Shifting Ground Beneath the Rate Shock Debate

by Adrianna McIntyre

Since California released the prices for exchange plans, wonks have been wonkily bickering—yeah, that’s five separate links and still doesn’t capture all of it—about whether or not “rate shock” exists in the state’s new market. The problem with this debate is that the context of the arguments is changing without notice or acknowledgment [1]. One reader pointed out that no one’s even bothered to define “rate shock”; it’s just one of those phrases common to health-wonk parlance. So, here’s my off-the-cuff take: rate shock is a phenomenon where increased premium costs discourage individuals from purchasing insurance. Can we agree on that? Awesome.

Here’s the problem with that definition: it’s relative, and we haven’t specified what we’re comparing the California premiums against. That ground has been shifting—the narrative about California changed from comparing exchange premiums against what was expected on the exchange to considering whether anyone will see rate increases. They’re totally different interpretations of rate shock. “He said, she said” is an inappropriate way to track the debate.

Rate shock argument #1: California’s rates were lower than expected. The initial media reaction to California’s numbers celebrated that they were less than analysts had previously anticipated—lower than the CBO’s 2009 projection of $5,200 and on average lower than premiums on the small-business market, which is the closest “apples-to-apples” comparison available, considering scope of coverage [2]. This was the first iteration of “hey guys no rate shock!” Exchange premiums also come in below the average employer-sponsored plan in the state; California’s average exchange plan costs about $3,850 per year, their employer-sponsored brethren run about $5,250 annually [3].

There are caveats to this argument; it’s too soon to say that California’s experience will be the norm. As Sarah Kliff points out, the state took a more active role in the selection of exchange plans, which may have fostered more intense price competition than we’ll see elsewhere. And Alex Wayne latched onto another nuance: California’s small-business market, the reference point used by ACA proponents, already prohibited insurers from turning people away based on health status. Not all states do that, but they’ll be required to under the new health law. Consequently, we might see more evidence of “rate shock” in other states, where we’re comparing new guaranteed-issue exchanges to old mostly-healthy markets.

Rate shock argument #2: Some people will see their premiums increase. The more recent pushback about California’s numbers has changed the argument entirely. Instead of being about exchange prices relative to expectation, it’s about whether or not the young and healthy will see higher premiums. Yes, some will. Yes, this has important implications for attracting us young’uns to the exchanges. No, this will not be the fate of all twenty-somethings.

Those under 26 will have the option of staying on their parents’ insurance, as long as they aren’t offered coverage through an employer. This provision was enacted in September 2010, and there’s already evidence of young adults benefiting substantially from it—insurance coverage among 19-25 year olds increased 6.7%  during the first year the provision was in effect. Admittedly, this measure initially favored families who were already fortunate enough to have coverage. But once the exchanges are up, it will apply to those plans, too. Families who couldn’t previously afford health insurance will receive subsidies and will be able to keep dependents on their plans into their mid-twenties.

Screen Shot 2013-06-03 at 2.40.14 PM

The subsidies are also a BFD. It’s not easy to pin down exactly what proportion of “young adults”—has even anyone defined that parameter for this debate? under 30?—will qualify for premium assistance. But we know this: over half of individuals aged 19-29 who bought insurance on the individual market in 2011 were below 200% FPL (an income of $23,000). A 26-year old making that much can expect to a monthly premium of $121 for a silver plan on the California exchange—and even less for a bronze. Subsidies stay constant; they’re indexed to the silver tier, even if an individual chooses a cheaper bronze plan (but the CA calculator doesn’t offer tiers as a variable). Bottom line: more than two-thirds of individuals under 27 will qualify for financial assistance in some form. Regrettably, the RWJF table below (from here) doesn’t break down the 28-44 population any further, but it’s still informative that over 40% of them will, at a minimum, qualify for subsidies.

RWJF

Here’s what bugs me: there is nothing mutually exclusive about those two debates. Yes, California’s premiums were lower than expected. Yes, there are young, healthy, and affluent individuals currently on the individual market who will see their insurance expenses increase. The second does not contradict the first—it is not evidence that the media was being misleading. The second isn’t even news. I realize the internet has the attention span of a three-year old, but we hashed out the young invincibles argument as recently as February. Really. We had headlines like “Obama Prepares to Screw His Base” out of BuzzFeed and everything (our take on that here).

That said, the two versions of rate shock are related: the actuaries behind California’s premium calculations made certain assumptions about how many young and healthy people will enter the individual insurance market in 2014. If those individuals choose the tax penalty over buying insurance, the risk pool becomes unhealthier than projected and premiums go up. But we don’t know how optimistic or conservative those underlying assumptions are. If you do know, please share—there’s a whole ecosystem of health policy wonks ready to tweak their arguments accordingly.

Footnotes

1. To be clear about what this post isn’t: it’s not about what President Obama or any other politician promised in 2008 or 2010 or any other year. That’s tangential to this debate, which arose specifically out of California’s numbers and the media’s reaction to them.

2. This was the initial “apples and oranges” debate. Some people compared the new exchange rates to the individual market, where insurance costs less—but likely less comprehensive and exclusionary (people could be denied coverage for pre-existing conditions). The small-business market is a more sensible comparison if you want to hold benefits and population as constant as possible under the status quo.

3. Employees tend to be insulated from the true cost of their insurance because the employer tends to pick up a big chunk of the premium each month. There are many reasons employer-sponsored insurance might cost more than the exchange plans, including less cost-sharing (the typical “silver” plan on the exchange will have a $2,000 deductible, though that won’t apply to many “first-dollar” services like routine preventive care).

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Adrianna is a graduate student in public policy & public health at the University of Michigan. Follow her on Twitter @onceuponA.

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