The Patient Protection and Affordable Care Act is spreading the cost of… (Christopher Serra / For…)
One figure in a new report neatly summarizes the potential pitfalls for Obamacare: 30.1%. That's how much premiums could rise next year, on average, for the roughly 1.3 million moderate- and upper-income Californians who buy individual health insurance policies. Most of that increase is attributable to the insurance reforms in the 2010 law, also known as the Affordable Care Act. The bill's title is not ironic — its provisions will slow the growth of healthcare costs and lead over time to a more rational and efficient system. But the transition will have some rough patches, and we're about to hit one.
The report by Milliman, a San Diego-based consultancy, applies only to the small share (6%) of California insurance buyers who aren't covered by employer health plans, Medicare or Medi-Cal. And while it's headline-grabbing, the 30.1% average increase is just part of the story — the ugliest part. The bigger picture is that the law is spreading the cost of medical care more broadly, barring insurers from denying coverage to those with preexisting conditions or from extracting exorbitant premiums from older and riskier customers.
Milliman projects that the law's effect will vary widely, with younger, healthier and wealthier buyers paying more for individual coverage and older, sicker and lower-income buyers paying less. But because the law requires policies to guard against more health and financial risks with lower out-of-pocket expenses, there will be offsetting savings. The net increase in costs for those who aren't eligible for federal subsidies will drop to 20% on average. And for those who are eligible for subsidies — anyone earning less than four times the federal poverty level, or close to $95,000 for a family of four — average costs are expected to drop by 40% to 76%.
Still, the potential spike in some premiums could be a nightmare for insurers if healthy consumers decide en masse not to carry insurance. Doing so would leave insurers with sicker and costlier customers, which would only drive up premiums faster. The new law requires all adults to carry insurance starting next year, but the penalty for not doing so is far less than the expected cost of an unsubsidized individual policy.
The onus will be on Covered California, the state agency that's setting up a new insurance-buying marketplace for individuals and small groups, to persuade as many Californians as possible to sign up for coverage. Happily, lawmakers gave the agency the power to bargain with insurers, which could lead to lower premiums than Milliman expects. Insurers should be eager to hold down costs too, considering how much they stand to lose if the sticker shock of their premiums scares off customers.