Health insurance premiums skyrocket

Family health insurance premiums surged 9% in 2011 according to new data from the Kaiser Family Foundation. That’s the fastest health insurance inflation since 2005.

Insurance premiums thus outpaced both general inflation and worker earnings growth by a wide margin.

That scary spike raises an obvious question: Is health insurance more expensive because of the health reform enacted last year?

Kaiser crunched the numbers and says yes, but only modestly:

The two provisions in the Affordable Care Act likely to have the greatest effect on the premiums for employer-sponsored health coverage in 2011 are allowing children up to age 26 to remain on their parents’ plans and requiring plans that are not grandfathered to provide preventive services with no patient cost-sharing. Our analysis, based in part on estimates provided by federal agencies when regulations implementing these provisions were issued, suggests that these provisions are responsible for 1-2 percentage points of the 9% increase in family premiums in 2011. (emphasis added)

Stripping out those two specific ACA effects, premiums would still have increased by 7-8% according to Kaiser’s estimates.

But that isn’t the end of the story. A remaining question is whether other aspects of the ACA might also have contributed to the premium increase. Kaiser argues, plausibly, that the two factors it considered were the most direct link between the ACA and 2011 premiums. But perhaps there were indirect links as well?

I expect we will hear critics of the ACA make exactly that argument in the days ahead. Somewhat surprisingly, though, the first example I found came from the Administration. Writing on the White House blog, health adviser and deputy chief of staff Nancy-Ann DeParle pins some of the blame for higher premiums on insurance companies overestimating what their costs would be:

[2011 health insurance] premiums were generally set in 2010, when insurance companies thought medical costs would be significantly higher than they turned out to be. The Bureau of Labor Statistics found that the health insurance employer cost index (a measure of the price of health care services) was the lowest it has been in over 10 years in the first half of 2011. Additionally, some insurers assumed that the Affordable Care Act would dramatically raise their costs. In the end, both assumptions were wrong – but insurance companies still charged high premiums and earned impressive profits. Wall Street analysts’ review of results from the first quarter of 2011 found that 13 of the top 14 health insurers exceeded their earnings expectations, with profits that were over 45 percent higher than estimated. (emphasis added)

DeParle thus believes that the ACA did lead to higher premiums in 2011–beyond what can be explained by direct cost increases–but only because insurers overreacted. In other words, the ACA did cause premium increases beyond what can be explained by costs (since insurers would not have made the mistake about ACA costs otherwise), but the ACA doesn’t deserve the blame for those premium increases.

Without any numbers, we don’t know, of course, how much such misestimates might have contributed to the 7-8% rise that isn’t explained by the direct effects of ACA. Any such mistakes will, one hopes, be corrected in setting 2012 premiums. If so, that would soften health insurance inflation in 2012.