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There’s a widespread refrain that insurance premiums in the small group and individual market are set to spike this fall, once the full complement of Obamacare regulations hit that market. The insurers have been making the rounds on Capitol Hill, inside think tanks, and the White House, quietly previewing their new rates. The hikes are substantial. There’s even a term for it in Washington: “rate shock”.
So what’s the Obama Administration to do? Most likely, phase in some of the regulations that are the biggest culprit of the premium surge. That means, letting some of the historically based underwriting remain in place for a time.
The easiest target is the statutory limit on pricing health insurance premiums with respect to a beneficiary’s age. This Obamacare provision (also known as the “age rating”) bars insurers from varying premiums between old and young enrollees by more than 3:1. So if a 25-year-old’s premium cost $500, than a 60-year-old’s premium can’t cost more than $1,500. At the time Obamacare passed, critics held that these regulations would spike premiums. That day is about to arrive.
Some think that the Obama team can’t suspend these regulatory provisions since they are hardwired into the law. But there is ample precedent where the administration took its own discretion to largely ignore implementation deadlines and otherwise tweak or delay key aspects of the statute.
For instance, the Obama team unilaterally decided to phase-in the guaranteed issue requirements of child-only policies, even though the law required this provision to be fully implemented by the fall of 2010. The administration delayed and then limited the W-2 reporting provisions for employers. These are just two examples.
To the degree that delaying implementation of the insurance market regulations will help insurance companies secure profits and ease the burden on consumers, there is likely to be little political opposition standing in the Administration’s way. Even AARP is likely to step aside. While delay of the age rating provisions will keep costs higher for seniors, the old peoples’ lobby is likely to be more focused on its bigger political goal: making sure Obamacare gets implemented smoothly.
All of these regulations, and especially the caps on insurance company margins (AKA the Medical Loss Ratio) have a more pervasive and longstanding effect than the just these near term price increases, as painful as those hikes will be. The combined effect of these regulations will make it harder for new insurance plans to enter the market. That means limiting competition and thwarting innovation in the kinds of insurance products that people will have access to.
The regulations raise the costs to insurers, while at the same time limiting their profitability. Since most new insurance plans see their profitability erode over time, to the degree that their profit margins are capped at the outset, and their costs driven higher, these provisions will make it nearly impossible for new plans to enter the market. The net effect will be to lock in the legacy insurance plans, handing the market the existing players.
What does that mean for you? If you like your insurance plan you will indeed be able to keep it. Maybe not the benefit package, but at least the provider. Because there won’t be many new firms entering the market.
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