Insurance Rates Under the Affordable Care Act
(Inspired by No, Obamacare Hasn’t Jacked Up Your Company’s Insurance Rates.)
Mandelbaum’s article debunks some popular claims about the Affordable Care Act, chief among those that insurance premiums for small businesses are “skyrocketing” dramatically year-over-year. He points out that health premiums have been rising for years, and also that the growth has actually slowed since the law was passed. Individual premiums, however, have increased dramatically since the introduction of the new individual marketplace, but this is largely because the law is in its infancy, and the insurance companies needed to correct the prices after wrongly estimating the types of people who would sign up for the individual insurance. Really, Mandelbaum argues, Obamacare was not the dramatic legislative change that many have claimed it to be.
The health care market is unique in that it is a market with asymmetric information, and it is the buyers–not the sellers–who hold the information. The insurance providers do not know a priori whether an individual is healthy, and thus can only price based on gender, age, and a few other factors. By increasing the number of buyers in the market (by mandating health insurance), the expected cost of providing the insurance can be lowered, and thus premiums could actually shrink. Why would the expected cost go down? Because the most likely group of people who do not have health insurance are healthy people who do not feel that they “need” insurance. By adding these people to the market, costs can go down for everyone.
The ACA also makes it harder for insurance companies to price discriminate. Under the ACA, an insurance company cannot base its premium off an individual’s preexisting conditions. This makes it difficult for an insurance company to charge different prices to sick and healthy people. This makes the market more complicated, and could lead to higher premiums if the insurers are forced to price high enough that healthy people are driven out of the market.