Premium Inflation on the HIEs – Case Study of the California Individual Market


Gross of subsidies, and controlling for medical cost inflation, 2014 individual premiums for the cheapest plan option in the California market are substantially (average 63%) higher than for the cheapest option in the current market. We believe much of the ‘cheapest option’ inflation is due to the fact that the Affordable Care Act’s (ACA) minimum essential benefits provisions result in 2014’s cheapest options being substantially more generous coverage than the cheapest options offered in 2013

The jump in premium costs is greater for younger than for older beneficiaries; we believe this is because the ACA narrows the allowable bandwidth of age-based premium differences. The practical effect is likely to be reduced participation rates for younger / healthier beneficiaries, with negative consequences for adverse selection

Importantly, even after accounting for subsidies (which are available in 2014 but not 2013), ‘out of pocket’ (OOP) premium inflation is considerable for many beneficiaries. This too implies a high likelihood of adverse selection on the individual exchanges, as well as low overall rates of participation as the individual HIEs begin operating

For our full research notes, please visit our published research site

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