Reverse “Sticker Shock”—Why are Insurance Rates in the State Marketplaces Lower Than Expected? — Part I


Even Forbes’ columnist Avik Roy is recanting.  Earlier this month he acknowledged that under Obamacare, many Americans who buy their own coverage in 2014 will find that insurance is significantly more affordable than it was in the past:  “Three states will see meaningful declines in rates: Colorado (34 percent), Ohio (30 percent), and New York (27 percent).”

Colorado, Ohio and New York are not unique. As states announce the prices that carriers will be charging in the online marketplaces (or “Exchanges”) where Americans who don’t have health benefits rate at work will be purchasing their own coverage, jaws are dropping. Rates are coming down, not only for those individuals, but for some small business owners who will be buying insurance for their employees in separate SHOP (Small Business Health Options Program) Exchanges.

What may be most surprising is that premiums will be lower, not only in liberal Blue states but in some Red states that are opposed to Obamacare.

What is making health insurance more affordable?

First, the majority of individuals shopping in the Exchanges will be eligible for government subsidies that will go a long way toward covering premiums. In the past I have written about how these tax credits will help young adults (18-34).  But older Americans also will benefit. Fully 30% of those who receive tax credits will be 35-54, and 12.5% will be 55 or older.  This is important because in the Exchanges, insurers  in every state except New York and Vermont will be allowed to charge a 60-year-old three times as much as they would charge a 20-year-old for exactly the same policy.  Without subsidies many would find insurance totally unaffordable.

The second reason premiums are significantly lower than expected is that as I have explained on  in the state marketplaces insurers are forced to compete on price. All policies sold in the Exchanges must cover the same essential benefits, and follow other rules that will make the plans look very much alike. The only way for a carrier to distinguish himself from the crowd will be to charge less—or have a better network of providers. But the younger customers that carriers covet care far more about price than about the network.

Third, in many cases, state regulators have been clamping down. In Portland Oregon, for example, regulators forced insurers to cut their proposed rates by an average of nearly 10%. Three of the 12 insurance companies in that market had to lower their rates by more than 20% f

Finally, rates in many Exchanges are looking surprisingly affordable because many insurers are narrowing their networks to a group of hospitals and doctors who will offer higher-quality care for less. Meanwhile the fear-mongers argue that this means patients won’t receive the care they need.

Indeed, the New York Times just published an article suggesting that  patients with complicated medical  problems may have a hard time finding providers within an  insurer’s network who can treat their problems. 

What the Times neglected to mention is that the Obama administration had anticipated the possibility that a network could be too narrow and has already addressed the issue.  As Modern reports, “last year, the administration issued a rule” that insurers “must maintain a network of a sufficient number and type of providers … to assure that all services will be available without unreasonable delay.”  The rule also requires that “essential community providers” be included in all plans.

This is an important fact. It  is not clear why the Times ignored it.

Modern goes on to quote Dr. Jeff Rideout, senior medical adviser for the Covered California state exchange, stressing that  “all plans included in the exchange have to get state and federal regulatory approval for network adequacy.”

But will the in-network providers be as good as those who balk at the notion of charging less than top dollar? Study after study shows that there is little correlation between higher prices and better care.  In fact, lower costs and higher quality go hand in hand: when more efficient hospitals co-ordinate care there are fewer “medical misadventures,” hospital stays are shorter; and both patient and doctor satisfaction is higher.

In the 1990s, HMOs that asked that t patients stay “in network” fell out of favor. But today, when Consumer Reports publishes NCQA ratings on quality of care as well as consumer satisfaction, it turns that that HMOs that rely on “networks” outrank other insurers. Networks that coordinate care are the future of medicine.

Ohio—In September the Truth Finally Emerged

Ohio serves a striking case study of “reverse sticker shock.”

