CBO outlines how subsidies, regulations, insurer actions affect premiums

At a cost of roughly $300 billion, the federal government will subsidize most health insurance premiums in 2016, so a new report from the Congressional Budget Office (CBO) sheds some light on how federal subsidies, federal regulations and actions by insurers affect these premiums.

Premiums for private insurance have grown relatively slowly in recent years, but growth has been faster than the average income, and therefore the economy as a whole, the CBO says. Premiums for private plans will increase by about 4 percent for 2014 to 2018 and by 5 to 6 percent from 2019 to 2025, the CBO projects. 

Here are some other highlights from the report:

  • Federal subsidies encourage relatively healthy people to enroll in plans, which reduces insurers' average spending for enrollees' healthcare and thus helps to reduce premiums. However, the tax exclusion also provides an incentive for employers to offer, and for employees to select, more extensive coverage than they otherwise would.
  • The tax exclusion for employer-sponsored coverage cost $250 billion in fiscal year 2013, and is expected to be more now due to growth in premiums. The Affordable Care Act premium tax credits, meanwhile, cost $37 billion in 2016.
  • Federal regulations increase premiums noticeably in the nongroup market, but the nongroup market represents a relatively small fraction of the total private insurance market. The CBO expects that premium increases stemming from the ACA's regulations will have a relatively small effect on the overall average of private health insurance premiums.
  • Insurers affect premiums when they restrain spending on healthcare by negotiating lower payment rates for services provided within their networks of doctors and hospitals, managing enrollees' use of care more closely and increasing the amounts that enrollees pay out-of-pocket, the report says. Additionally, insurers foster competition, and premiums are lower, on average, when there are many options in the marketplace.

The report also addresses the potential reasons for why some insurers have lost money on their ACA marketplace plans. These reasons include: insurers trying to attract more enrollees by charging premiums that do not fully cover their expected costs; inaccurate calculations surrounding administrative costs; and some states requiring nonprofit insurers to provide subsidized coverage to some unhealthy people who would otherwise have had difficulty obtaining insurance.

To learn more:
- here is the CBO report (pdf)

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