States are beginning to release information on what health insurance premiums will be in 2014. That’s when the Affordable Care Act’s (ACA) market reform rules that apply to the individual and small group markets will go into effect. The natural temptation will be to simply compare the 2014 premiums to those in 2013 to determine how the ACA may have affected premiums beyond any usual changes due to rising medical spending. But such comparisons will mask not only the reasons for any premium changes, but also how premium changes will differ across states and individuals. Premiums will go up for some individuals and down for others.
When examining how premiums change beginning in 2014, it is important to understand the various factors underlying these changes. These factors include the effectiveness of the individual mandate and premium subsidies at attracting low-cost enrollees into the insurance market; the new benefit requirements that may lead to higher premiums but lower out-of-pocket costs; employer decisions regarding whether to continue offering insurance and the health status of those whose coverage is dropped; how each state’s current issue and rating rules compare to those beginning in 2014; and each individual’s demographic characteristics and health status (and income when determining premiums net of subsidies).
Changes in average premiums
Changes in overall premium averages will depend on changes in the composition of the risk pool, that is the underlying demographics and health status of the insured population. This in turn will reflect the effectiveness of the individual mandate and premium subsidies at increasing coverage among young and healthy individuals, compared with the increased ability of high-cost individuals to purchase coverage due to the guaranteed issue requirement. In addition, plan generosity requirements could increase average premiums, but reduce out-of-pocket costs.
It’s also important to consider whether and how individuals will shift between different types of coverage. If employers drop coverage and workers instead obtain coverage in the individual market, the impact on individual market premiums will depend on the demographics and health status of those shifting coverage. Individuals moving out of high-risk pools and into the individual market also will also impact premiums. Presumably, these individuals will have high costs, putting upward pressure on premiums. Offsetting this effect in the near term will be the temporary reinsurance program in effect from 2014 to 2016.
Individuals will face different premium changes based on age, gender, and health status
In most states, the compression of premiums due to the ACA’s age rating restrictions will increase the relative rates for younger adults and reduce them for older adults. The prohibition on the ability to charge different premiums by gender will shift costs between men and women, depending on age. The prohibition of health status rating will increase the relative premiums for healthy individuals and reduce them for those in poorer health.
Although young adults not eligible for premium subsidies are most at risk for premium increases, they will have access to catastrophic plans. The premiums for these plans can be adjusted to reflect expected enrollee spending, meaning premiums could be lower to reflect a younger enrollee population.
Premium changes will vary by state
In states that already limit the extent to which premiums can vary across individuals, especially those with guaranteed issue requirements, average premiums potentially could decline as lower-cost individuals obtain coverage due to the individual mandate and premium subsidies. In states with no or few rate restrictions, premiums are more likely to go up, to reflect an influx of higher-cost individuals.
Premium changes in the small group market
Guaranteed issue requirements won’t affect small group premiums, because insurers are already prohibited from denying coverage to small groups. However, in most states, insurers are allowed to vary premiums across groups. The compression of premiums by age, and the prohibition of varying premiums by health status, gender, group size, and industry, will cause different premiums changes across groups. In general, the groups that will experience the greatest increases will be the low-cost groups, while the groups experiencing the greatest decreases will be the high-cost groups. The changes will be largest in those states that currently allow the greatest flexibility in rating and much lower in those states with existing rules similar to those required by the ACA.
The ACA’s plan generosity requirements will impact premiums in the small group market to a much lesser extent than in the individual market. Small group plans are already more likely to meet those requirements.
This post is based on a forthcoming issue brief from the American Academy of Actuaries, “How Will Premiums Change Under the ACA?”