Covered California Health Insurance Prices Will Skyrocket Starting in 2017

Individuals in California who buy health insurance through Covered California will see an average increase of 13.2 percent added to their premiums in 2017. While this number reflects the average increase in premiums throughout the state as a whole, some counties in California will see premiums increase on average as much as 28.6 percent. The two largest insurance companies, which together represent over half of the Covered California market, are proposing increases of 17 and 20 percent, respectively.

California isn’t alone in their large double-digit increases for 2017.  Although nationwide exchange premium increases haven’t been published yet, the Kaiser Family Foundation did an analysis of 14 major metropolitan areas throughout the nation and found an average proposed increase of 10 percent for the silver-tiered Affordable Care Act (ACA) plan.

Why are health insurance premiums increasing?
Health insurance companies that offer their policies through Covered California have said that the reason for the large increase is due in part to the expiration of federal programs, most notably the re-insurance program, which helped insurance carriers pay large health care costs for the sickest and most expensive patients.  Other reasons for the increase, according to many insurance companies, is that they didn’t plan for the large number of high-risk people who enrolled in insurance through the marketplace. Additionally, the cost of pharmaceuticals has increased dramatically in the past few years.

This comes recently after the Department of Health and Human Services released a report showing that the cost of health care spending per person has reached an all-time high of over $10,000 a year.

The potential impact to business of increased healthcare costs
Many small businesses with fewer than 50 employees offer health insurance to their employees with a small group plan.  Unfortunately, the cost of offering these benefits has increased significantly and many companies I speak with are considering dropping company-sponsored coverage. This means that many employees will buy individual insurance on the health insurance marketplace through Covered California, also causing them to have to bear the full increase in premiums if they don’t get a subsidy. 

Evaluating risk pools
When evaluating prices, insurance companies are looking at the risk pool of the people on that insurance.  The higher the risk pool, the higher the insurance rates have to be to pay for the cost of insurance claims.  The cost of this risk is then spread over the entire group of enrollees, even healthy ones.  The lowest risk pool typically has the lowest cost health insurance rates. This risk pool has traditionally been large employers who have hundreds or thousands of employees on their insurance.  The risk is spread over a large group so usually there are a large number of healthy employees whose premiums cover claims for the sick employees. 

The next lowest risk pool is generally the smaller employers that offer health insurance to their employees.  Like with large employers, the risk is spread out over a group of employees.  However, the small group insurance market rates are not based on the risk of that individual group.  They are driven by the risk of the overall small group market by demographic and location. 

Most insurance carriers consider the individual market as the highest risk pool, in which people are not getting insurance through their employer or through Medicare.  Insurance companies are now mandated to offer coverage for everyone and cannot exclude individuals with a pre-existing condition. 

Another option for businesses
There is a fourth option, however, for small to midsize businesses (SMBs). This is a professional employer organization (PEO).  A PEO, such as TriNet, offers benefit plans to each client company’s worksite employees, allowing them all to be part of a large group plan.  In addition to receiving the buying power of a large corporation, SMBs also get administrative support from the PEO. All of this helps them attract and keep top talent.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.