Are Nongroup Marketplace Premiums Really High? Not in Comparison with Employer Insurance

By Linda J. Blumberg, John Holahan, and Erik Wengle
Urban Institute, September 2016

Abstract

We compare unsubsidized 2016 nongroup marketplace premiums to the average employer sponsored insurance premiums in all 50 states and 73 metropolitan areas. We adjust second lowest cost nongroup marketplace premiums to account for the differences in actuarial value, induced utilization, and age distribution of enrollees. We find that nationally, nongroup marketplace premiums are 10 percent lower than the average employer sponsored insurance premium, after the adjustments. There is variation at across states and metropolitan areas, but more than ¾ of states and more than 80 percent of metropolitan areas having lower marketplace than employer premiums.

Conclusions

Premiums in the nongroup insurance Marketplaces attract considerable attention, with some concerned that average growth rates since 2014 are high in some areas and that this might signal a fundamental weakness with the new nongroup insurance markets. This analysis places nongroup Marketplace premiums in a context where we can compare them, apples to apples, with employer-based insurance. Our findings show that in more than 75 percent of states and more than 80 percent of the metropolitan areas we can study, nongroup premiums are actually lower than employer premiums in the same area, even though nongroup insurance tends to have higher administrative costs per enrollee than does average employer coverage. In fact, once adjusting for year, actuarial, and associated utilization differences, half of states’ nongroup Marketplace premiums are lower than their average employer premiums by double-digit percentages. Metropolitan-area findings are similar.

In a previous analysis, we found that Marketplace nongroup insurance premiums tend to be lower in rating areas with more participating insurers and in those with Medicaid insurers or provider-sponsored insurers participating (Blumberg et al. 2016). Nongroup Marketplace premiums may tend to be lower because Marketplace insurers are more aggressive in offering narrower provider network plans than their group market counterparts. Other market characteristics may play roles, such as premium transparency and plan comparability. The large differentials between nongroup and employer premiums in many areas also may indicate that nongroup premiums continue to be underpriced in some areas; the large premium increases seen in several states may be part of the process through which these markets will reach a stable equilibrium.

Thus, with few exceptions, the level and growth of nongroup premiums in the Marketplaces should not be interpreted as evidence that these new markets are weak. Nongroup insurance, when adjusted to make its premiums comparable to employer premiums, is much more often than not lower cost than the average coverage offered through employers. But the persistent, uncomfortable truth is that health care is an expensive commodity, regardless of the market in which one purchases it.

http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000931-Are-Nongroup-Marketplace-Premiums-Really-High-Not-in-Comparison-with-Employer-Insurance.pdf

Much has been written about the anticipated large increases in premiums for the nongroup health plans being offered through the ACA exchanges (Marketplaces) compared to the more modest increases in premiums of employer-sponsored group plans. This new Urban Institute report shows that premiums adjusted for plan equivalence for the nongroup exchange plans have actually been lower than those of employer plans. So what is the significance of this?

Although numerous factors no doubt contributed to this difference, it is likely that the most important was the strategy of insurers to initially offer lower premiums to gain market share with the intent of later adjusting premiums upward once competitors were reduced or eliminated. The miscalculation resulted from the fact that most employers did not drop their plans and thus there was not a large influx of healthy workers into the exchanges. There also was a component of adverse selection since many younger, healthier individuals stayed out completely, increasing the costs of covering the less healthy enrollees. Higher administrative costs of the nongroup plans compared to the employer plans were largely offset by lower negotiated rates for the narrower plan networks.

So the higher premium increases in the exchanges were necessitated primarily by initial lowballing and also by higher spending than anticipated. The insurers, with all of their actuarial talent, fell short, and some of the nation’s largest insurers are withdrawing.

So what is the lesson here? This is simply one more example of why supposed marketplace competition is a cumbersome and wasteful way to finance a health care system. An equitably-funded universal risk pool is not only more efficient, it is more equitable as well – including everyone, at a cost they can afford.