Analysis: Obamacare exchanges will push Anthem’s premiums lower

Anthem Blue Cross and Blue Shield of Indiana expects the premiums it charges on the health insurance exchanges being created by Obamacare to be slightly less than they would have been without the law.

That’s the conclusion of an analysis of Anthem’s rate filing with the Indiana Department of Insurance by Indianapolis-based consulting firm HealthCare Options Inc.

The HealthCare Options analysis shows that Anthem’s exchange customers will actually pay nearly $5 per person per month less, on average, than they would have if no elements of Obamacare went into effect next year. That's a savings of $60 per year, even before any of Obamacare's subsidies for low- and moderate-income Hoosiers are factored in.

Instead of paying an average of nearly $412 each month for every member of an Anthem health plan, Anthem expects to charge its customers $407 per member per month. That’s an average savings of $60 per year over what customers would have paid without the benefits of the law, formally known as the Patient Protection and Affordable Care Act.

These averages will be far different from customers’ actual premiums, which will vary widely based on their age and smoking habits, and a small amount based on the part of Indiana where they live.

Those actual rates look like they’ll come in higher than in many other states, according to an analysis released last week by California-based Kaiser Family Foundation.

“From my review of the Marketplace insurance filings in Indiana, it appears that the average individual premium will not be higher because of the law despite the fact that coverage will be more complete and people cannot be rejected for coverage,” wrote Dave Kelleher, president of HealthCare Options, in an emailed statement. “Although the premiums in Indiana are higher than in a number of other states, on balance, this is good news for most Indiana consumers."

Kelleher’s findings are at odds with the message sent out in July by the Indiana Department of Insurance when it announced Obamacare would drive up individual premiums in Indiana by 72 percent. That’s because the insurance department analyzed Anthem’s filing based on the total amount of claims its plans could pay, based on the benefits that Obamacare will require them to cover.

But Kelleher’s analysis focuses on what Anthem actually expects to happen once Obamacare requires all Hoosiers to buy health insurance and blows up the myriad pools of customers that now exist in the individual insurance market in favor of one predominant risk pool.

Because of those changes, Anthem expects a slightly sicker level of patients to sign up for coverage than before. Actuaries call this higher “morbidity.” Anthem’s actuaries expect morbidity in the exchanges that is 19 percent higher than what it would have been.

However, that figure is misleading because Anthem expects that Obamacare will cause consumer behavior in general to change. The requirement to buy insurance and the pooling of risk prompted Anthem’s actuaries to expect that the exchanges will operate much more like small employers, with two to five workers, do now.

The big difference now between the individual market and the small-group market is that the health status of the small-group market is generally better. Individual customers typically have health risks that are 30 percent higher than what Anthem sees among small employers. The smallest employers, those with two to five workers, have workers with health risks just 3 percent higher than all small employers do.

Anthem’s switch to use small employers as the baseline of its cost estimates entirely offsets the higher premiums that would have been charged because of the 19-percent rise in morbidity. That’s the big thing that leads to such a different expectation than the Insurance Department produced.

(To see it more clearly, see Page 2 of this spreadsheet.)

“Individuals will have more options and can make individual purchasing decisions that fit their needs, resulting in higher-risk individuals being more likely to opt in than the lower-risk population in 2014,” wrote Anthem’s actuaries, affirming a critique of Obamacare advanced by its conservative opponents.

“On the other hand,” Anthem’s actuaries added, “the bigger Small Groups are less subject to adverse selection [i.e., only sick people signing up for benefits] since the purchasing decision is being made at the group level, contributing to better average morbidity in Small Group.”

In other words, Anthem’s actuaries expect Obamacare’s basic bet to work: that by requiring everyone to have insurance, more healthy people will sign up, thus lowering the overall risk and premiums in the individual market.

Of course, Obamacare also requires richer benefits than were required before in Indiana. Those richer benefits are what boosted predicted costs 72 percent in the Insurance Department’s analysis.

But Anthem expects its customers to choose different types of plans than before, many with higher levels of cost-sharing or less-generous drug benefits. And because of those choices, Anthem expects, on average, that Obamacare’s requirements for richer benefits will add nothing to overall premiums.

What will add to the cost of coverage is simply the continued rise in the cost of medical care. Anthem expects the cost of health care to rise 24 percent over 2012.

But other changes wrought by Obamacare will help mitigate those increases. First of all, the law requires Anthem to keep its administrative costs to no more than 20 percent—or else rebate the difference to customers. Anthem’s overhead costs were 29 percent in 2011, the year the rebate requirement took effect.

Second, Obamacare establishes a “transitional reinsurance fund,” which will pay Anthem and its peers to offset the rise in morbidity. Such a rise is expected because of Obamacare’s individual mandate, which requires all Americans to obtain health insurance, or else pay a tax.

That provision alone will reduce premiums in Indiana 12 percent from what they would have been.

When asked about HealthCare Options’ analysis, Anthem referred to a March study by the Society of Actuaries, which predicted premiums for individuals' health insurance in Indiana would rise 68 percent because of Obamacare.

Anthem spokesman Tony Felts also said HealthCare Options had made a mistake by assuming that Anthem’s rates of retention of customers would hold steady. It’s not clear whether correcting those assumptions would have significantly altered the conclusion Kelleher reached.