More costs for your health insurance plan, your employer and you – subsidizing the Obamacare Health Insurance Exchanges

When the new health insurance exchanges under Obamacare are operational in 2014 all individuals must be accepted for coverage. This includes high risk, high cost individuals who cannot be turned down or charged more for coverage. In other words, the plans offered within the exchanges will be subject to adverse selection. To cope with this adverse selection money will be transferred from better risk plans to subsidize plans in the exchanges. That transfer will occur by assessing group health plans, both insured and self-insured. The dollar amount of such fee has not been determined and is based on a complicated formula using claim data. However, preliminary estimates indicate it could be $60.00 per year per participant or as much as $105  for a transition period of several years.

That means a large employer could be facing additional costs of hundreds of thousands or even millions of dollars. The fee is based on covered lives in a plan. Let’s say an employer has 2,000 employees. That would mean about 5,000 covered lives including dependents give or take a few hundred. If the fee is $60.00 as some early projections indicate, that means this plan is hit with additional costs of $300,000 per year for three years. Apply that formula to America’s larger employers and the number is in the millions of dollars. Needless to say these expenses will end up in the premiums plan participants pay.

Here is an excerpt from the final regulations issued by the Department of Health and Human Services. I call your attention to the sentence I have placed in bold. This is a reflection of much of the thinking of the Obama administration. You see, insurers are not setting premiums “higher than necessary,” but rather they are setting premiums to cover the risk of adverse selection. Rather than charging Exchange participants for that risk, the Affordable Care Act charges participants in group health plans through their insurance company or self-insured plan administrator.

Underpinning the goals of high quality, affordable health insurance coverage is the need to minimize the possible negative effects of adverse selection. Adverse selection results when a health insurance purchaser understands his or her own potential health risk better than the health insurance issuer does, resulting in a health plan having higher costs than anticipated.

To protect themselves from adverse selection, issuers may include a margin in their pricing (that is, set premiums higher than necessary) in order to offset the potential expense of high-cost enrollees. The uncertainty resulting from adverse selection could also lead an issuer to be more cautious about offering certain plan designs in the Exchange. This risk will likely be greatest in the first years of the Exchange; however, the risk should decrease as the new market matures and issuers gain actual claims experience with this new population.

In the above paragraph I highlighted the words “the risk should decrease” because that risk may not decrease if the mandate to carry coverage is not as effective as anticipated. In addition, the fact that insurers “gain actual claims experience” does not alter the reality that adverse selection will still be reflected in Exchange premiums.

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