The Major Factors | Subsidies | Variation | Rising Health Care Costs |
Frequently Asked Questions
The health care reform law will expand
access to insurance coverage and broaden insurance benefits. Anyone will be
able to sign up for coverage, including those with pre-existing medical
conditions. These new benefits bring new costs. Financial assistance will be
available to help qualifying individuals and families pay for coverage. Even
with this new assistance, the new benefits will cause some people who currently
have insurance to pay more than they do today. These changes will affect people
differently, depending on where they live, what coverage they have today, and
their age, health, gender, and income. To learn more about the major changes to
health insurance, visit www.timeforaffordability.org.
The Major Factors:
On January 1, 2014, health insurance changed significantly for
individuals buying coverage on their own.
A report from Milliman, Inc. examines in comprehensive detail the
factors that increase or reduce premiums.
These factors include:
- Change in who is covered
– The health care reform law will mean millions of new people are
getting coverage for the first time.
Many of these individuals may have higher health care costs than
individuals who currently have coverage.
Additionally, for the first time ever, individuals with pre-existing
conditions who do not employer sponsored coverage will be able to purchase
- Change in what is covered
– The health care reform law requires
health plans to provide coverage for an essential health benefits (EHB) package that
includes a broad range of mandated benefits, some of which typically are not
included in current individual and small group policies. Additionally, plans will have to cover a
minimum percentage of health care costs for an average beneficiary (known as
- New regulations – There are a number
of new changes to the way health insurance is regulated, including limiting how
much premiums can differ. These
regulations include restrictions on age rating as well as no longer
allowing premiums to differ based on health status or gender. The law allows for differences of premiums
based only on four criteria: age, location, family size, and smoking.
- New taxes and fees – The law includes a
number of new taxes and fees that will increase premiums. This includes a new $100 billion health insurance tax which increases costs for individuals, families, and employers.
There is also a new “user fee” for health plans operating in the federal
Exchange; state-based exchanges may impose user fees as well.
- Financial assistance –
Millions of individuals will have access to financial assistance
in the form of premium tax credits and lower cost sharing. While this financial assistance does make
coverage more affordable, it does nothing to actually lower the cost of health
- Other factors – The Milliman report
also examines the impact of other factors such as competition in the Exchanges,
benefit design, the transitional reinsurance program, and pent up demand from individuals
having coverage for the first time.
For a more in-depth analysis of all of these provisions, read the
full report from Milliman.
Other reports have examined the impact of the new law and
reinforce the Milliman report’s findings.
An issue brief from the American
Academy of Actuaries identifies several factors that will determine premium
levels in 2014: the effectiveness of the individual mandate and premium
subsidies at attracting low-cost enrollees into the insurance market; new
benefit requirements that may lead to higher premiums but lower out-of-pocket
costs; decisions by employers about whether to continue offering coverage and
the health status of employees whose coverage is dropped; how each state’s
current market rules compare to the reforms that take effect in 2014; and the
demographic characteristics and health status of consumers purchasing coverage
through the new Exchanges.
The ACA provides premium and
cost-sharing subsidies to help low- and moderate-income
Americans purchase insurance. Subsidies will clearly help many families pay for
health care coverage, but subsidies will do nothing to bring down the actual
cost of that coverage. Suggesting that they will is comparable to saying that
Pell Grants reduce the cost of college tuition. Pell Grants enormously help
families afford the high cost of education, but they do not lower tuition
levels. Meanwhile, tuition prices soar.
Importantly, according to the CBO, millions of people are not
eligible for subsidies and the amount of the subsidy declines significantly as
incomes rise. The CBO states that more than 40 percent of people purchasing
coverage in the individual market today would be ineligible for premium
subsidies. Individuals with incomes between 250-300 percent of the federal
poverty line (FPL) would receive subsidies sufficient to cover 42 percent of
the cost of the second lowest-cost “silver” plan while those with incomes
between 350-400 percent of the FPL would receive subsidies sufficient to cover
just 13 percent of the premium. Moreover, due to how the subsidies are indexed, CBO states that over time “the shares of the premiums that the subsidies
cover will decline.”