Before next year’s rates for individuals buying their own insurance were announced, many Red state officials had warned that prices would spiral. In June, for example, Ohio Lt. Gov. Mary Taylor, a Republican who heads the state’s insurance department, took fear-mongering to a new level by announcing that in 2014, the average cost of coverage would rise by an estimated 88 percent. l

Two months later, when Taylor’s department disclosed the actual premiums that insurers will be charging in Ohio’s marketplace, reality forced her to amend her estimate. Nevertheless, she still insisted that in 2014, premiums for individuals will be a whopping 41 percent higher than they were this year. Republican House Speaker John Boehner then picked up his megaphone, calling her announcement “irrefutable evidence” that Obamacare will hurt the economy as it drives up costs.

The Cleveland Plain Dealer wasn’t buying any of this. Reporting on Taylor’s revised numbers, it immediately observed that her statement “masks the fact that for many individuals, premiums and out-of-pocket medical expenses will go down” because the vast majority of Americans buying their own insurance in the state exchanges “will be eligible for income-based federal subsidies to reduce or eliminate their costs.”    (It would be difficult to accuse the Plain Dealer of liberal bias. In 2012, the paper endorsed Mitt Romney for president. )

The paper then pointed to a second flaw in Taylor’s reasoning.  When she compared the average cost of insurance to 2013 to the average cost of 2014 policies,  she included bare-bones plans sold in 2013 that “require deductibles of $10,000 or more and offer only catastrophic coverage.”

This distorts the comparison between 2013 and 2014 prices in two ways:

1)   All of the plans sold in the Exchanges in 2014 will offer far better protection and much lower deductibles than the bargain basement plans Taylor used in her comparison. She was comparing apples to rotten apples.

2)    More importantly, as the Plain Dealer went on to explain, even in 2013 “relatively few people bought these plans (because of super-high deductibles and crummy coverage).”  In other words, in order to draw a fair comparison between “average” prices in 2013 and 2014, one needs to look at the plans that most people purchase.   

By September Forbes columnist Avik Roy, a senior fellow at the conservative-leaning Manhattan Institute for Policy Research agreed: rates in Ohio would plunge.

In June, Roy had trumpeted Taylor’s projections that healthcare reform would lift rates in Ohio’s state marketplaces by 88%.  But as states announced the premiums they had approved,  Roy and his team re-crunched the numbers, and acknowledged: “rates on average will go down for Ohioans” by “30 percent. . .  even before even considering the effect of subsidies.” /

Let me be clear: Roy continues to claim that most Americans buying their own coverage will see their premiums rise in 2014. On that point, he still is wrong: in his state-by-state analysis of rates, he doesn’t include the impact of the subsidies.

But a policy’s “sticker price” won’t matter to someone purchasing insurance in the state marketplaces. What will matter is what he actually has to lay out, after applying his tax credit. That will determine whether he believes that the “Patient Protection and Affordable Care Act” is actually offering affordable insurance.

(Keep in mind that most people shopping for insurance in the Exchanges live in low-income and median-income households– and thus are eligible for subsidies. More affluent Americans are far more likely to work for employers who offer good health benefits– or to have coverage through a spouse or a parent. The Exchanges will not be open to them because an employer already subsidizes their insurance.)

Still, I greatly respect Roy’s honesty regarding Ohio. In these polarized times, retractions have become rare, even in highly-respected publications. A hat-tip to Roy and to Forbes.


14 thoughts on “Reverse “Sticker Shock”—Why are Insurance Rates in the State Marketplaces Lower Than Expected? — Part I

  1. Maggie’s two posts on the realties of Obamacare under the exchages (reverse “sticker shock” articles 1 and 2) must be widely circulated asap and repeatedly. We must drive these reality messages home. Thanks Maggie.

  2. Thanks for the update.
    I presume we still do not know how ‘limited’ the networks may be, e.g., if a patient needs the urgent services of an electrophysiologist, or a transplant team and center (with all the care that it entails, including Nephrologist/Hepatologist/Cardiologist involvement, sometimes for years before and after), then this will not be a problem?
    Is everybody sure that out-of-pocket costs are capped, even if one of these ‘super’-specialists *has* to be involved, but may be out of ‘narrow’ network?
    If we assume that the best exchange plans perform well in regard to being able to access high-level care when needed, then the current policies being sold to individuals will likely experience attrition and an effective cannibalization will have occurred.
    I foresee a ton of problems and surprises, but do lean in favor of this whole move towards more universal care.


