Competition, not higher premiums, is biggest threat to Obamacare buyers

There have been lots of news reports, including some from me, about insurers raising premiums 10 percent or more on the Obamacare exchanges next year.

But for most people who bought health coverage in the Obamacare exchanges, that’s not really a concern.

That’s because the vast majority of Obamacare buyers so far have received tax credits to reduce the cost of that coverage.

Those subsidies, rather than being flat dollar amounts, fluctuate so customers never pay more than a certain percentage of their incomes on insurance.

In other words, if premiums rise next year like WellPoint Inc. has predicted, subsidies also will rise to keep the net cost to consumers at the same percentage of their income.

So rising premiums aren’t a problem for consumers, unless their income rises so much that it reduces the size of their subsidy.

"If all insurers increase their rates by 10 percent, that might not have a dramatic shift in the market," said Paul Houchens, a consulting actuary at the Indianapolis health practice of Milliman Inc. "Most of that premium increase is going to be absorbed by the federal government."

(Rising federal spending could also be a problem for Obamacare–not to mention taxpayers–but that's not my focus today. Also, Houchens noted, Obamacare's premiums are not scheduled to rise in line with premiums forever, but will be indexed to income growth and inflation.)

But for 2015, what could cause the biggest problem for Obamacare consumers, Houchens pointed out to me last week, is if an insurer reduces its premiums. Or if a new competitor enters the market in 2015 with lower premiums than insurers were offering in 2014.

If that idea makes your head spin, welcome to Obamacare, where up is down and down is up—at least compared to how health insurance used to work. It’s what I’ve taken to calling “the weightlessness of Obamacare”.

Here’s how low-cost competition actually could be worse for Obamacare consumers:

Obamacare requires insurers to offer a variety of health insurance plans whose benefits are valued at one of four levels: bronze, silver, gold and platinum.

The subsidies for all of those kinds of plans, however, are calculated so the second-lowest-cost silver plan will only cost consumers that pre-set percentage of their incomes. Those subsidy amounts are then applied to any plan a consumer may purchase.

Here’s an example using the plans available on HealthCare.gov in Marion County:

If a family of four headed by two adults in their mid-30s is making $59,625 per year, the Obamacare subsidies will make it so the second-lowest-cost silver plan costs no more than 8.15 percent of its income, or $4,860.

In Marion County, the two cheapest silver plans are sold by Anthem Blue Cross and Blue Shield. The cheapest plan costs $7,700 a year and the second-cheapest costs $8,040.

To make that second-cheapest plan cost only $4,860, Obamacare applies a tax credit of $3,180. So that is the subsidy available for any family of four making $59,625—NO MATTER WHICH HEALTH PLAN that family purchases in the Obamacare exchange. It can be a bronze plan or a gold plan. It can be more or less expensive. No matter, that family will receive a subsidy equal to $3,180.

But what happens if another insurer—such as UnitedHealthcare, which sat on the sidelines this year, or MDwise Inc., offers a silver plan in 2015 that’s just a little bit cheaper than the cheapest Anthem plan, say, for $7,500 per year?

In that situation, Anthem’s cheapest silver plan would then become the benchmark for the subsidies. To make a $7,700 plan only cost a family of four $4,860, the tax subsidies would need to be only $2,840 per year–$340 less than they were before.

Now, the family of four could shift plans to that cheaper Anthem plan, and pay no more in premiums.

But if that family doesn’t want to change health plans—and with the narrow networks in these exchange plans greatly restricting patients’ choice of doctors and hospitals, that’s a very real possibility—the family will have to cover the $340 themselves.

That’s an extra $28 a month, or 7 percent more—for exactly the same coverage.

So, the key to affordability next year in the Obamacare exchanges—at least for those receiving subsidies—is whether the insurers try to undercut one another on price in the silver category.

Such competition will lead to more choices and better prices—but it will either require consumers to switch plans or pay higher premiums.