An Analysis of Health Insurance Premiums under the Patient Protection and Affordable Care Act

November 30, 2009

This morning CBO released an analysis of how health insurance premiums might be affected by enactment of the Patient Protection and Affordable Care Act, as proposed by Senator Reid on November 18, 2009. The marketplace for health insurance is complex and many-faceted, and the impact of a proposal on premiums cannot be readily summarized in one or two numbers. The analysis, which was prepared in conjunction with the staff of the Joint Committee on Taxation (JCT), looks separately at the average effects on premiums in 2016 for coverage purchased individually (in the nongroup market), coverage purchased by small employers, and coverage provided by large employers. However, many individuals and families would experience changes in premiums that differed from the changes in average premiums in their insurance market. Table 1 in our analysis summarizes the major components of CBO and JCTs estimate of the changes in average premiums that would result from the legislation.

The analysis focuses on the effects of the legislation on the average premium per personthat is, per covered life, including dependents covered by family policies. The analysis examines the effects of the proposal in 2016 in order to indicate the impact that it would have once its provisions were fully implemented. As with other types of projections involving significant changes in the nations health insurance system, a substantial degree of uncertainty surrounds any estimates of the legislations impact on future premiums.

Effect of the Legislation on Premiums in 2016

The effects of the proposal on premiums would differ across insurance markets. The largest effects would be seen in the nongroup market, which would grow in size under the proposal but would still account for only 17 percent of the overall insurance market in 2016. The effects on premiums would be much smaller for employer-based coverage (which accounts for five-sixths of the insurance market).

Nongroup Market

The nongroup market would consist of coverage purchased individually through the new insurance exchanges that would be established, and coverage purchased by individuals and families directly from insurers. The average, unsubsidized premium per person covered (including dependents) for new nongroup policies would be about 10 percent to 13 percent higher in 2016 than the average premium for nongroup coverage in that same year under current law.

The government would subsidize the purchase of nongroup insurance through the exchanges for individuals and families with income between 133 percent and 400 percent of the federal poverty level (FPL). (Most nonelderly people with income below 133 percent of the FPL would be eligible for Medicaid.) More than half of the enrollees in nongroup policies would get federal subsidies, and taking those subsidies into account, the amount that subsidized enrollees would pay for nongroup coverage would be roughly 56 percent to 59 percent lower, on average, than the nongroup premiums charged under current law.

Average premiums in this market would be higher than under current law primarily because the typical insurance policy in this market would cover both a substantially larger share of the average enrollees costs for health care and a slightly wider range of benefits. That outcome would reflect the requirement that all new policies in the nongroup (and small group) market cover at least a minimum specified set of essential health benefits; the requirement that such policies have a certain minimum actuarial value (that is, the percentage of costs for covered services that the insurer pays); and the design of the federal subsidies, which would encourage many enrollees in the newly established insurance exchanges to join plans with an actuarial value above the required minimum. As a result, new nongroup policies would cover certain services that are often not covered by nongroup policies under current law (such as maternity care, prescription drugs, and mental health and substance abuse treatment). Although new nongroup policies would be required to have an actuarial value of at least 60 percent, federal subsidies would be tied to a reference premium equal to the premium of a plan with an actuarial value of 70 percent. As a result, taking into account the projected choices of people who would receive subsidies as well as those who would not, CBO and JCT estimate that the average actuarial value of nongroup policies would be roughly 72 percent. Other effects generated by the proposal would offset some of the premium increase that would result from greater coverage, including savings in administrative costs and increased competition among insurers.

Employment-Based Coverage (Small Group and Large Group Markets)

The legislation would have much smaller effects on premiums for employment-based coverage. In the small group market, which is defined in this analysis as consisting of employers with 50 or fewer workers, CBO and JCT estimate that the change in the average premium per person resulting from the legislation could range from an increase of 1 percent to a reduction of 2 percent in 2016 (relative to current law). In the large group market, which is defined here as consisting of employers with more than 50 workers, the legislation would yield an average premium per person that is zero to 3 percent lower in 2016 (relative to current law). Those overall effects reflect the net impact of many relatively small changes, some of which would tend to increase premiums and some of which would tend to reduce them. As in the nongroup market, the effects on the premiums paid by some people for coverage provided through their employer could vary significantly from the average effects on premiums, particularly in the small group market.

Those figures do not include the effects of the small business tax credit on the cost of purchasing insurance. A relatively small share (about 12 percent) of people with coverage in the small group market would benefit from that credit in 2016. For those people, the cost of insurance under the proposal would be about 8 percent to 11 percent lower, on average, compared with that cost under current law.

The reductions in premiums described above also exclude the effects of the excise tax on high-premium insurance policies offered through employers, which would have a significant impact on premiums for the affected workers but which would affect only a portion of the market in 2016. Specifically, an estimated 19 percent of workers with employment-based coverage would be affected by the excise tax in that year. Those individuals who kept their high-premium policies would pay a higher premium than under current law, with the difference in premiums roughly equal to the amount of the tax. However, CBO and JCT estimate that most people would avoid the cost of the excise tax by enrolling in plans that had lower premiums; those reductions would result from choosing plans that either pay a smaller share of covered health care costs (which would reduce premiums directly as well as indirectly by leading to less use of covered medical services), manage benefits more tightly, or cover fewer services. On balance, the average premium among the affected workers would be about 9 percent to 12 percent less than under current law. Those figures incorporate the other effects on premiums for employment-based plans that were summarized above.

Uncertainty Surrounding These Estimates

The analysis presented here reflects the cost estimate for the legislation that CBO and JCT provided on November 18. The same substantial degree of uncertainty that surrounds CBO and JCTs estimates of the impact that the proposal would have on insurance coverage rates and the federal budget also accompanies this analysis of the proposals effects on premiums. Some components of those effects are relatively straightforward to estimate, such as the effect of imposing specific fees or the effect of a change in the amount of coverage purchased because of requirements for minimum coverage; however, estimating effects that depend heavily on how enrollees, insurers, employers, or other key actors would respondto such things as the changes in the market rules for nongroup policies or the excise tax on high-premium policiesinvolve greater uncertainty. The projections of average premiums in each market under current law are also uncertain.