  3. How will tax credits help those who do not pay taxes, because of low very income, but with sufficient assets to not qualify for Medicaid (>$3k)?
    The whole notion of ‘subsidy’ seems loaded. Will the money be owed, if income subsequently rises…or is it truly ‘free’ money? I doubt it.


  4. Pingback: Angry Bear » October 1st, A New Republican Proposal, and the Bad News Bears

  5. Ruth good questions.
    First, if you don’t owe any taxes, you still get the subsidy– a very big subsidy. The IRS simply sends a check to your insurer at the beginning of every month.
    If your income is so low that you don’t owe any taxes, you also will get a big subsidy that
    sharply reduces the co-pays and deductibles that your insurer charges you.
    Of course, if you get a new job or a huge raise and your income shoots up you are expected to notify the IRS (when you get a subsidy, they’ll tell you how to do that.)
    The IRS will adjust the amount they send to your insurer each month accordingly.
    (Note if you suddenly inherit money, or win a prize, that does NOT count as part of your income. )
    By the same token, if you lose your job, or are cut to part-time in the middle of the year, you let the IRS know, and they begin raising the amount that they send to your insurance company each month.
    When you pay your 2014 taxes in April of 2015, the IRS will look at what you earned in 2014 and what they paid out in subsidies in 2014. If your subsidies were lower than they should have been, they give you a refund. If they were higher than they should have been, they add that amount to the 2014 tax bill that you owe.
    If you’re not comfortable with the idea of winding up having to pay the IRS back, you can tell them from the beginning : “Just send 2/3 of what you think my subsidy should be to my insurer each month. You then wind up paying your insurer a little more each month, but in April of 2015, you get a full refund for the other 1/3 of your subsidy.
    This is all extremely fair.
    This is why the bill is so long. The folks writing the bill did their best to think of all all sorts of contingencies.
    On the question of the size of the networks:
    First, last year the Obama administration issued a rule that insurance networks must
    n fact, the Obama administration addressed that problem last year, issuing a “rule” that ensures that networks will not be too narrow. In order to win state and federal approval insurers will have to show that their network includes “a sufficient number and type of providers.”
    That’s the law.
    This gives a patient a very clear basis for a lawsuit if his insurance network does not include an electrophysiologist or a transplant teams and that’s what he needs..
    No insurer would want to deal with the suit. The law is very clear and very specific on so many points. (Again, that’s why it is so long.)
    In such case, the insurer would simply make an exception and let the patient go out of network.
    Keep in mind that the majority of insurers in the Exchanges will be non-profits like Kaiser–not for-profits like Aetna. When Consumer Reports compares non-profit and for-profit insurers using NCQA ratings to rank them on quality of care and consumer satisfaction non-profit HMOs (that use networks) beat the big for profits (AETNA,
    United Healthcare etc. all to a hollow.
    Study after study shows that there is no correlation between price and qualify of care. I’ve written about that here
    Finally, we do know a great deal about how large the networks will be in many states. If memory serves, in California 80% of all health care providers in the state will be included in the networks–including the very best hospitals in the state (based on patient satisfaction, infection rates, patient safety and outcomes.)
    A couple of large hospitals that are not included don’t rank well when it comes to quality of care and patient safety. They have a marquee reputation , in part because they are super-expensive and lay people think more expensive means better.
    Finally, what is likely to happen is that as insurers exclude super-expensive providers from their networks, some of those providers will be forced to re-consider their rates, become more efficient, and charge less.


  6. “networks to a group of hospitals and doctors who will offer higher-quality care for less”

    The notion that ACA Exchange rates are lower than expected because health plans sought out high quality plans is just plain wrong.

    Recall this article where high quality plans want to Stay Out
    of the Exchange.

