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A Bad Deal Gets Worse

Obamacare is already damaging the individual insurance market.

Jun 21, 2010, Vol. 15, No. 38 • By BETH HENARY WATSON
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Hostility to the individual health insurance market and its less pleasant features, including medical underwriting, permeated President Obama’s crusade for health care reform. Although Obama-care ultimately will outlaw underwriting based on health history, it will increase the number of people responsible for obtaining their own coverage. As costs continue to rise and new taxes go into effect leading up to 2014, the year the individual mandate kicks in, many individual health insurance consumers who previously were winners in the health care marketplace will find themselves on the losing side. 

A Bad Deal Gets Worse

Take Obamacare’s provision that premium price differentials based on age under the new state exchanges may not exceed a 3 to 1 ratio. Devon M. Herrick, a health economist at the Dallas-based National Center for Policy Analysis, calls this a “large cross-subsidy”: The young and healthy will subsidize older people and those with more health problems.

“If you are an early retiree, you might love the idea,” Herrick notes. “If you are a 22-year-old college graduate trying to freelance, you might not.”

Herrick and other experts estimate the current differential in actual health care costs between those approaching Medicare eligibility and younger adults at closer to 5:1 or 6:1.

“At a time when younger individuals are being required to purchase health insurance, they are going to be seeing major increases in premiums because of this provision,” says Robert Zirkelbach, a spokesman for the industry group America’s Health Insurance Plans. “It will increase premiums percentagewise for younger workers much more than it will decrease premiums for older people.”

Zirkelbach figures the 3 to 1 provision alone will cause premiums for consumers under 30 on the state exchanges to rise between 50 percent and 60 percent. Roy Ramthun, president of HSA Consulting Services and a visiting fellow at the Council for Affordable Health Insurance, suggests the figure could reach 70 percent.

It’s important to pay attention to underlying premiums without the subsidies that will be provided for those earning less than 400 percent of the federal poverty level. First, although the law allows those younger than 30 to purchase relatively inexpensive catastrophic plans, everyone will age out of that provision. Also, some eligible for subsidies may earn their way out of them. 

Using an online calculator from the Kaiser Family Foundation, I compared what two young Texas families might pay under Obamacare with what they pay today for their individual policies. Neither family expects to qualify for a subsidy in 2014, and Texas has fewer mandates than many other states and no “guaranteed issue” (that is, an insurance company can refuse to cover a given customer). So an individual market still functions. 

The first family, a couple in their mid-30s with two children, owns a CPA firm, which has no employees. They now pay $245 per month for a no-frills Blue Cross Blue Shield plan with a $5,000 deductible. They also contribute monthly to a health savings account. According to the Kaiser calculator, in 2009 dollars this family could pay $720 per month on an Obamacare state exchange, a 194 percent increase.

Similarly, a couple in their late 20s who own a small remodeling business report paying $334 per month for a Blue Cross Blue Shield plan with a $1,500 deductible and no health savings account. Like most affordable individual plans, their policy does not provide maternity coverage, but they just wrote a check to the hospital for delivering baby number one and plan to do the same for baby number two, which is on the way. The Kaiser calculator estimates that this family could pay $617 per month in today’s dollars to buy health insurance on a state exchange, an 85 percent increase. Of course, with the increased premium would come a more comprehensive list of mandated benefits, including maternity coverage.

Zirkelbach warns that the pain of astronomical premiums likely will be more intense in states that were less regulated before Obamacare than in states like Massachusetts, where the average family premium for an individually purchased policy was already $13,288 in 2009. 

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