There will also be tremendous variation in how the reforms will affect
individuals depending on the rules and regulations a state has in place
today. In fact, a recent
study by the Society of Actuaries found
that “there will be significant variation across states in the impact of the
ACA on average cost” for individuals and families purchasing coverage on their
The impact on specific individuals will vary significantly depending on
their age, gender, location, health status, income level, and what coverage
they have today. The Milliman report
found that “young, healthy males could see substantial increases due to the
combination of the overall rate change and the age/gender rating requirements”
while “older, less healthy individuals could see rate reductions.”
Further, families and employers currently have
broad flexibility to purchase the coverage that best meets their specific
health care and financial needs. The impact the ACA will have on their premium
depends entirely on the type and amount of coverage they have today. For
example, a person who currently has comprehensive coverage through their
employer will not see the same impact on their premium as someone with
individual market coverage who has chosen to purchase a low-premium,
high-deductible plan that provides coverage for catastrophic health care costs.
Simply looking at the average increase does
not tell the whole story about what these changes may mean for a particular
individual or employer.
Rising Health Care
Any increase in premiums as a result of the
ACA will be on top of the unsustainable rise in underlying medical costs.
Soaring medical costs are driving up the cost of coverage, taking up a greater
share of federal and state budgets, and threatening the long-term solvency of
our nation’s public safety net programs. While the ACA takes a number of
preliminary, but promising, steps toward reforming the delivery system, much
more needs to be done to control health care cost growth.
To help shine a spotlight on medical cost
drivers, AHIP released a new iPad app that consolidates 50 years of federal health care spending data
into a series of easy-to-use, interactive charts. App users can view historical
and projected health care spending data at the national level, state-by-state,
on a per capita basis, or as a percent of GDP. The app also provides a detailed
breakdown of how much the nation is spending on different aspects of the health
care system, such as hospital care, physician services, prescription drugs, and
health plan administrative costs, and how each of these components contributes
to health care cost growth.
Health plans are leading efforts to reform the payment and
delivery system by partnering with providers to reward quality care, promoting
prevention and wellness, and helping patients and physicians manage chronic
disease. These initiatives have demonstrated results in better health outcomes,
improved patient safety, fewer preventable hospital readmissions, and lower
health care costs.
Frequently Asked Questions
Doesn’t the individual mandate solve the problem of people waiting
until they are sick to buy coverage?
families purchasing insurance in the individual market are guaranteed
coverage for pre-existing conditions, and their premiums cannot vary based on
their gender or medical history. The ACA also includes a requirement that all
Americans carry health insurance. The individual mandate is intended to reduce
the incentive for people to wait to purchase coverage until after they are sick
or injured, which would unfairly penalize everyone with insurance. Yet many experts question whether the coverage requirement will be sufficient to
encourage younger and healthier people to take up coverage, especially when
they are faced with significantly higher costs due to the health insurance tax,
benefit mandates, and rating restrictions included in the ACA. In fact, the
penalty for failing to carry insurance in 2014 will be as low as $95 – far
below the cost of purchasing insurance.
What about health plan administrative costs and profits?
Health plans’ administrative costs and profits
are sometimes cited as a reason why premiums are rising. The evidence clearly
contradicts this unfounded claim. Health plan profits account for less than one
penny out of every dollar spent on health care. Further, government data show
that last year the portion of premiums allocated to health plans’
administrative costs was the second lowest in the last nine years, even though health plans have
been incurring new compliance and regulatory costs related to the health care
Moreover, despite evidence that medical
costs are driving premium increases, the ACA imposes a new arbitrary federal
cap on health plans’ administrative costs and profits (referred to as the
"Medical Loss Ratio") and establishes a new federal rate review process on top of existing state laws
and regulations governing premiums. To make health care coverage more
affordable for families and employers, the focus needs to be on all of the
factors driving premium increases, including soaring medical costs, changes in
the risk pool, and new taxes, benefit mandates, and regulations. Back to top