Industry Analysts: Premium Rates Will Continue to Rise Under Obamacare

By Loren Heal

The health insurance industry is preparing for premiums to continue to rise as President Obama’s health care law is implemented, according to the chief executive officer of one of the nation’s largest insurers.

Aetna, Inc. CEO Marc Bertolini told the company’s prospective investors at a December conference that insurance premiums would continue their rapid increases as insurers prepare for the implementation of Obama’s law. In some cases, Bertolini said, the increases could double consumers’ cost of insurance because the law adds expenses that must be passed on to the broader marketplace.

Consumers with incomes too high to receive subsidies will suffer “premium rate shock,” Bertolini predicted.

“We’ve shared it all with the people in Washington, and I think it’s a big concern,” he said. “We’re going to see [prices in] some markets go up as much as 100 percent.”

Blame Community Rating

Merrill Matthews, resident scholar in health care policy at the Institute for Policy Innovation, said several factors in Obamacare are causing rates to rise.

 “The current rate increases are due in part to the recognition that insurers are going to have a lot of people with medical conditions applying in the very near future, and that is going to send rates up significantly. The guaranteed issue provision is a problem, but the real cost driver is the modified community rating,” Matthews said, referring to the requirement that insurers cannot charge customers more even if they have a serious medical conditions.

“Guaranteed issue without community rating isn't that destructive because an applicant with a serious medical condition would face very high, and probably unaffordable, premiums,” Matthews said. “With community rating, though, high costs get shifted to everyone else.”

Bertolini notes insurers are merely responding rationally to these economic pressures, and consumers are likely to be stuck with the resulting higher costs.

“More consumers are going to be buying their own health care, even if the employer-sponsored system continues—if it survives the ACA, consumers are still going to have a lot of opportunity to buy their own health care,” Bertolini told the group. “Not just on public exchanges, but also on private exchanges, which will create marketplaces for individuals to have more choice and to make their own choices.

“We have seen very rational behavior in the marketplace. We haven’t seen insurers pricing on the lean side in order to gain market share,” Bertolini added in his speech.

Insurers May Withdraw

Aetna revealed in its presentation to investors that the company expects to participate in the individual exchanges in up to 15 states in 2014, but may withdraw from markets where the investment doesn’t pay off.

“We will approach exchanges with caution until we are confident they represent a rational and stable marketplace,” Aetna’s staff said in the slides presented to investors. “After a transition period, if Aetna cannot earn its cost of capital on exchanges, we will exit market areas.”

In order to profit, Aetna and other insurers will have to raise premiums, according to Bertolini.

“A 49-year-old in Texas can buy a $5,000 deductible policy that is well below the 60 percent threshold required by law. So if I’m at a 45 percent threshold policy, actuarial threshold, and it goes up to 60 percent, you have a 33 percent increase just in moving the benefits up a level,” Bertolini said in an interview with CNBC on December 28.

“If we’re going to insure all Americans, which I think is a worthy and appropriate cause, then somebody has to pay for it. That’s the end analysis: somebody has to pay for it,” Bertolini said.

Higher Rates Are Coming

Matthews says he expects premium rates to continue to rise as implementation continues, especially if the individual mandate’s penalties remain low compared to the cost of coverage.

“If people see a real financial benefit in gaming the system, many will,” Matthews said. “And I think there is very little chance that the penalties will be increased, because no one wants to appear to be penalizing someone for not having coverage just because they can't afford it.”

But it’s possible to avoid such rate hikes and still expand coverage, according Matthews, if states can implement more sensible high risk pools.

“Some high risk pools worked better than others. But well-functioning HRPs are a government safety net, letting the market work for the vast majority of people but providing a state-based option for those who couldn't get coverage,” Matthews said.