Insurers Have a Plan to Lower Obamacare Premiums, but Consumers Probably Won't Like It

By Markets

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As expected, the success or failure of the Affordable Care Act, or Obamacare, has been a hotly contested talking point between presidential candidates Hillary Clinton and Donald Trump.

Obamacare: good or bad for America?

Clinton, the Democratic Party nominee, would leave Obamacare firmly in place and build upon its strengths. There are certainly reasons for Clinton to believe that Obamacare can be the long-term answer to lower uninsured rates and better the quality of life in America.

According to the Centers for Disease Control and Prevention, the uninsured rate at the end of the first quarter of 2016 dropped to 8.6%, an all-time low. The individual mandate, and threat of a penalty for not purchasing health insurance, along with the issuance of premium and/or cost-sharing reductions to lower-income individuals and families, has been instrumental in pushing the uninsured rate lower. Not to mention, removing the ability of insurers to pick and choose whom they'll insure has allowed previously uninsurable Americans to purchase health insurance.

On the other hand, Republican Party nominee Donald Trump has suggested that Obamacare has been a failure in every way imaginable, and he, too, has talking points that would back up this assertion.

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For instance, the risk corridor, which was a risk-pooling fund designed to prop up money-losing insurers that'd priced their premiums too low and encourage competition, failed to do its job. The failure of the risk corridor has pushed 17 of Obamacare's 23 approved healthcare cooperatives out of business. Higher-than-expected medical expenses have also coerced three of the nation's five largest insurers to drastically reduce their coverage heading into 2017.

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Premium inflation is the biggest Obamacare battleground

However, the biggest battleground of Obamacare's success or failure usually revolves around its premium prices. A recent study published by Loren Adler and Paul Ginsburg of Brookings Institution in Health Affairs found that Obamacare has lowered premiums compared to the trajectory they were on prior to its implementation. The author's estimated that a 44% hike in premium prices would need to be enacted in 2017 just to match the prior premium price trajectory before Obamacare.

But, there's also little denying that premium prices are on track to increase in 2017 at a faster pace than we've seen in many years. An early analysis by the Kaiser Family Foundation of 14 major cities estimated a 9% median increase in premiums for the upcoming year, though finalized weighted increases of 59% in Tennessee, 45% in Illinois, 33% in Georgia, and 30% in Iowa, give the impression that premium hikes may be a lot worse than consumers expect in 2017.

Controlling premium inflation has become a concern for consumers. Yet, interestingly enough, insurers have a solution. The only problem is consumers probably aren't going to like it.

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Here's how insurers plan to lower your Obamacare premium

Based on a newly published study in the journal Health Affairs from authors Daniel Polsky, Zuleyha Cidav, and Ashley Swanson at the University of Pennsylvania, insurers are managing their costs and premium inflation by offering considerably narrower provider networks.

The authors of the study examined low-cost silver plans across the country in 2014, including more than 450,000 doctors participating in at least one network. What the researchers found was that extra-small networks had a monthly premium that was, on average, 6.7% lower than plans with a large network of providers.

Health insurance providers have been pushing toward restricted provider networks to more closely monitor patients' medical claims to ensure that they're getting their medical care in the least expensive and most efficient manner (i.e., with their primary care provider or in a primary-care setting). This is probably why UnitedHealth Groupis reducing its coverage from 34 states to three in 2017, and why Humanaand Aetnaare reducing the number of counties they're offering coverage in next year by nearly 90% and 70%, respectively.

Though consumers are unlikely to appreciate less in the way of choice, it could ultimately save consumers money and reduce how much the federal government pays out in subsidies annually, thus helping taxpayers.

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This could be Obamacare's bigger issue

It's possible that this narrow network approach could make health insurance more affordable in certain parts of the country, especially large metros. However, there's a potentially bigger issue with Obamacare that hasn't been dealt with that could very well lead to ongoing high premium inflation. This issue is none other than the Shared Responsibility Payment, or SRP.

The SRP is the penalty that's attached to the individual mandate -- the actionable component of Obamacare that requires you to buy insurance or face a penalty come tax time. In 2014, when Obamacare was first implemented, the SRP totaled the greater of $95 or 1% of modified adjusted gross income (MAGI). By 2016, the SRP is now the greater of $695 or 2.5% of MAGI. The Kaiser Family Foundation estimates that the average SRP this year will be $969.

Though $969 sounds a lot, it's still peanuts next to the lowest-cost bronze level plan -- and that's the problem. The vast majority of bronze-level plans are going to cost $200 a month, if not higher. Plus, buying a bronze-level plan doesn't mean consumers can necessarily afford the deductibles, which can easily top $6,000 annually. If a younger, healthier adult has the choice between paying a $1,000 penalty and paying $2,500 annually for health insurance, they're probably going to opt to save $1,500 a year. Even with the added tax deductions afforded to paying healthcare premiums for some folks, the disparity is still night and day. Until the SRP more accurately reflects what consumers are paying for a low-cost plan, young adult enrollment is likely to remain below par, and premium inflation is liable to remain high.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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