5 Must-Fix Items in the Affordable Care Act: Higher Insurance Costs

Supporters of the Affordable Care Act told us the law would make medical care and health insurance less expensive.  Advocates said there were several reasons.  More people will have insurance, including a lot more healthy young people.  Competition created by health insurance exchanges will bring prices down.  More people would gain access to preventive care.    

However, other parts of the Affordable Care Act got less attention.  These include some on which we commented earlier.  The question is what these changes and others do to the affordability promise.  In this last part of our series, we’ll look an issue that is surprising even supporters of the law.

Required Fix #5 – The Affordable Care Act’s Higher Health Insurance Premiums

affordable care act empty walletDespite its supporters’ promises, the Affordable Care Act will lead to increases in the health insurance premiums.  For some Americans, the increased costs will be hidden by government subsidies that limit a family’s health insurance to 9.5% of its income, as long as the family income is less than 400% of the poverty level.  People who do not qualify for premium subsidies are not as lucky.  

Insurance companies and consultants who have worked on health insurance reform agree rates are going up under the Affordable Care Act.  In a recent presentation to agents, United Healthcare estimated individual  rates would double.   Small group rates, they said, may increase 25% to 50%.  Other insurance carriers are talking about similar rate changes. In a report for the State of Oregon, Wakely Consulting Group, a Massachusetts firm associated with health reform there,  estimated individual premiums will increase between  24% and 38% due to the ACA changes, before premium tax credits. 

At Soter, we decided to put the premium ranges to a test.  Contact us to request a copy of the results.

Here are just a few of the reasons we believe Americans will see premium hikes.

1.  The ACA prohibits using health conditions for underwriting.

This one is nonsensical and one of the biggest failings of the Affordable Care Act.  Historically, health insurance has evaluated an applicant’s medical condition, much as auto insurance has considered someone’s driving record.  In auto insurance, a driver with an excellent record gets preferred rates over one with many tickets and several accidents.  In health insurance, a person with a history of chronic or major health conditions would pay a higher rate than a healthier person.  Jonathan Gruber, the MIT economist and chief architect of the Affordable Care Act, now concedes his economic formula did not adequately include this factor and admits the ACA will result in premium increases.

Effective in 2014, the Affordable Care Act prohibits medical history and current health as an underwriting criterion.  Insurance companies will only be permitted to consider age, family size, tobacco use and geographic area.  Consequently, two 30-year-old men will receive the same premium, even if one is in excellent health and the other has chronic liver disease and cancer.   For healthy people, especially healthy, young people, the effect of this community rating method will be significant.  Many expect insurance companies will drop preferred rates for healthy people and the associated premium increases will be between 35% and 66%.

2.  The ACA institutes more coverage mandates.

The Congressional Budget Office commented in 2010 that premiums for many people might go down by 7% to 10%, provided they had the same coverage [emphasis added].  The problem is that many people will not have the same coverage.

The Affordable Care Act defines ten categories of “essential benefits” insurance policies must cover.  These include items many health insurance policies offer as options, including substance abuse coverage, mental health benefits, behavioral health benefits, and pediatric dental and vision coverage.  In order to comply, millions of people will have to buy more coverage than they now have.  In some cases, it may also require them to buy more coverage than they may want or need.  In our tests, we found adding coverage to follow essential benefit requirements tacks on 4% to 26%, depending on the benefit or benefits added.

3.  The ACA imposes new taxes and fees.

Beginning in 2014, the ACA imposes a new sales tax on health insurance plans that sell policies to individuals, small businesses and beneficiaries enrolled in Medicare and Medicaid managed care.  While one of the goals of the ACA is to make coverage more affordable, the new tax on health insurance will have the opposite effect.

The Congressional Budget Office has said that this tax will be passed along to individuals and small businesses in the form of higher health insurance premiums. According to Doug Holtz-Eakin, former director of the Congressional Budget Office, this tax will add about 3% per year  to the average family premium.

4.  The ACA caps small business deductibles.

The Affordable Care Act caps deductibles for small businesses at $2,000 for individuals or $4,000 for families.  Rather than repeating it here, see our earlier post on the premium impact of this limitation.

5.  Subsidies don’t change the costs of products or services.

The Concise Encyclopedia of Economics describes a subsidy as “Financial assistance…to a person or group to promote a public objective…Although subsidies exist to promote the public welfare, they result in either higher taxes or higher prices for consumer goods.”

