THE BLOG
06/13/2014 01:28 pm ET Updated Aug 13, 2014

Health Insurance Premiums Can Be (And Always Have Been) Volatile

Health insurance carriers are in the process of calculating premium rates for next year.

Some insurers have completed the process, but at this point, we don't have a complete picture of what rates will look like across the industry in 2015. What we do know is that every anecdote surrounding rate increases or decreases will find its way into the political debate leading up to this year's mid-term elections.

The immediate analysis will focus on how new rates compare to last year's prices. But the more important question from a policy point of view is how the Affordable Care Act affected those rates. Will premium increases be significantly higher or lower than before the ACA was fully implemented in 2014? And what role did the ACA play in any changes?

When we try to answer those questions, it is important to remember that there is never a uniform, across-the-board national or state-based rate increase, even though political ads will try to imply that there is. In the real world, premiums vary from insurance carrier to insurance carrier and from plan to plan. Rates will be different from state to state and can vary from location to location within a state. Premiums will generally be higher in San Francisco than in rural Mississippi, where the cost of living and health care prices are significantly lower.

As we have seen in Colorado, rates can vary wildly from resort areas like Aspen and Vail (which in 2014 had the highest premium rates in the country) to small towns on the Eastern Plains. Premiums will also vary from locations where one carrier has the vast majority of market share (and more influence over health care prices) to locations where there is greater competition among carriers but less influence over the prices charged by health care providers.

Also, premium increases have been the rule and not the exception. In 1999, the average health insurance premium consumed about 11 percent of a median family's income. By 2010, those premiums had almost doubled, to 19 percent of income. A recent study from the Commonwealth Fund found that from 2008 through 2010, prior to the implementation of the ACA, insurance premiums in the individual market grew by an average of more than 10 percent each year.

The study also showed the wide variation in premium increases from state to state. In 2008, average rate increases ranged from 2.8 percent in Iowa to 14.7 percent in Wisconsin; in 2009, from 4.1 percent in New Jersey to 20.1 percent in Connecticut; in 2010, from 3 percent in Idaho to 21.8 percent in Nebraska. The study could not identify any clear geographical pattern to the increases.

Rate increases in the individual market varied significantly by plans as well as carriers before the ACA. In 2008, 1 percent of customers enrolled in plans saw premiums increase by an average of 28 percent; 45 percent of enrollees had increases ranging from 10.8 to 18 percent; 15 percent of enrollees saw no change or a slight reduction in premiums; and 1 percent saw a reduction of 9.5 percent.

That was before the ACA. Right now, there is too little information about too few carriers to make any conclusions on the ACA's impact on premiums. The variation in rates is simply too great, too localized and the result of many factors. The individual insurance market, the one most directly affected by the ACA's reforms, is far more unpredictable than other insurance markets. While the ACA may address some of the more extreme premium fluctuations, it does not fundamentally change the basic structure of a market that has always been highly volatile and uncertain.

However, there are provisions in the ACA that do impact premiums. Insurance companies must sell and renew coverage regardless of a policyholder's health status. Premiums can be rated only on family size, age, smoking and geography. Each health plan must cover the law's 10 essential health benefits, and plan variation is much more limited. All of these provisions could put upward pressure on premiums.

At the same time, there are provisions that could limit increases in premiums. The insurance marketplaces have created larger risk pools and have spurred competition among carriers. Premium rate review at the state level requires carriers to justify increases above 10 percent. Tax credits are making premiums more affordable for some, bringing more people into the market and reducing the amount of uncompensated care. The individual mandate is designed to bring more young and healthy people into the market, and risk-sharing mechanisms protect carriers from risk and adverse selection. All of these provisions are likely to place downward pressure on premiums.

While there is not enough data yet to measure the collective impact, there are some positive trends. Rates in 2014 in most cases were lower than many of the early projections. According to the Congressional Budget Office (CBO), premiums for an average "silver" plan (pays 70 percent of health care expenses) turned out to be about 16 percent lower than in earlier projections. As for its latest analysis, the CBO projects premium rates will increase by 3 percent from 2014 to 2015 and by 6 percent on average per year from 2014 through 2024. If accurate, that would be a lower rate of increase than what we saw in the three years prior to the passage ACA in 2010.

In the end, premium increases will be up to individual insurance carriers, and decisions will be based on assumptions about who will buy coverage and how much health care they will use. Those assumptions will be based upon a limited amount of experience in the post-ACA world. Real data will take some time to collect, and in the meantime insurers will limit their exposure to risk as much as they can.

The bottom line is that premium rate increases, including really large ones, were common before health care reform. The new health insurance cost-and-premium landscape will become clearer only with time. Real data and experience can't be rushed. Which means we need to be skeptical about premature conclusions, in the middle of an election year, that exaggerate or minimize the impact of health care reform on premiums. All too often those are really political assessments made for political reasons.