probably will increase individual and small-group premiums for young people and lower them for older people.
With or without the health care overhaul, most experts expect private health insurance premiums to increase next year because of the rising costs. Whether the new law exacerbates or moderates those increases depends on who’s answering the question, what states they’re talking about and which plan members would be affected.
“There are winners and losers in this,” said James O’Connor, a principal at Milliman, an actuarial consulting firm that deals with health care and insurance.
But in New Jersey, New York, Massachusetts, Vermont and, to a lesser extent, Maine, Washington and Oregon, those same individual-plan premiums might see little or no change and may even decline, O’Connor said. Coverage requirements and consumer protections in those states are already similar to what the new law requires.
Keep in mind that while the improvements in coverage will increase premiums for some, they also may lower out-of-pocket spending for deductibles, coinsurance and co-payments. Increased competition among insurers also will help keep premiums in check.
Rate shock
The prospect of higher premiums has fueled concerns about “rate shock,” in which large numbers of young people – who most likely face the largest premium increases – forgo individual coverage altogether and just pay the fine for violating the individual mandate. If that happens, rates would climb for everyone, experts say.
But tax credits available to individuals and families who earn 133 percent to 400 percent of the federal poverty level will help offset the higher premiums for individual coverage. In 2013, the tax credits would go to individuals who earn roughly $15,300 to $46,000 or to four-person families that earn roughly $31,300 to $94,200.
About two-thirds of people age 30 and under who have no coverage or are enrolled in individual coverage and who won’t qualify for Medicaid – the people most likely to face rate shock – would be eligible, according to estimates by Avalere Health, a health care advisory firm
The tax credits are available only for those who get coverage through the new state insurance exchanges. The amount of the tax credit – which is based on income – is revealed after submitting an online application. The money is sent directly to the applicant’s insurance company to be applied to the premiums.
Young adults who don’t qualify for the tax credit but can’t afford individual coverage will have access to “catastrophic plans,” with lower premiums.
Small group coverage
Individual circumstances will determine whether premiums rise or fall next year for people with small-group or small-employer coverage.
“Groups that are made up of younger, healthy males will tend to have higher rate increases than those groups who are unhealthy or are comprised mainly of older people,” O’Connor said.
And low-cost, small-group plans will see the greatest premium increases, “while those with the greatest decreases will be the high-cost groups,” according to recent congressional testimony by Cori Uccello, a senior health fellow at the American Academy of Actuaries.
The health care law requires that deductibles for small-group plans in 2014 not exceed $2,000 for individuals and $4,000 for families.
While people with individual policies and workers with small-group coverage will experience the biggest cost changes next year, the 125 million other Americans with job-based insurance won’t escape unscathed.
The law imposes taxes on the insurance, pharmaceutical and medical device industries to help pay for expanded Medicaid coverage and premium subsidies. Because they’re nondeductible, those taxes, or a portion of them, very likely will be passed on to all consumers with work-based coverage in the form of higher insurance premiums.
Other factors that will affect premiums next year include geographic cost differences, whether large swaths of employers decide to drop coverage, and the demographics and health status of people who do drop job-based insurance for individual coverage.
The wide range of possibilities underscores the difficulty insurers face in trying to synthesize the new rules, predict their effects and price their products competitively and accurately.
Earl Pomeroy, a former North Dakota Democratic congressman and state insurance commissioner, said insurance companies were facing “the most complicated rating challenge” that he’d ever seen.
“It involves the great unknown,” Pomeroy said. “New systems, new market structures and behavior responses from the population that will be impossible to predict."