The Affordable Care Act relies on two government subsidies to make health insurance affordable: expanded Medicaid eligibility and premium assistance credits.  Neither changes the cost of health insurance.  They simply give financial assistance to promote the idea that government support is creating affordability.  In reality, the subsidies shift the financial burden to families that do not quality for assistance and to the government.

The Affordable Care Act needs attention before Americans are priced out of the health insurance that was supposed to become more affordable.

Will you going be able to afford the ACA’s premium increases?  We want to hear from you.



16 responses to “5 Must-Fix Items in the Affordable Care Act: Higher Insurance Costs”

  1. Debra Gordon Avatar

    Yes, premiums may go up. They’ve been going up at a rate beyond inflation to begin with. In addition, insurance companies will now have millions of new members to dilute the risk pool, which should lead to slower increases. And for individuals who previously had to buy health insurance on the open market, premiums should dramatically decline and accessibility increase.

  2. Les Stettner Avatar
    Les Stettner

    Community rated, non underwritten health insurance is the only way to spread the pool of risk evenly. Cherry picking underwriting takes no skill or expertise or understanding of risk. It is sad that PPACA is full of potholes. It needs to be amended in order to accomplish what it intended to do. Many Americans will face more medical bills that they can not pay. I agree with Mr. Watson and have been writing about it for years. Genetics, lifestyle, nutrition and exercise may result in lower costs thru early diagnosis and intervention. Incentives have not had much success in the past. Hopefully, that will change. Good point thou’ because PPACA needs at least 5 fixes. Thanks for your post.

  3. Eric Vanderhoef Avatar
    Eric Vanderhoef

    I am fascinated by the belief by our law makers that the laws of economics don’t apply to their legislation. Like gravity, it can be overcome with substantial amount of resources (airplanes flying), but when the resources are gone, gravity will win. PPACA is attempting to defy gravity under the guise of improving healthcare. How much money will be sunk into defying the laws of economics before Congress will revisit this issue?

    1. Lance B Johnson Avatar
      Lance B Johnson

      Yes, whichever side wins, the ACA in 2013 will generate jobs for us healthcare professionals . Yea! Too bad the middle class will not be able to eat cake while we enjoy the frosting.


  4. Tom Keney Avatar


    I will bet you believe in the tooth fairy and the easter bunny to think that things are covered at no cost. Look at employer rating of health care and you can see that there is no, I repeat, no personal responsibility laid on the feet of the people getting this benefit. ACA only moves farther away from personal responsibility.

    75% of chronic disease is the result of a lifestyle choice.


    1. Roberta Watson Avatar
      Roberta Watson

      I didn’t say there was no cost to the system, just no copayments or deductibles to the covered person. Long term, preventive care should make a person’s total health costs less, and help them get control of their chronic conditions.

      Certainly lifestyle is a factor in some chronic conditions, but genetics is a huge factor in some of those and the primary factor in many. In both cases, medical science can often help people get control of their chronic conditions and prevent expensive flareups.

  5. Roberta Watson Avatar
    Roberta Watson

    Huge premium increases were happening each year before the Affordable Care Act was enacted, and people who paid the premiums had no security that the coverage would stay in force once they got sick. If the coverage did stay in force, the costs could escalate dramatically, making renewals unaffordable even for those whose illness had not cut back their income. As long as everybody is required to be “in the system” for their entire lives, in sickness and in health, it is fair that they not be discriminated against once they become sick.

    The taxes on insurers, etc., are a fair payment for having more customers, many of whom will be healthy. If they are passed on to the customer, the amounts are smaller than the 30+% premium increases that were happening previously, and the covered individuals will have more security in their coverage.

    Insurers will have an incentive not to overprice their policies because excess amounts received over the Medical Loss Ratio threshold will have to be refunded to policyholders. This should help keep costs down.

    While you complain about subsidies for the poor paid for by others, the emergency care costs for the poor were already being added to the costs of services that were covered by insurance. By having everybody “in the system,” even if some require subsidies to get there, it should be possible to allocate the system’s resources in a rational way, give care to the poor in a less costly place than the emergency room (and hopefully to treat chronic conditions so that emergency room visits are not necessary), and manage the total cost of care.

