Rising healthcare costs are Americans’ primary financial concern. In fact, a recent survey found that 76% of Americans are concerned about increasing health insurance costs with nearly two-thirds more concerned this year than they were last year. As is now clear, the Affordable Care Act (ACA) is making the problem worse. A recent S&P Global Institute report (not publicly available) showed that healthcare spending per individual market enrollee increased by nearly 70% in the first two years after the key provisions of the ACA took effect.

According to S&P, per covered member per month (PMPM) costs increased 38% between 2013 and 2014 and another 23% between 2014 and 2015. The two-year increase (69%) is the product of the two single-year increases.

The comparable PMPM cost increase in the commercial market, which the ACA affected much less, amounted to about 11%. Assuming an 11% increase would also have happened in the individual market absent the ACA, the ACA increased individual market PMPM costs by about 58% between 2013 and 2015.

As a result of much higher than expected PMPM costs—which is largely the result of younger, healthier, and middle class people generally avoiding coverage (a topic I explored in previous Mercatus research)—insurers overall losses in 2015 were likely much larger than the sizeable losses they incurred in 2014. In fact, my back-of-the-envelope calculations show that insurers may have lost more than $1,000 per enrollee in 2015.

These substantial losses, along with the expiration of two programs—reinsurance and risk corridors—that aided insurers from 2014 to 2016, suggest that premiums will rise considerably. Large premium hikes will increase adverse selection pressure in the exchanges as younger and healthier enrollees are more likely to forgo coverage when premiums rise. This may force a new Congress and administration to change key aspects of the law regardless of the outcome of November’s election.

Massive Insurer Losses in 2015

In a recent Mercatus working paper I authored along with Doug Badger of the Galen Institute and Ed Haislmaier of the Heritage Foundation, we found that insurers made risk corridor claims of $273 per enrollee on individual market qualified health plans (QHPs)—plans that comply with the ACA and are certified to be sold on exchanges—in 2014. Risk corridors were designed to transfer money from insurers that made profits selling QHPs to insurers that incurred losses on QHPs. Assuming that a fully-funded risk corridor program would have subsidized about two-thirds of insurer losses, insurers likely lost around $400 per enrollee in 2014. Since insurers enrolled about 8 million people in 2014, they likely lost about $3.2 billion overall selling individual QHPs.

When insurers set premiums for 2015, they had only a few months of claims data from 2014 and they likely expected the risk corridor program would be fully funded. According to PwC’s Health Research Institute, premiums increased modestly in 2015—up an average of 5.4% from 2014. The combination of low average premium increases for 2015 and large individual market PMPM cost increases for 2015 means insurers likely incurred substantially larger losses in 2015 than in 2014.

Combining what happened in 2014 with the estimates of premium and spending increases in 2015, my back-of-the-envelope calculations (shown below) indicate that insurers potentially lost upwards of $1,000 per enrollee in 2015, even accounting for payments insurers will receive through the reinsurance program. Through the reinsurance program, the government compensates insurers for a large share of the cost of their most expensive enrollees. Assuming about 30% more enrollees in 2015 than 2014—about the percentage year-over-year increase in exchange enrollment—insurers’ aggregate 2015 losses selling individual QHPs potentially exceeded $10 billion.

Large Future Premium Increases  

In the Mercatus working paper, we estimated that insurers’ average 2014 premiums would have needed to be 26% higher to have covered their total expenses without the reinsurance program and assuming the same enrollment and utilization. Based on the relatively small 2015 premium increases relative to the huge increase in corresponding spending, the average premium increase insurers would have needed to cover their 2015 expenses likely would have needed to be much higher.

Last year, insurers began to raise premiums considerably. From 2015 to 2016, the mean weighted-average state increase equaled about 15%. While premiums increased, insurers also increased deductibles and other cost sharing amounts and tightened provider networks. For example, Seth Chandler documented that 93% of rating areas contained at least one preferred provider organization (PPO) in 2015 compared to 77% of rating areas with a PPO in 2016.

Two states—Oregon and Virginia—have released insurers’ requests for 2017 and insurers in both states are seeking large increases. The weighted average increase requested by Oregon insurers is 27.5%—up from a 23.1% requested weighted average increase from last year. The approved weighted average increase last year in Oregon was 24.4%.

In Virginia, insurers’ 2017 weighted average requested increase of 17.8% is more than double the weighted average approved increase of 8.5% in the state for 2016. Although only two states have released the requested increases thus far, insurers’ massive 2015 losses combined with this early data suggests 2017 premium increases may make last year’s large average increases look small in comparison.

The Reason the Administration is Cracking Down on ACA Gaming

Although the Obama Administration decried excessive insurance company profits when attempting to build support for the ACA, it quickly realized the importance of insurers’ participation once it came time to implement the law. The House Committee on Oversight and Government Reform (where I worked at the time) issued a report in the summer of 2014 detailing how the White House was directly involved with trying to increase the generosity of the risk corridor program for insurers.

For example, we found that Carefirst CEO Chet Burrell emailed senior White House advisor Valerie Jarrett in the spring of 2014 that insurers would raise premiums considerably if the ACA’s risk corridor program was made budget neutral, meaning taxpayer money could not subsidize insurer losses through the program. Jarrett replied that the administration was “aggressively exploring options” in one email and that the administration’s policy had “given you 80 percent of what you requested” in a second email.

Of major concern to insurers now is that people, in large numbers, appear to be gaming the ACA by waiting until they need medical services before purchasing coverage. In fact, the law’s core provisions incentivize exactly this type of behavior.

Twice this year—most recently this past Friday—the administration has responded to insurers’ complaints by cracking down on special enrollment periods—periods in which people can sign up for QHPs outside of open enrollment. From the administration’s perspective, making it more difficult for people to enroll is now a necessity since insurers’ losses selling ACA plans are so staggering. For good reason, the administration is likely concerned that other insurers will follow UnitedHealthcare’s lead and withdraw from the ACA. In fact, at a Capitol Hill event yesterday, Kansas Lt. Governor Jeff Colyer remarked that there may only be one insurer offering coverage in its exchange next year. Unfortunately, a lot more needs to be done than cracking down on special enrollment periods in order to reverse the ACA’s damage and to increase competition and lower premiums in the individual insurance market.

Back-of-Envelope Calculations for Estimating Insurers’ 2015 Losses 

In the above-mentioned Mercatus working paper, we found that insurers received premium income of $4,433 per enrollee and paid medical claims of $4,624 per enrollee for their individual QHPs in 2014. Inflating premium income by 5.4% and medical claims by 23.0%—the averages cited above—yields estimated premium income of $4,672 and medical claims of $5,688 for 2015. The other two key financials to consider are reinsurance payments and administrative costs. In 2014, administrative expenses per enrollee exceeded reinsurance payments per enrollee received by individual QHPs. Assuming the same relationship between administrative expenses and reinsurance payments in 2015 (this is a conservative assumption since reinsurance payments per enrollee will likely decline given 30% additional enrollees in 2015) yields insurer losses incurred on individual QHPs in excess of $1,000 per enrollee in 2015. Admittedly this is a crude estimate that omits several factors, including the effect of market entry and exit, which would influence the calculations.

This calculation assumes that the average increases in premium income and particularly in PMPM spending are representative of individual QHPs. Since non-QHP plans, largely grandfathered plans, were available in the individual market in 2015, the estimated loss would  depend on how PMPM costs increased for individual QHPs relative to the entire individual market and could therefore be higher or lower. However, in 2015, most of the plans sold in the individual market were QHPs so the 23.0% PMPM increase is likely close to the PMPM increase for individual QHPs.