Are you ready for Obamacare?
Three and a half years, one Supreme Court case, and more than 43 repeal attempts later, President Obama’s signature health care law has hit prime time as of October 1.
This means the new state health insurance marketplaces—a signature feature of Obamacare—are now open for business.
The idea behind the marketplaces—sometimes called exchanges—is simple. Think of them as Bing Travel for health insurance, where consumers can comparison shop for coverage. Information will be presented in simple formats to make choosing easy. Participating plans will offer a guaranteed set of benefits. People falling within 100 and 400 percent of the poverty line will have access to tax credits and subsidies to ensure coverage is affordable.
The Amazon of Health Insurance
The significance of these new health marketplaces cannot be overstated. For the first time, the 50 million or so Americans who lack health insurance will have access to a one-stop shop for coverage—a place where both prices and products are understandable and access to government benefits are instantaneously determined.
But, what will it cost?
Although the full effects of health reform will not be known for some time, the early results are in and the news is good. The marketplaces will reduce premiums and many Americans will save, according to the Department of Health and Human Services (HHS). In the 36 states where marketplaces are administered, premium rates come in at an average of 16 percent below early Congressional Budget Office (CBO) projections. In 15 states, the benchmark plan will be less than $300 monthly.
How is this possible?
Because, the magic of Obamacare is simply basic economics.
Here are six economic reasons why the Affordable Care Act marketplaces reduce premiums.
More Competition. Generous subsidies and an individual mandate create a lucrative pool of formerly uninsured consumers. Insurers will compete with each other to gain market share, driving premium prices down.
Less Adverse Selection. The Achilles’ heel of the individual insurance market is adverse selection. This occurs when one side of a transaction lacks the necessary knowledge to make the transaction. Insurers typically lack precise information about the health profiles of their customers, but they do know the people most likely to buy health insurance are often the sickest. As a result, they raise prices to cover risk, which increases prices for everyone in the market. Obamacare’s individual mandate ends the cycle. Put simply, if everyone is required to buy health insurance, insurers can afford to charge less.
Lower Transaction Costs. Information is a key to market efficiency. For the invisible hand to match supply and demand, consumers must make informed decisions, which has traditionally been quite difficult. In the new marketplaces, insurers are required to present their offerings and benefits in standardized formats. Prices will be clear and simple to compare.
Lower Administrative Costs. Under the ACA, the share of premiums insurers spend on actual medical services, as opposed to administrative costs, will be subject to a floor. If insurers spend less, they are required to rebate the balance to plan participants. Consequently, insurers will have less ability and incentive to pad premiums, creating savings for consumers.
Rate Review. The ACA empowers the HHS and state regulators to review premium increases. Insurers can be required to justify unreasonable increases, which will be made public. Although regulators do not have the power to limit rate increases, public shaming may have the same practical effect.*
Better Quality. Even in the absence of premium reductions, consumers will see savings and an improvement in the quality of coverage. What your premium buys you is more important than its price sticker, and under the ACA, consumers will get bigger bang for their buck. Qualified marketplace plans are required to cover all essential health benefits, including preventive services.
To be sure, October 1 is the just the beginning for Obamacare. The enrollment process will extend across several months, with coverage starting January 1. The ultimate legacy of reform may only be knowable years in the future, but if textbook economics is any guide, the American people have a lot to be excited about.
For more detail, read the Commonwealth Fund analysis and this report by the Congressional Research Service.
*Update: While the ACA did not explicitly give states or HHS the power to stop rate increases, about half of states have already given their insurance departments or regulators the power of prior approval/disapproval of certain types of rate increases. The ACA preempts none of this – it only strengthens existing review practices where applicable.