Insurers Don't Know How Sick Their New Customers Are, but Plan to Raise Prices Anyway

There are still 12 days left in Obamacare's open enrollment period, but the insurance industry doesn't need to wait for final enrollment numbers to know that they'll raise prices.

There are still 12 days left in Obamacare's open enrollment period, but the insurance industry doesn't need to wait for final enrollment numbers to know that they'll raise prices. As a series of anonymous industry sources told The Hill, premiums will "skyrocket" in 2015 due to the law's bungled rollout and the low number of 18-to-34 year olds who have signed up. Insurance industry officials emphasized that "any spikes would be a consequence of delays and changes in ObamaCare’s rollout," but that is premature. Until the enrollment period ends and insurance companies assess how sick their customers are — and how much cost will be absorbed by the government — it may be too early to promise increased premiums due to Obamacare.

The sources The Hill cites were responding to Health and Human Services Secretary Kathleen Sebelius saying last week that rates would rise, but not as noticeably as they have in the past. That, anonymous insurance industry official #1 told the si, is “pretty shortsighted because I think everybody knows that the way the exchange has rolled out … is going to lead to higher costs.” He said his company plans on tripling rates.

There are several points of consideration that will affect a premium spike. They would vary by region, state, and carrier; areas with sicker, older people are likely to be hit harder, according to insurance officials. States that are doing well in terms of overall enrollment would be less likely to see hikes. At the same time, some companies apparently underpriced their plans last year with the intent of hiking them this year regardless, and others will keep prices low to stay competitive. State insurance departments may also limit how much insurers can raise prices.

More importantly, industry officials don't yet have enough information on their new customers. Jay Gruber and David Cutler, health policy experts who assisted with Obamacare, told The Hill they expect prices to rise — because they always do — but how much depends on how big insurers think the exchanges will be. Three bits of information will influence their perceptions:

1. How many people have enrolled in their plans and how old are they?
2. How sick (or healthy!) are those enrollees?
3. How much will the risk corridors pay out if the companies has too many sick enrollees?

The officials interviewed by The Hill said the industry is "pessimistic" when it comes to the surge of enrollments by young people that the administration predicts. Which makes this a little premature, since insurers won't know how many young people have enrolled in plans by March 31 until after March 31.

As CNBC found last week, insurance companies have been scrambling to figure out how sick their new customers are. “The insurance executives understand this is a brand new group of customers they know very little about,” Ceci Connolly, managing director of the Health Research Institute at PricewaterhouseCoopers, told CNBC (emphasis added). As The National Review explained:

[T]he health of the actual enrollees — and therefore what they cost insurers — is what’s going to determine whether predictions about the enrollees were accurate, which determines whether insurers lose a bunch of money on the exchanges this year, and whether they have to raise premiums a lot next year.

The Review argues that Obamacare makes it "woefully difficult" for insurers to find this out. Some insurers, like Wellpoint, predicted their enrollees would be older and won't be taking any big hits. If only 33 percent of enrollees are in the 18- to 34-year-old range, as the Kaiser Foundation found in December, insurers would have to raise premiums by one percent. If the enrollment rate stays at a lower 25 percent, it's hard to see how that would justify tripling premiums.

Via American Academy of Actuaries.

When the insurers do know how sick or healthy their customers are, they'll know if their estimates were right. If they have more healthy people than they predicted, they'll pay into the risk corridor program, a pool of money meant to keep insurers from having to raise rates. If they have too many sick people, they'll get paid by the system. (Federal health officials have limited how much the government can pay out to insurers.)

The genuine concern insurers have is that there's a lot of uncertainty about their costs, and what they'll need to charge in 2015 to make their shareholders happy. And so it's accurate for health industry officials to say they will double or triple their premiums in some areas, because they have the power to do that. But we won't know how much Obamacare policies warranted those price increases until after the 31st. Anonymous officials #1 and #2 may be getting ahead of themselves.