Blog PostJuly 18, 2013

The NY Times Tries — And Fails — To Protect Obamacare From Health Insurance ‘Rate Shock’

Author: Avik Roy, Contributor

Publication: Forbes


Yesterday, fans of Obamacare were cheering. A front-page story in the New York Times announced that individuals shopping for health insurance in New York would see their premiums halved, based on figures released by the Cuomo administration. It was an “extraordinary decline” that “demonstrates the profound promise” of Obamacare, said one supporter of the law. But the cheerleaders are wrong. New York’s premiums will remain among the costliest in the nation, after Obamacare becomes fully operational. And the unique history of how the Empire State destroyed its individual health-insurance market–using policies quite similar to Obamacare’s–will translate, at best, to only a handful of other states.

We’ll start our discussion with a recounting of that tale, of the unflattering history of the individual health insurance market in New York state.

Mario Cuomo destroyed the New York insurance market

Our story begins in 1992, during the third term of Gov. Mario Cuomo, the liberal lion of his day. In July of that year, Gov. Cuomo signed into law the most draconian health insurance regulations drafted in recent times. Insurers were barred from charging different rates based on age, gender, or health or smoking status, what wonks will call pure community rating. In addition, insurers were not allowed to deny coverage based on pre-existing conditions, a.k.a. guaranteed issue. The state mandated that all plans cover a specified set of benefits, and restricted certain cost-sharing practices.

Within four years, these changes resulted in a mass exodus of health insurers from the individual market, for all the reasons that will be familiar to regular readers of this blog. If you charge the same amount to healthy and sick people, and to young and old people, young and healthy people suddenly find themselves paying thousands of dollars for insurance they don’t need. They recognize this as a bad deal, and drop out of the market. Only the sickest people, who need the insurance, stay in the pool, leading prices to go up and up in an adverse selection death spiral.

Gov. George Pataki, Cuomo’s Republican successor, made several attempts to patch up the market, though he never repealed the 1992 law. Most notably, in 2000, he signed the Health Care Reform Act, which created an exchange for individuals of modest means who didn’t get coverage from their employer, called “Healthy New York.” Small businesses could also use the exchange to partially subsidize coverage for their workers.

While Healthy New York has been reasonably successful for the portion of the individual market it served, it doesn’t serve everyone, because of its eligibility restrictions. The other half of the individual market continued to worsen. From 2001 to 2010, as my Manhattan Institute colleague Paul Howard has chronicled, enrollment in the non-Healthy New York individual market dropped by 76 percent.

“You have a mandate that’s accessible in theory, but not in practice, because it’s too expensive, Mark Scherzer told the New York Times in 2010. “What you get left clinging to the life raft is the population that tends to have pretty high health needs.” By 2009, when Obamacare was winding its way through Congress, New York had the priciest market for individually-purchased insurance in the nation, something that surprised no one who understood the economics of health insurance.

New York premiums have nowhere to go but down

There are two ways to improve an insurance market that has been wrecked the way New York’s was. The first is to eliminate the market distortions that caused the problem in the first place; for example, by eliminating age-based community rating, so that young people can buy insurance whose price is more closely related to their actual health-care consumption, instead of being asked to pay thousands of dollars more for insurance they don’t need.

The other approach is to do what Obamacare does: to impose an individual mandate that dragoons the healthy into subsidizing the sick, and to subsidize the cost of the inflated health premiums for some low-income individuals, so at least they can afford coverage.

In the vast majority of states, Obamacare has the net effect of raising premiums by a lot, which has given rise to the term “rate shock.” In California, for example, a healthy 40-year-old today can pay $94 per month in the individual market; that rises to $234 a month under Obamacare: an increase of 149 percent.

