Understanding Premium Changes on the Affordable Care Act's Health Insurance Marketplaces
For more than three decades, I have worked on annual surveys of employer-based health insurance such as the Kaiser Family Foundation/Health Research and Educational Trust Employer Health Benefits Survey and the California HealthCare Foundation Employer Health Benefits Survey. When I present the findings to business groups, a skeptical broker, insurer, or employer will inevitably say, “Your premium increases are too small.” They may quote premium trends reported by insurers or a study by a benefits consulting firm—citing substantially higher figures than those found in the surveys.
The differences arise because trends reported by insurers and brokers represent the prices insurers seek, not what is ultimately sold. Like many consumers shopping at a grocery store, employers and employees tend to choose lower-cost health plans over higher-cost plans—a phenomenon known as "the substitution effect." Once purchasers buy their health plans, average premiums are substantially lower than the figure previously calculated by insurers or brokers.
In an effort to provide real-time information on premium increases or decreases, researchers at NORC at the University of Chicago, with support from The Commonwealth Fund, are building a national database of plan offerings on the individual and Small Business Health Options Program (SHOP) marketplaces in 2014 and 2015. We will collect data on premiums, cost-sharing (deductibles and other out-of-pocket expenses), and key elements of benefit design, such as which benefits are covered and to what degree.
In addition to informing research, the database will be of interest to the media and consumers. In the political arena, premium rates have become a metric as to whether the Affordable Care Act is working. Some consulting firms have already published national estimates of premium increases—despite the fact that only a handful of states have posted final 2015 rates for plans sold on the individual market.
Actual enrollment in individual plans sold through the marketplaces will not be known until the end of the open-enrollment period, in early 2015. As a result, early estimates of premium increases should be interpreted with caution, since they're calculated before consumers make substitutions, and we expect the substitution effect to be substantial. Extensive research has shown that employees migrate to lower-cost plans under incentives similar to those in the individual marketplaces. David Cutler and Sarah Reber, for example, examined what occurred at Harvard University when the institution adopted a new formula in which it contributed the same fixed-dollar amount for employee coverage, regardless of the plan chosen—the same formula used by the marketplaces to determine base contributions. The authors found that a 5 percent increase in premiums led to a 10 percent loss in the plan's market share. A similar natural experiment occurred at the University of California system, where total health benefit spending fell more than 25 percent over a three-year period as employees moved from higher- to lower-cost plans because of insurer price competition. Young and healthy employees were most likely to switch plans and older and sicker employees were less sensitive to changes in premium rates.
In the marketplaces, we expect people in low- and moderate-income households to be sensitive to price increases. Those in higher-income households (i.e., with incomes more than 400 percent of the federal poverty level) who receive no subsidies also may switch from higher- to lower-costs plans.
Another key metric to follow is the premium for the second lowest-cost silver plan, since federal subsidies are linked to it. (About 85 percent of the households with coverage through the individual marketplaces receive subsidies, and about 65 percent of enrollment is in silver plans.) Media reports indicate that many insurers that did not participate in the marketplaces in 2014 will offer marketplace plans in 2015, so it is possible that premiums for the second lowest-cost silver plan will fall as these new plans enter the market. If this occurs, per capita federal subsidies will decline. The Kaiser Family Foundation recently reported from a sample of 16 urban centers that the price of the second lowest silver plan declined by 0.8 percent.
If the gap between the median-cost silver plan and the second-lowest-cost silver plan grows, then households’ premium contributions for median and high-cost silver plans will increase because the subsidy amounts are pegged to the second-lowest-cost plan with consumers paying the difference for higher-cost plans. Fewer households, in turn, are likely to buy the higher-cost plans, and this should foster further migration to the lower-cost silver plans. On the other hand, if many consumers choose to be automatically reenrolled in their current plan, there will be less movement to lower-cost plans.
As states post their final plan offerings and premiums for the 2015 open-enrollment period, NORC will analyze changes in premium rates on the Commonwealth Fund Blog and track them in an interactive map. Many of the state-based marketplaces are likely to post their final premiums within the next few weeks, with those in the federal marketplaces expected later this fall.