Several friends of mine have been complaining lately about experiencing “sticker shock” when they have shopped for health insurance at http://www.healthcare.gov. Unfortunately, what many of them apparently consider to be a “bug” which needs fixing (along with the website itself) is actually a “feature” of the so-called Affordable Care Act (ACA). According to the American Cancer Society’s summary of federal rating rules (see http://bit.ly/Oyrsii), “Health plans will be allowed to adjust premiums only for the following factors: 1) Self-only or family enrollment; 2) Geographic area; 3) Age (except the rate cannot vary by more than 3 to 1 for adults) and 4) Tobacco use (except the rate cannot vary by more than 1.5 to 1).” By severely limiting risk classification, the ACA is consequently designed from the ground up to make good risks pay too much for coverage and consequently cross-subsidize the premiums paid by bad risks who pay too little.
The problem with this pricing scheme is that it dissuades good risks from buying insurance in the first place. The ACA addresses this problem by imposing an “individual mandate”. Under the individual mandate, if you refrain from purchasing insurance, you are obligated to pay a “penalty” (redefined by the Supreme Court’s 2012 ACA decision as a “tax”). The penalty/tax paid by a single adult for failing to comply with the individual mandate during 2014 will be $95 but will increase within 3-4 years to $695 a year for such an individual and $2,085 a year for a family (or 2.5 percent of household income (whichever is greater); source: http://on.tnr.com/11wWS0i). In many cases (particularly for otherwise healthy individuals and families who don’t qualify for ACA premium subsidies; see http://kff.org/interactive/subsidy-calculator/ to see whether you qualify), people will forego insurance and pay the penalty. With “good risks” dropping out, this implies that average claims costs (and therefore prices that need to be charged to cover these costs) will likely increase over time. As prices increase, expect to see even more (healthier than average) individuals and families drop their insurance coverage and pay the penalty/tax instead. This dynamic process is commonly referred to as “adverse selection” (see my blog posting from a couple days ago entitled “Adverse Selection – a definition, some examples, and some solutions” for more on this topic).
As bad as this all seems, adverse selection also pretty much wreaks havoc upon the business models of insurers participating in the health insurance exchanges. AEI resident fellow Dr. Scott Gottlieb writes in a recent Forbes article that the ACA faces a ‘death spiral’ which turns not only on rising premiums (due to the adverse selection problem described above) but also upon declining participation over time of health insurance plans and doctor networks provided by such plans; see http://onforb.es/1g6zwGL for details).