They know that they won’t get very sick due to their lifestyle, they are not willing to pay a lot for insurance-and they probably won’t need the coverage. The opposite is true for safer individuals. If I know I have a high chance of illness or injury due to my lifestyle, I am more willing to pay a higher premium. How does this happen? First, this assumes that people have a certain willingness to pay for insurance based on their risk. Not only do these regulations drive up insurance premiums for everyone except the very ill, they also drive healthy people out of the insurance market.Įconomists refer to this as “adverse selection.” Simply put, this is a situation in which healthy individuals drop from the insurance market, thus leaving only sick and expensive individuals in the insurance pool, driving up premiums for those left in the market. Six states currently have this regulation.īefore discussing the final regulation, it is worth mentioning the effects that these two regulations have on insurance markets. If companies are forced to insure these people, this will also drive up average premiums throughout the market, as insurance companies spread the cost of these individuals to everyone. There is a 100 percent chance a person with preexisting conditions will cost the insurance company money. As you can imagine, with community rating, insurance companies have an incentive to turn-away very sick individuals because they are not allowed to adjust their premiums according to their risk. This regulation ties into community rating. Guaranteed Issue: This regulation is what President Obama refers to when he says that no one will be turned away with “preexisting conditions.” This prevents insurance companies from turning anyone away that may be very expensive to insure. It is also worth noting that how states do this differs. In order to stay in business, it needs to raise premiums for everyone else to make up for the loss.Ĭurrently 18 states have Community Rating regulations on health insurance. Since the insurance company can no longer charge an actuarially fair premium (a fancy term for charging based on risk level), it will lose $100 per year on this high-risk individual. Suppose lawmakers think a $500 premium is too much for one person, no matter what their risk, and decide that an individual’s premium can no longer exceed $400 dollars. If you do get sick, the insurance company will pay.Ĭommunity rating limits the amount an insurance company can charge an individual based on their expected risk. In order to protect yourself from that large, unexpected cost, you are willing to pay the insurance company a premium of $500 a year (5% times $10,000). Suppose you have a 5 percent chance of getting very ill any given year and this illness will cost you $10,000.
Down to the fundamentals, insurance is priced based on a person’s likelihood of incurring a large cost. There are three major insurance regulations that are part of Obamacare that-when taken all together-are supposed to even out the costs of healthcare across the entire population.Ĭommunity Rating: One can think of this regulation as a restriction on pricing people based on their risk. In other words, what happens to your insurance premiums depends on where you live and what insurance regulations existed in your state before Obamacare. Of course, both supporters and opponents of Obamacare latch on to each of these stories both say: “see, I told you so!” So what gives? Can both sides be right?ĭue to the nature of current state insurance regulations and their interactions with Obamacare, some states will see higher average premiums and others will see average lower premiums. Some stories highlight premiums that will skyrocket, yet others show that some insurance premiums will be lower.įor instance, New York State released data showing that premiums would drop by 27 percent throughout the state, while data from Virginia shows that premiums for some people will increase by more than 60 percent. Most of the recent news of the Affordable Care Act (ACA) has been centered on its effects on insurance premiums throughout the country.
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