Does California Redeem Obamacare? Not At All

Last week, California released proposed rates for health plans to be sold on the state's exchange - and listening to those championing Obamacare, there wouldn't appear to be much "rate shock" in the proposed premiums. Indeed, the statewide average of the three lowest cost silver plans is around $321, and according the way that California's health benefit exchange frames it, it would appear that premiums are actually falling!

Are premiums really falling? Will lower than expected competition, more comprehensive benefit requirements, and tighter age-band restrictions cut costs?

Let's take a moment to review the evidence.

1. The claim that premiums are falling is likely not true. The California health benefits exchange compares the average of the three-lowest cost silver plans that will be offered in 2014, to the average and "comparable" rate for the small group market in 2013. In most cases, the new plans that will be offered come with a lower price tag than the existing small group plans. But this is an improper comparison. The plans offered on the health insurance exchanges will cater to the individual market - the small group market is used by organizations and companies, and likely offers more comprehensive, employer-sponsored coverage (CBO has noted that employer-sponsored coverage has, on average, higher actuarial value than the individual market).

Estimates of average insurance rates are hard to come by, and can vary depending on the source. Earlier this year, however, consultancy Milliman released a report on the Californian individual health insurance market which indicates a 2013 average premium of about $314 - judging by this standard, the increase is small (around 2 percent, but it is an increase nevertheless). Yet, looking at other data - such as that from the Kaiser Family Foundation - makes it look as though premiums have truly skyrocketed. In 2010, the average individual market premium in California was $157 - this means that over 4 years, premiums will have spiked by around 104 percent. It isn't a stretch to think that insurers would have begun increasing pricing steadily over those years, so that come 2014, the increase didn't resemble a "rate shock."

2. California already has the largest individual market in the country. According to data from the Society of Actuaries, California's "non-group" market pre-Obamacare, was the largest in the country, at around 1.8 million individuals. The next largest was in Texas, at less than half that number. One of the reasons that generally, the individual market is so expensive, is that there really isn't much of an individual market across the country. The large majority of people receive coverage through employers, and the rest through Medicaid or Medicare - and fragmented state rules for how insurers can conduct business in the individual market have led to an expensive an inefficient status quo.

Bucking the trend, however, California's individual market was well developed pre-Obamacare (and California's lower-than-average individual market premium in 2010 is emblematic of that). Yet, one would expect that the new regulations being imposed in California (such as guaranteed issue) would contribute quite a bit to premium hikes. However, the Milliman analysis mentioned above indicates that the newly insured in California will likely have better average health status than the existing insured - a risk pool where the average beneficiary becomes healthier can stymie premium hikes.

3. California is not representative of the country as a whole. Only a handful of states have issued their 2014 rates. As other states confirm what their insurance marketplace will look like, we will have a better idea of the wide-ranging impacts of Obamacare on insurance costs. States with relatively non-existent individual markets that are largely unregulated will likely see the largest premium hikes. California is unique in that it already has a fairly robust individual market. States with a largely non-existent individual market, with uninsured that are in poor health will see the biggest impact. At the very least, champions of the president's 2010 health care law should be cautious about using California as evidence that the law is "working."   

Regardless of which narrative is most convincing, the underlying point is this - premiums are increasing in California. And they will increase in most states as well. It is illogical and unrealistic to think that Obamacare's health exchanges with comprehensive health insurance policies will lower premiums or slow health care costs - they won't. 

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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

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