Why Obamacare's State Rate Changes Are Misleading

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In addition to inspiring heated debate from both sides of the health-care issue, Obamacare has become one of the most confusing pieces of legislation ever passed. With the difficulties in analyzing the law's effects, every new development seems to raise more questions than it answers.

For months, a number of states have announced expected premiums under their state health insurance exchanges, and in most cases, the premiums under Obamacare have been decidedly higher, inspiring opponents to declare the legislation a patent failure. Yet this week, the state of New York came out and said that its exchanges would cut premiums by more than half, leading to proponents of health-care reform declaring the success of the program. Which side is right?

Measuring from different baselines
The problem that objective analysts face in assessing Obamacare is that everything depends on the baseline from which you start. Every state's insurance environment is different , and so in judging savings under Obamacare, you're inherently judging not only how well Obamacare does in establishing a health-insurance framework but also how well the pre-Obamacare framework did in providing low-cost care to those seeking coverage.


President Barack Obama delivers remarks on the Affordable Care Act's Medical Loss Ratio Refunds. Source: White House.

For instance, one key variable that is much different from state to state is the quality of insurance coverage offered under pre-Obamacare plans. In states that allowed insurance companies to craft lower-priced coverage by trimming benefits and imposing restrictions on coverage, premium increases under Obamacare tend to be higher, because Obamacare requires more comprehensive coverage that should lead to a decrease in out-of-pocket costs. Indeed, major insurance carriers UnitedHealth Group , Aetna , and Cigna are probably choosing not to participate in some states' health-insurance exchanges precisely because the required changes in benefits will fundamentally change the health-insurance landscapes in those states. That makes their profit prospects less certain and their shareholders more nervous about the impact the legislation will have on their bottom lines.

By contrast, in states that already required some of the same things that Obamacare does, Obamacare exchanges are more likely to produce premium savings, but they're also unlikely to have as much savings on out-of-pocket costs because pre-Obamacare insurance offerings already provided favorable benefits. They're also less likely to lead insurance companies to change their minds about offering coverage, because the nature of that coverage isn't all that different under Obamacare.

Another important aspect of pre-Obamacare insurance is the extent to which individuals actually obtained insurance under pre-existing frameworks. In New York, for instance, individual-coverage insurance has traditionally been extremely expensive, providing a huge incentive for healthier individuals to take the risk of going without insurance rather than paying high premiums. The result was essentially a high-risk pool of insurance policyholders who had no alternative. Insurance always works better when there are more people to share the risk, and the individual mandate under Obamacare will have a more positive impact on premiums in states where individual participation in pre-Obamacare insurance options was low.

Finally, no analysis of Obamacare health-insurance premium costs is complete without understanding the impact of federal subsidies on cost. With hefty redistributive impacts between high-income individuals paying full cost while middle- and lower-income households get varying amounts of subsidies, relying on averages can hide the differences that families in different financial situations will pay.

Don't believe the headlines
Whenever you see a claim that a state's premiums will go up or down under Obamacare, your first reaction should be to look beyond the headlines to see the assumptions that the claim is making. Without considering both total cost and insurance quality, you're likely to draw false conclusions from shallow analysis of Obamacare's impacts.

The other place where people are still very confused about Obamacare is in figuring out how it will affect your personal costs and your investment portfolio. On that score, we can help, as The Motley Fool's special report " Everything You Need to Know About Obamacare " takes a 360-degree look at how the law may impact your taxes, health insurance, and investments. Click here to grab your free copy today.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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