    No prices are down because plans are only using community hospitals in their networks which were already cheaper anyway or they got discounts from hospitals scared they’d lose volume because the network threatened to keep them out its exchange products.

    Bottom line for health plans was as long as the hospital didn’t really really suck quality wise and met the other criteria then they got on the Exchange.

    Now it’s just going to be a battle between the MLR and the enrollee’s price elasticity which is partly regulated by how much subsidies the government will be able to extend to them.

    Health plans got a great deal because essentially for the same fixed costs they get new customers thanks to the subsidy.

    Hospitals big losers because in order to get on Exchange they got to reduce rates. Which may bring them more volume but probably not enough to cover their costs (fixed).

    • Joe-

      First, the U.S. News article you cite was written by “”

      Who are they? A group funded by large conservative groups–including the Koch brothers.

      (This is only one of many articles calling them out.)

      Secondly, they assume that hospitals rated “best” by U.S. New & World Report are the best.

      It’s widely known that the U.S. News list represents well-known hospitals, but not hospitals with the best outcomes.

      In addition, the Exchange networks are not limited to community hospitals. That is simply a lie.

      In NYC alone, the Exchange networks include the big academic medical centers– Columbia, NYU, Motefiore, etc.

      Much research (published in medical journals) reveals that there is no correlation between how expensive a hospital is and quality of care measured by outcomes and patient safety.

  7. Well reputation is part of US News survey however clinical outcomes and clinical inputs are also part of the rating.

    Those academic institutions may have quality but they also have high expenses above national averages (Dartmouth Atlas, Health Compare).

    My contention would be those academics are on Exchange to preserve volume but they had to discount their normal commercial hmo rates to do it. I bet they are likely losing money per patient!

    Also last I heard Mayo Clinic is pretty much out of the Exchange. Why wouldn’t Mayo,a very high quality provider, be in the Exchange unless it’s about rates being too low?

    • You’re wrong about Mayo. This is another myth spread by (funded by the Koch brothers.)
      Mayo takes Blue Cross/Blue Shield silver plan. (Silver plans are the most popular plans in the Exchange)
      Anyone who want to go to Mayo can sign up for that plan.
      Narrow networks were not caused by Obamacare. This is a myth spread by GOP. Narrow networks go back to the early part of this century–Google Jon Cohn and The New Republic.

      We overpay brand-name hospitals. See Steve Brill’s article on this.

      Trust me, the academic medical centers in Manhattan are NOT losing money.
      Look at the constant expansion–adding amenities.

      They are beginning to tighten their belts a bit–trying to cut make on avoidable errors , unnecessary readmissions (because discharge wasn’t done the right way the first time around.)

      • First I said Mayo pretty much out of Exchange not all the way. And if your data correct then that’s correct.

        Because Unless Blue Cross only plan on Exchange then why is Mayo ONLY in one product? Sounds like narrow network to me.

        Also I said per patient losses on Exchange so AMC’s could be losing money on Exchange but still make enough from other medical operations to make money.

        But again I have no bones to pick with you about price doesn’t equal quality.

        • Joe–

          By teaming up with just one insurer, Mayo was able to get Blue Cross/ Blue Shield (the largest non-profit insurer in Minnesota) to agree to
          follow what Mayo has learned about how to direct patients to the level of care they need–not too much, not too little. Mayo has excellent electronic medical records which show it how patients who fit a particular profile react to particular treatments. Mayo uses that EMR to decide which drugs it will and won’t include in its formulary. A number of years ago, Mayo stopped cover one drug because evidence suggested that risks outweighed the benefits. Kaiser Permanente and the VA made the same decision. But most insurers continued to cover the drug, because it was very popular. They did not want to lose market share.
          About 1 1/2 years later, the news became public: the drug was killing people. The drug-maker had been hiding the evidence. The manufacturer was forced to take the drug off the market. When most insurers continued to pay for the drug, they were making a business decision. Kaiser, Mayo and the VA were making a medical decision–based on medical evidence.
          Blue Cross/ Blue Shield will be covering the treatments that Mayo believes provide the best value for our health care dollars. Whether the treatment is popular will not determine what BCBS covers.
          The patient’s primary care doctor at Mayo will co-ordinate his care.
          Thus Mayo and Blue Cross have created an “integrated medical system”—the insurer and the provider are on the same page.
          I wrote about “integrated medical systems” for the NYT here:
          The network is narrow only in this sense: you go to Mayo’s doctors and hospitals. You don’t go to other doctors and hospitals–who might not follow
          Mayo’s guidelines . (Many doctors and hospitals over treat. Doctors at Mayo are required to follow evidence-based guidelines.)

