California Exchange Picks Winners and Losers

Published July 9, 2013

The State of California has announced the winners and losers under its new approach to controlling the state’s health care market. While the state touts the number of insurance carriers participating, the market will be dominated by a handful of companies.

The negotiation process took place behind closed doors, according to a spokesperson for Covered California, the state’s health insurance exchange. The contracts to provide specific insurance products at a specific set of prices also remain secret, though some California legislators say they’re interested in opening the negotiation process.

The exchange divides the state into 19 regions based on demographic and economic conditions. Policies offered on the exchange must be uniform within each region.

Consumer Choice Limited

Sally Pipes, President of Pacific Research Institute, said dividing the state into regions will lead to less cross-subsidization between high-cost and low-cost areas.

“We shall see how it all unfolds. I do not know how the winners were selected,” said Pipes. “More interesting is the fact that Aetna, Cigna, and United are not participating.”

The absence of three major insurers will limit consumer choice, Pipes said. But the companies make up only 7 percent of the individual and small group market in California, she noted, so they likely decided it wasn’t worth the trouble to participate.

“These three insurers moved out of the California market because all the regulations in the state made it not worthwhile to do business in California,” Pipes said. “It will be interesting to see how things unfold in 2014. These three are probably waiting to see if young people do not enroll in the plans in the exchanges and pay the penalty.”

According to Covered California, the average “silver” plan sold through the exchange will cost $321 per month in 2014, a significant increase over equivalent plans sold today on the individual market, which average $177.

“In 2014, there will be new mandates placed on insurers that are required by the Secretary of HHS,” Pipes continued. “These mandates will add to the cost of insurance. Some people do not want all of the benefits that are mandated. Therefore, you cannot compare prices in 2013 with those in 2014.”

Few Options in Some Regions

Although every region in the state will be covered by at least three carriers, the state’s insurance market will be dominated by four carriers: Anthem Blue Cross, Blue Shield of California, Health Net, and Kaiser Permanente. The remaining nine companies have only 17 regional offerings in 13 of Covered California’s regions. Many offer service only to one county, according to Lanhee Chen, a research fellow at the Hoover Institution.

“The process was in some ways difficult from the start, because what you’re asking people to do is to participate in a marketplace that (A) will be much more heavily regulated than it probably is today, and (B) you’re asking them to sign up for a program that eventually will result in rate shock that will have a negative impact on the insurers who participate,” Chen said.

“One of the reasons health insurance in the exchange will cost a lot more in most states,” said Chen, “is because the new health law outlaws many of the existing plans now being offered and requires only those much richer plans to be sold.”

Premium Increases Expected

Although regions will differ in experience, nearly every region will get hit with premium increases, Chen said.

“It doesn’t really matter what regions you pick, you see pretty similar trends across most regions, so whether you’re talking about Los Angeles or San Diego, the reality is that’s where all of the people are. So even if it is the case that in Fresno or smaller communities in California the rate increases don’t look as bad, the reality is that more Californians are going to affected in areas that are more populated,” he said.

According to Chen’s calculations, a 25-year-old male living in San Francisco who doesn’t receive premium subsidies could see his health insurance premiums rise by about 50 percent. Chen says the state shouldn’t try to disguise what is going to happen in 2014.

“If they’re resorting to deceptive comparisons to make premiums look like they’re going to be better than people expected, we’re sure to see only more bad news. I’d just encourage people to be vigilant in holding agencies like Covered California responsible for providing accurate descriptions of what’s actually going to happen to health insurance premiums as a result of Obamacare,” he said.

“The most important thing for people to understand,” Chen stressed, “is the lengths that people who support Obamacare will go to to make the thing look better than we know it’s going to be. California is already a pretty strongly regulated state, and so the changes that you would otherwise expect, going from pre- to post-Obamacare, shouldn’t be that substantial.”

The opposite is true in many other states, Chen said.

“The bigger question,” Chen said, “is not what happens in California, it’s what happens in states with relatively little regulatory overhang now, when they go to a post-Obamacare system. What are premiums going to look like in those kinds of states? If you take less-regulated insurance markets and you turn them into very highly regulated markets, the natural [expectation] is to see premiums skyrocket. Experience so far suggests that’s what is going to happen in a lot of those states.”