PPACA’s Impact on Insurance Premiums: Actuarial Study Predicts 32% Increase in Costs Over Next Five Years

ImageA new report by the Independent Society of Actuaries predicts that individual market health insurers could experience as much as a 32% increase on average in health care costs from 2014 through 2017 due to changes brought on by the Patient Protection and Affordable Care Act (PPACA). This would result in higher premiums as the increased costs are passed on to those who purchase health insurance in the individual markets. 

The report refers to an “average” increase in costs, but the actual increase in “per member per month” (pmpm) claims expenses will vary from state to state.  

According to the report, some states could experience dramatic increases. By 2017, the study estimates the pmpm increases will be 62% for California, 67% for Maryland and over 80% for Ohio and Wisconsin.  Other states will see less dramatic increases. Colorado, for example, could experience a 39.6% higher pmpm; Florida 26.5%; and Texas 33.8%. The higher claims costs would primarily be due to the increased level of health care services required by new entries to the insurance market.

However, some states that already have imposed extensive mandated benefits and community rating provisions could see a decrease in pmpm anticipated average claims, including Massachusetts (-12.8%), New Jersey (-1.4%), New York, (-13.9%), and Rhode Island (-6.6%).  

The report also includes two other major findings:

  • After three years of Exchanges and insurer restrictions, the percentage of uninsured nationally will decrease from 16.6% to between 6.8 and 6.6%, compared to pre-ACA projections.
  • Under PPACA , the individual non-group market will grow 115%, from11.9 million to 25.6 million lives; 80% of that enrollment will be in the Exchanges. (See report athttp://cdn-files.soa.org/web/research-cost-aca-report.pdf, page 6.) 

The report does not address PPACA’s impact on large employer group health plans as the most affected will be individual and small employer group health benefits during this period.

The study immediately drew fire from the Obama Administration regarding the projected premium increases. The administration claims the analysis fails to consider cost relief strategies in the law, such as federal premium tax credits to make premiums more affordable, and the risk adjustment pools that would help subsidize health insurance carriers that attract a disproportionately higher share of those with expensive health conditions.  

However, insurance experts countered that neither of these mechanisms actually will cut the cost of the claims’ pmpm. These mechanisms will simply transfer funds from the federal budget to individuals, or shift funds generated by a premium tax on individual health insurance companies to plans with a disproportionate share of adverse actuarial risks.   

Rick Foster, former Medicare chief Actuary, says the report does “a credible job” of estimating potential enrollment and costs under the law “without trying to tilt the answers in any particular direction.” He further notes that “actuaries tend to be financially conservative, so the various assumptions might be more inclined to consider what might go wrong than to anticipate that everything will work beautifully.”

On a positive note, clearly PPACA will expand insurance coverage for many. However, the Democratic leadership promised that the passage of PPACA would save the country money. This Society of Actuaries study reminds us that this last promise is unlikely unless the Administration makes some modifications to the current reforms. 

Author: Michael Gomes
APRIL 19, 2013 – 9:53 AM

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