          Academic Medical Centers are not losing money on Exchange patients. Even if Exchange insurers pay them less than insurers who overpay, the overpayments are so large that the Exchange payments cover the hospital’s costs–as long as the hospital is efficient. Efficient hospitals make
          money on Medicare’s payments.

  8. I don’t know all of them so it may be true to say most AMCs are making bundles of money but I know Montefiore in a recent year only made ~33k off of ~3 billion in revenue but still quite remarkable after they gave out ~ 355 million in charity (actual costs not charges!)

    All this make me think if they are on Exchange they are probably losing money with margins so low like that.

    But that could just be short term.

    If the Exchange works and attracts more paying members it reduces the number of charity cases hospitals like Montefiore have to absorb.

    • Joe-

      See this article on Motefiore It generates modest profits and even manages to reinvest in itself, buying regional hospitals. At the same time, as you say, it cares for many poor people. Fully 40% of its patients are Medicaid patients. 80% of patient bills are paid by the government (which means that if they are not on Medicaid, most are on Medicare)

      Supposedly Medicare underpays and Medicaid Way underpays. So how does Montefiore generate a profit? It is very efficient and patient centered. It is not wasting money on
      cosmetic improvements.

      Montefiore is one of the new “accountable care organizations” set up under the Affordable Care Act.
      Though in fact, Montefiore was holding itself “accountable” for better outcomes at a lower price long before the ACA passed.

      Montefiore is a very good hospital. (One of my favorite doctor/readers works there).

      But most upper-class Manhattanites would not go there because it is: a) in the Bronx b) many of the other patients would be poor, people of color c) it is not a
      “marquee” hospital like NYU, Mt. Sinai, etc. Those hospitals spend money on spa-like amenities , etc.

      A non-profit hospital needs a “profit” margin of about 3% in order to stay in the black, have enough $$ to invest in equipment it truly needs, and cover bad years when revenues are off.

      Also, see this report on Mass. hospitals.
      As you will see, margins average 3% to 4%– though up to 1/4 of hospitals may be operating at a loss. Research done by MedPAC–the Medicare Payment Advisory
      Committee–shows that when hospitals are operating at a loss, the vast majority can move into the black by getting serious about things like patient safety (preventable errors are
      very expensive), co-ordinating care, etc. The one exception: public hospitals in poor areas located in a state or county that does not support its public hospitals. (Texas is a good example. As a doctor in Texas once said to me: “Texas never has and never will take care of its poor.”

      As you say, under the ACA, fewer of Montefiore’s patients will be uninsured, and this will help the hospital. At the same time, because it cares for so many indigent patients,
      prior to Obamacare, Montefiore had been getting fairly large “disproportionate share” payments from the government because it cares for a “disproportionate share” of the poor.
      Now, those “DSH” payments have been cut–because more patients are insured–yet in 2014, Montefiore was still making a modest profit.

      This is a well-run non-profit hospital that has a sense of “mission”– it’s mission is to care for patients. Non-profit hospitals are tax-exempt–they don’t pay property taxes or corporate taxes for this reason. (And this is another reason why they can remain in the black with only a 3% or 4% profit margin.)

      But many “marquee” hospitals do not do much in the way of improving public health in their communities, and many actively discourage poor patients from coming into their ER’s (NYU is notorious for this.)