Health Reform and Skyrocketing Insurance Premiums

Family health insurance premiums surged 9% in 2011 according to new data from the Kaiser Family Foundation. That’s the fastest health insurance inflation since 2005:

Insurance premiums (in red) thus outpaced both general inflation (gray) and worker earnings growth (blue) by a wide margin.

That scary spike raises an obvious question: Is health insurance more expensive because of the health reform enacted last year?

Kaiser crunched the numbers and says yes, but only modestly:

The two provisions in the Affordable Care Act likely to have the greatest effect on the premiums for employer-sponsored health coverage in 2011 are allowing children up to age 26 to remain on their parents’ plans and requiring plans that are not grandfathered to provide preventive services with no patient cost-sharing. Our analysis, based in part on estimates provided by federal agencies when regulations implementing these provisions were issued, suggests that these provisions are responsible for 1-2 percentage points of the 9% increase in family premiums in 2011. (emphasis added)

Stripping out those two specific ACA effects, premiums would still have increased by 7-8% according to Kaiser’s estimates.

But that isn’t the end of the story. A remaining question is whether other aspects of the ACA might also have contributed to the premium increase. Kaiser argues, plausibly, that the two factors it considered were the most direct link between the ACA and 2011 premiums. But perhaps there were indirect links as well?

I expect we will hear critics of the ACA make exactly that argument in the days ahead. Somewhat surprisingly, though, the first example I found came from the Administration. Writing on the White House blog, health adviser and deputy chief of staff Nancy-Ann DeParle pins some of the blame for higher premiums on insurance companies overestimating what their costs would be:

[2011 health insurance] premiums were generally set in 2010, when insurance companies thought medical costs would be significantly higher than they turned out to be. The Bureau of Labor Statistics found that the health insurance employer cost index (a measure of the price of health care services) was the lowest it has been in over 10 years in the first half of 2011. Additionally, some insurers assumed  that the Affordable Care Act would dramatically raise their costs. In the end, both assumptions were wrong – but insurance companies still charged high premiums and earned impressive profits. Wall Street analysts’ review of results from the first quarter of 2011 found that 13 of the top 14 health insurers exceeded their earnings expectations, with profits that were over 45 percent higher than estimated. (emphasis added)

DeParle thus believes that the ACA did lead to higher premiums in 2011–beyond what can be explained by direct cost increases–but only because insurers overreacted. In other words, the ACA did cause premium increases beyond what can be explained by costs (since insurers would not have made the mistake about ACA costs otherwise), but the ACA doesn’t deserve the blame for those premium increases.

Without any numbers, we don’t know, of course, how much such misestimates might have contributed to the 7-8% rise that isn’t explained by the direct effects of ACA. Any such mistakes will, one hopes, be corrected in setting 2012 premiums. If so, that would soften health insurance inflation in 2012.

8 thoughts on “Health Reform and Skyrocketing Insurance Premiums”

  1. If you’re an insurance company looking to raise rates without taking the political, PR, etc. blame involved in a large raise, the ACA seems to provide the perfect cover.

    1. Yup. And one that may have been focal for many insurers, so employer purchasers ended up absorbing it (or passing onto workers) rather than switching to other insurers.

  2. Another possible explanation is that 2010 premium increases were UNDER cost increases. 2010 increases were 3%, the lowest in the chart and 2% below increases of the previous three years. If one were to assume that the 2010 rates were set and/or revised in part during the period in early 2010 when the industry was being hammered for overly high rate increases and ended up trailing true cost increases, then the 2011 rates would include 5% (average of previous five years) +2% catchup +1-2% impact of ACA.

    DSM

    1. Good point. In principle, your hypothesis should be distinguishable from the hypothesis that insurers overdid it in 2011. If insurers overdid it, we would expect them to undo it in 2012, leading to below trend premium growth. In your case, though, we would just expect a return to trend. Check in next year.

  3. The reduction in usage is a direct result of the new higher deductible plans, right. Folks have more skin in the game and are less likely to buy medical services.

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