As Obamacare’s third open season wrap ups on January 31, 2016, a majority of enrollees in Obamacare exchange plans can expect to pay significant double-digit percentage rate hikes for 2016. Tax credits will reduce the net premiums paid by many subscribers, but tax credits do not reduce the rate of premium growth from 2015 to 2016.
Executive Summary
Depending on an enrollee’s income and choice of plan in the previous year, the way tax credits are structured will actually ratchet up the out-of-pocket cost of premiums even higher than the rate increases insurers have requested. Furthermore, the ratchet effect is greatest for the lowest earning enrollees, only slightly above the federal poverty level — some of them will see hikes of 50 percent or more.
Why? Obamacare tax credits are determined by an enrollee’s income and the benchmark (second-least expensive Silver) plan in the local rating region. This introduces harmful leverage for most enrollees when they renew their policies. It can increase the net premium by a significantly higher percentage than the increase in gross premiums.
According to the administration, if every single enrollee who chose the second-lowest cost Silver plan in 2015 shopped around and found the (usually different) second-lowest cost Silver plan in 2016, the average gross premium hike would be 7.5 percent. However, that did not happen. Only 23 percent of 2014 beneficiaries who re-enrolled in 2015 switched plans.
Moreover, while 70 percent of enrollees chose Silver plans in 2015, only 11 percent chose the second-lowest cost Silver plan. Because the tax credits are based on the second-lowest cost Silver plan in a rating region, the amount of the credit did not increase much from 2015 to 2016: on average, from $976 to $1,012 for an
enrollee earning 250 percent of FPL and from $2,636 to $2,700 for the enrollee earning 150 percent of FPL. If these enrollees did shop around perfectly and switched, they would be largely immunized from a premium hike.
However, for the majority who do not shop around the tax credits introduce leverage that can result in a higher percentage increase in net premiums than gross premiums. For example, six insurersoffer Silver policies in the East Los Angeles rating region under Covered California, a state-operated exchange:
- In 2015, the before-tax-credit, gross annual premium for a 40 year old buying the lowest cost Silver plan was $2,760, offered by Health Net.
- The second-lowest cost Silver plan, offered by Anthem, cost 12 percent more than Health Net’s plan (or $3,084).
- Subtracting the tax credit, the 40 year old earning 150 percent of the FPL only paid $380 net premium for Health Net or $704 for Anthem.
For 2016, the lowest cost plan remains Health Net. However, Blue Shield offered the secondlowest cost plan for 2016 — actually dropping its premium by 9.3 percent.
By shrinking the gap between the lowest cost and second-lowest cost plan from 12 percent to just one percent, Blue Shield also shrank the relative value of the tax credit (based on the second-lowest cost Silver plan) when applied to the lowest cost plan. As a result, a Health Net subscriber earning 250
percent of poverty will see a net premium hike of 12 percent, and an individual earning 150 percent of poverty will see a net premium hike of 58 percent!
For a nationally representative 40 year old, with an income of 250 percent or 150 percent of the FPL, because the average Silver premium increased 10 percent, the enrollee earning 250 percent of FPL will see a 12 percent increase in net premium, while the enrollee earning 150 percent of FPL will see a 28 percent increase.
By the end of 2015, as at least six independent and credible sources had confirmed that rate increases will be in the double digits. Claims by the administration and others that individuals’ rate hikes will largely be limited to single-digit percentage increases are unrealistic, given the experience of Obamacare exchanges so far.