Misreading the Obamacare tea leaves
Health-insurance premiums on New York’s individual market are expected to decline substantially in October, once key provisions of the federal Affordable Care Act become effective.
Supporters claim that this “demonstrates the profound promise of the Affordable Care Act.” President Obama himself touted the news of these expected declines as evidence that his health-care overhaul will “allow hundreds of thousands of New Yorkers who don’t have insurance [to] be able to afford it.”
But does the news of premium-rate reductions in New York really mean that — contrary to the expectations of critics — Obamacare is making health care more affordable?
In reality, New York’s health-insurance market has long been a disaster — and precisely because, decades ago, lawmakers there imposed many of the requirements on insurers that the ACA is scheduled to impose nationwide.
In 1993, Gov. Mario Cuomo signed a bill that barred insurance companies from charging different rates to individuals based on age, gender, health or smoking status and other factors that correlate with health-care expenses. Instead, all New Yorkers were forced into a single risk pool, causing those who maintained healthy lifestyles to subsidize poor health decisions by those who smoke or fail to exercise. Simultaneously, insurers were required to provide coverage to anyone who applied — even if they’d already developed a costly condition and were just then applying for coverage for that condition.
These new regulations — commonly called community rating and guaranteed issue — made insurance premiums more expensive for the relatively young and healthy. At one large carrier, individual coverage premiums rose 170 percent for 30-year-old males. This rate shock produced so many calls to New York’s state insurance department that directors established a toll-free number dedicated solely to handling complaints about the impact of the new regulations on insurance premiums.
It didn’t take long for many young and healthy New Yorkers to figure out that they could avoid the new costs simply by refusing to buy health insurance altogether. After all, if they ever did develop a costly condition, New York’s insurers could not refuse them coverage.
By 1998, researchers at Wake Forest University’s School of Medicine found that, following the law’s passage, enrollment in the individual market had declined — depending on the data source — 38 to 50 percent. Worse, those refusing to buy insurance were the young and healthy, the cheapest to insure. As the insurance pool trended older and more sickly, insurance premiums continued to increase — further discouraging young people from buying insurance.
By 2009, the average annual premium on New York’s individual market had risen to $6,630 — about 29 percent higher than Massachusetts, which had the second-highest premiums. For comparison, the same plan would cost just $3,276 in Nevada or $2,606 in Iowa.
New York’s imposition of community-rating and guaranteed-issue regulations essentially destroyed the state’s individual insurance market. Those same regulations are key elements of the ACA. The difference is that the ACA aims to compel young and healthy individuals to purchase insurance coverage — regardless of how expensive premiums become as a result of these regulations.
It’s not surprising that premium rates would decline in New York as young and healthy people are forced back into the insurance pool and begin subsidizing the old and unhealthy. For most states, however, this will not be the case.
In Nevada, monthly premiums for a 25-year-old would climb to at least $184 while a comparable plan could be purchased today for $83. In California insurance premiums for a healthy 40-year-old are expected to more than double — growing from $94 per month to $234 per month, all at once. For 25-year-olds, rates will jump from $74 to $148 per month.
More than anything, New York’s experience demonstrates that the ACA will be financially unworkable unless the Obama administration can succeed in coercing the young and healthy to pay these skyrocketing prices. That’s why administration insiders have been working on a massive public-relations campaign to induce young people to enroll. It’s also why the law penalizes individuals who don’t purchase insurance.
However, as young people become more informed about the law’s impacts, it’s likely that many will still refuse coverage — a scenario that could torpedo the entire scheme.
The National Center for Policy Analysis reports that for 3.7 million individuals, ages 18-34, the cost of insurance will exceed the penalty by more than $500. Within that group, 3 million would save at least $1,000 annually by simply paying the penalty. Then, with guaranteed issue, they can return to the health-insurance market as soon as they get sick.
If young people make the rational decision not to purchase health insurance, then more states will suffer the fate of New York’s ill-advised interventions in the insurance market.
Or, policymakers could legitimately drive back health-care costs and increase access to care by scrapping the ACA altogether and implementing market-based reforms to end government distortions in the health-care industry.
Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more information visit http://npri.org.