NCPA - National Center for Policy Analysis

Double-Digit Premium Hikes Debunk California's "Active Purchaser" Claim

August 10, 2016

Senior Fellow John R. Graham writes in NCPA's Health Blog.

With some embarrassment, Covered California (the state's Obamacare exchange where people can purchase health coverage) has announced the average premium hike next year will be 13.2 percent. For many subscribers, the hike will be much greater because of the way federal tax credits discount premiums. 

This year, a 40-year-old single person making between $17,820 and $23,760, can buy a Blue Shield Silver level plan with a monthly premium of $318. However, the subscriber only pays $122 while the federal government chips in $196. Next year, the premium will go up 20 percent to $381, of which the subscriber will pay $170, while the government will chip in $211. The total premium will increase by 20 percent ($63), while the subscriber's net premium will increase 39 percent ($48).

Next year's premium hikes debunk Covered California's claim that its power to act as an "active purchaser" gives it an advantage in holding down rate increases. California is one of only four states in which the Obamacare exchange has the statutory authority to act as an "active purchaser," substituting its own judgement about benefits consumers value for their own. Covered California dictates, for example, a primary-care visit has a $45 co-pay for those with Silver plans; or that a family deductible is $4,500.

According to Peter Lee, Executive Director of Covered California, consumers do not really care about the ability to choose plans with different features. "What's the difference between them?" In order prevent consumers making choices of plans with different co-pays and deductibles, Covered California only accepted 12 of 32 insurers which initially showed interest in participating in 2014. UnitedHealthcare, the country's largest insurer, entered Covered California in 2015 but will not participate in 2017.

Commenting on next year's double-digit rate hikes, Lee blamed the cost of prescription drugs and the end of some federal subsidies for the problem. Neither claim stands up to scrutiny.

Although drug costs have been increasing faster than other health costs, that trend is breaking down. The Milliman Medical Index, prepared by a leading firm of consulting actuaries, reported health costs for employer-based plans experienced the "lowest annual increase in 15 years" this year, at 4.7 percent. Prescription drug spending grew 9.1 percent, down from 13.6 percent in 2015. IMS Health, a leading provider of health market intelligence, forecasts U.S. prescription spending will increase between just 4 percent and 7 percent annually through 2020.

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