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The White House's Council of Economic Advisers Calls Premium Hikes a Sign of a "Distorted Market"
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The White House's Council of Economic Advisers Calls Premium Hikes a Sign of a "Distorted Market"

Kelly Davio
As the companies that remain on the market have gained more experience with the individual and small group market risk pools, and have set higher premiums for exchange plans, their gross profit margins have increased. The Council of Economic Advisors said that the fact that premiums continue to rise “is a clear sign of a distorted market that involves larger transfers from taxpayers to insurers.”
The White House’s Council of Economic Advisers (CEA), an agency within the Executive Office of the President, has issued a new report on the profitability of health insurance companies, and said that health insurer profitability in the individual market has risen since the implementation of the Affordable Care Act (ACA).

Initially, health insurance companies had difficulty turning a profit in the individual and small groups markets after implementation of the ACA, largely because insurers were unsure how to price plans that met the newly instituted ACA requirements. CEA said that some companies underpriced products relative to enrollees’ health needs, and others left the individual marketplace altogether.

However, for the companies that remained in the market, the ACA created new opportunities for financial growth, according CEA, by funding much of the cost associated with implementing the ACA through government monies.

In the small group and individual market, the ACA provided subsidies to lower the cost of premiums for people with lower incomes who purchased plans on the exchanges. According to CEA, approximately 85% of people who purchased plans on the exchanges qualified for taxpayer-funded premium subsidies.

Additionally, more lower-income, able-bodied, working-age adults gained coverage under the ACA’s Medicaid expansion. Between 2014 and 2016, federal funds paid for the premiums associated with the Medicaid expansion, and today pays approximately 94% of these premiums.

After adjusting to the new market, insurers’ financial health—which the CEA report measured by stock prices—surpassed pre-ACA levels; from January 2014 to January 2018, the stock prices of health insurance companies rose by a cumulative 272%, outperforming the Standard & Poor 500 index by 106%. The CEA predicts that the largest health insurance companies will see their net income increase by 8.7% to 19.6% in 2018 over last years’ numbers, though it notes that “a significant portion” of this increase will be driven by recent tax reform.

As the companies that remain on the market have gained more experience with the individual and small group market risk pools, and have set higher premiums for exchange plans, their gross profit margins have increased. The CEA said that the fact that premiums continue to rise “is a clear sign of a distorted market that involves larger transfers from taxpayers to insurers.”

The CEA report’s findings stand in contrast a recent Robert Wood Johnson Foundation (RWJF) report on the insurers that remain in the ACA markets. According to RWJF, it was the anticipated rollback of the ACA’s individual mandate that led insurers to set higher premiums for 2018, and that will likely push premiums even higher in 2019. The mid-2017 loss of the ACA’s cost-sharing reduction payments, say RWJF, also drove premium increases.

In general, said RWJF, “Insurers are confident that given greater certainty about the direction of federal policy, they can continue to offer marketplace coverage and set premiums that accurately reflect their risk.”

However, insurers currently lack that certainty; in the days ahead, concluded the report, “Insurers will be watching closely how consumers respond to the lack of an individual mandate and the availability of new coverage options; a worsening of the marketplace risk pool will likely cause many insurers to reduce their market presence, will cause all to increase premiums, and may lead to more exits.”

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