Health insurers offering plans in the Obamacare exchanges are planning for premium increases effective the next open enrollment period. Early reports show increase requests from the high single digits to a whopping 85%.
Insurers are largely using educated guesses at this point and trying to mitigate risk as much as possible. The exchange market is not mature, there are still many unknowns regarding current and future enrollment especially given anyone can enroll regardless of health status. For now there are several programs under the law to spread risk and subsidize companies facing adverse selection, but they will expire at various points.
Given the many variables, some premiums will be too high and others too low, but given the competitive nature of the market, insurers want to protect their bottom line while still being able to attract customers.
The risk of setting a premium too low is greater than too high, even for the customer.
Let’s say you expect your total costs (including profit and reserves) at the end of 2016 to be $1,000 per person. You set your premium at $83.33 per month. At the same time the annual health care trend is 10% (changes in prices and utilization).
Now it is the end of 2016 and you must set premiums for 2017. In a perfect world you would increase the premium by trend or 10% so the new premium is $91.66.
But wait, at the end of 2016 you find that your costs are not $1,000, but actually $1,200 because of higher than projected claim costs. You lost $200 per person. You must recover your loss and start with a new assumption for 2017.
At a minimum the premium increase in 2017 must be 32% ($1200+10%=$1320/12=$110-$83.33=$26.67/32%).
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