    1. David Mair Avatar
      David Mair

      Roberta, thank you for sharing your thoughts. We agree with your comment about making it harder for insurance companies to rescind coverage. We also like the fact that the Affordable Care Act eliminates pre-existing conditions exclusions for people buying individual insurance. However, we would like to see it tied to continuous coverage, rather than allowing someone to wait until a medical need arises.

      Our concern about subsidies should not be mistaken as a complaint about utilizing them to aid those who are unable to care for themselves. In fact, we feel society does have a role in doing so. If you read the entire series, you’ll find that our concern is twofold. First, we do not believe people are aware their premium subsidies can disappear and require repayment as added taxes after they are used. Second, we do not believe that premium subsidies make insurance more affordable. In fact, as costs rise, the people who do not receive them and the federal government are the losers.

      1. Roberta Watson Avatar
        Roberta Watson

        The purpose of the mandates is to make sure people are in the system from cradle to grave, so that they can’t wait until they are sick to buy the coverage. Starting in 2014, they will be required to have coverage. You are correct that you can’t plug adverse selection at one end without also plugging it at the other end.

      2. Roberta Watson Avatar
        Roberta Watson

        If you support having people covered who can’t pay (as I think you said you do), how do you do that without premium subsidies? Short of a single payor system or national health insurance, which the ACA was designed to avoid having to implement, how do you cover the poor without subsidies? If your objective is to go back to the old system of just letting the poor go to the emergency room when they are seriously ill instead of having help with conditions when they are less expensive to treat, those costs also go into the insurance for the rest of us.

        1. David Mair Avatar
          David Mair

          Roberta, if you read my earlier answer to your question well, you’re aware that we believe there is a need for subsidies. We believe we have a responsibility as a society to care for those who cannot care for themselves. Where we may differ is who should receive subsidies and how they can be best delivered. We would have preferred a distinctly different approach. We would agree that expanding Medicaid makes sense, albeit it we would like a second program, and we would include anyone receiving unemployment benefits or whose benefits have exhausted but remain unemployed. For those who are employed, we would have preferred an approach that uses tax credits for businesses that offer affordable health insurance, using a 9.5% standard similar to the ACA, in order to suport business growth and expand access to insurance. Let’s get a dual benefit for the dollars.

          We would prefer that federal dollars be used to increase Medicaid and Medicare payments to physicians and hospitals. Currently, those programs pay 82 cents for each dollar of delivered care. Those underpayments create a situation in which commercial insurers pay $1.19 for each dollar of delivered, and it adds about $1200 a year to the price of a family insurance policy. These underpayments are a greater cost problem nationwide than indigent care, and they are resulting in an increasing number of physicians declining Medicaid and Medicare patients. Those folks, even with federal benefits, are also finding themselves in emergency rooms for care.

          What we aren’t as fond of is having private businesses subsidize health insurance for children who are working at another firm. Why should my daughter get health insurance from her mother’s policy when she is eligible for benefits at her job? We also aren’t keen on subsidizing health insurance for families making more than three times the federal poverty level. This latter group is not among those unable to care for themselves.

          The rest of the answer requires a long discourse that needs more time and space than is available here.

  6. Lance B Johnson Avatar
    Lance B Johnson

    Excellent analysis. As the middle class is by definition middle aged with children and has lots of smokers, the ACA is just another tax on them.

  7. Tom Keney Avatar

    I am disappointed with the directives laid out in a Democratic action that offers no economic effect for life style choices when it comes to health care. That makes as much sense as charging a female and a male of the same age the same premium. It is no wonder that the exchanges will crumble under their own weight and states will be left holding the bag with no money from the federal government. I am sick.

    1. Roberta Watson Avatar
      Roberta Watson

      There are many wellness incentives in the Affordable Care Act. Preventive care is covered at no out of pocket cost, and many providers will have incentives to quit smoking and improve health (but those incentives will not deny care to those unable to meet the health objectives).

      1. Lance B Johnson Avatar
        Lance B Johnson

        Roberta: Socially I agree wellness programs and coverage of all is a desirable goal. But, we also need to be honest that the middle class will pay for it and there is going to be a lot of complaining about the higher rates that most families will pay.


        1. Roberta Watson Avatar
          Roberta Watson

          I don’t think the total rates the middle class families will pay under the Affordable Care Act will be higher than what would have happened if the ACA had not been enacted, since insurance was going into a death spiral. Indeed, without the ACA, I doubt that many middle class families could even get coverage by now (unless they are completely healthy, in which case they would lose it when they do get sick and need it).

What do you think?