Obamacare even drives up costs in heavily regulated states. In 1993, Washington instituted progressive reforms similar to those of New York, though Washington’s were somewhat less punitive. This led me to expect that Washington, along with New York and a handful of other states, could see individual-market rate decreases under Obamacare. Much to my surprise, it turns out that even in Washington state, Obamacare will drive premiums upward by 34 to 80 percent. The average of the five lowest premiums for a 40-year-old in Washington today is $162; Obamacare will drive that up to $243.

But New York, today, is in worse shape than Washington, and far worse shape than California. In 2010, according to the Kaiser Family Foundation, the average premium in the New York individual market was $357 a month. By my calculations–aided by my Manhattan Institute associate Yevgeniy Feyman and our summer intern Paul Chung–today, that figure has climbed to $495 a month.

As a result, Obamacare does have the effect of lowering premiums in New York, to a weighted average of $301 a month: a 39 percent decrease from 2013 rates, and a 16 percent decrease from 2010 rates. According to several studies of the New York market, the biggest driver of the improvement is the fact that the mandate and the subsidies will encourage healthier people into the insurance pool, driving average costs down.

It’s always better to see rates go down rather than up, but you have to remember the context. New York’s rates will still be three times higher than those found in California before Obamacare. And the Times inflated the impact of the ACA, implying that average premiums in New York City exceed $1,000 today vs. $308 under Obamacare; by our analysis, using a fairer comparison, the five-borough average for affordable coverage was $695, with a much lower average upstate.

Indeed, there is wide regional variation as to how the state performs. As you can see from the chart above, New York City and its suburbs will fare best under the law, with rates falling by an average of 55 percent. That’s encouraging, as that is the densest part of the state. However, much of eastern New York, including Albany, will face rate increases, of between 30 and 39 percent.

Some New Yorkers will also benefit from Obamacare’s exchange subsidies, though others will pay the taxes needed to fund those subsidies. For a lengthier discussion of the impact of subsidies on the Obamacare exchanges, go here.

What happens in New York, stays in New York

People who aren’t familiar with Empire State’s unique circumstances have been quick to presume that rate reductions in New York under Obamacare mean that the law will bring down rates nationwide. The Times was content to leave its readers with this misunderstanding.

I’m told that President Obama will even give a speech today at 1:30 p.m. ET to tout the New York results. But lower rates in New York is hardly a surprise; as Obamacare advocate Timothy Jost put it, “If there was any state that the ACA could bring rates down, it was New York.”

Massachusetts is another state that, prior to Romneycare, had a dysfunctional individual insurance market. I wrote a month ago that “there are a handful of states that have Massachusetts-like problems in their individual markets: Maine, New Jersey, New York, Vermont, and Washington. Those states are unlikely to see much impact from Obamacare on insurance premiums; indeed premiums there might even go down. But nearly every other state will endure significant disruptions as Obamacare goes into full effect.” So if you live in those states (other than Washington), you may do okay in the individual insurance market. If not, you likely won’t.

As a guy who lives in Manhattan, I’m glad to see Obamacare move the city’s individual insurance market in the right direction. But New York’s rates will remain far higher than they are in other states. And in those other states–states like California and Ohio–premiums are set to go up dramatically.

Some people think that the Yankees are America’s Team. And some people hope that if New Yorkers gain from Obamacare, so will America. But just as in baseball, New York’s gain is not necessarily the nation’s. As we learn more about insurance premiums in the Obamacare era, we will be repeatedly reminded of that fact.

METHODOLOGY NOTE: To conduct the above analysis, I and my Manhattan Institute colleagues, Yevgeniy Feyman and Paul Chung, compiled data from the five least-expensive plans on the traditional individual insurance market in the most populous ZIP code of each New York county, via, the federal government’s health insurance web site. By taking the average of those five plans, while adjusting for the impact of the individual-market component of the Healthy New York exchange, we established a “current rate” baseline for each New York county. We then compared those rates to the average rate of the five least-costly Bronze plans in each ACA rating region. No adjustment was needed for denials, surcharges, or age, because New York prohibits charging different rates based on health status, gender, and age.