New subsidies will help millions more Californians obtain health insurance. Lifetime limits and pre-existing conditions will no longer be taken into consideration in determining coverage. Already, young adults can remain covered up to age 26 under their parents' health insurance.
All this and more is either in effect or will be implemented in 2014 as part of the Affordable Care Act. This revolution in health care coverage holds the promise of improving Californians' overall health and helping them avoid financially crippling medical bills.
As a result of the ACA, premiums will decline for many moderate- and low-income Californians who will qualify for subsidies through the state's new marketplace for insurance, Covered California. But some will see an increase in their insurance premiums and that may come as a surprise.
All the expansions in coverage come at a cost, and the federal government is imposing a sales tax of more than $100 billion over the next nine years to help pay for them. The Affordable Care Act also will impose age rating restrictions and other expensive requirements that will increase the cost of coverage for millions of Californians and their employers. When this happens, many younger and healthier Americans likely will decide against getting coverage which will cause further increases for everyone else.
California health plans support the implementation of the Affordable Care Act. But as they undertake its implementation, their first priority, under law, is paying for members' doctors and hospital bills, prescription drugs, diagnostic tests and other health care costs. Those costs consumed 89 cents out of every $1 in premiums for California's commercial health plans in 2011, the last year for which comprehensive data is available.
The state's commercial plans exceeded the 80-85 cents out of every $1 in premiums federal and state laws require be paid to health care services. The laws require the plans to meet these thresholds or pay rebates to policy holders.
With so much of the premium dollar going to medical bills and other health care costs, California's commercial plans had a net profit margin of just 3.6 percent in 2011. By comparison, drug manufacturers reported a 16.7 percent net profit margin.
Health care costs continue to rise faster than inflation as the baby boomers age and science develops new and costly technology and life-saving procedures, such as organ transplants. The rising rates of obesity and chronic disease also drive up costs. For instance, health care for a Californian with chronic conditions costs an additional $5,550 per person annually. And 40 percent of California adults have a chronic condition.
The ACA's sales tax on health insurance will add approximately $5,000 to $7,000 to an average California family's premiums over 10 years, with none of that money going to the beneficiaries' medical care. It will go to the government. The Affordable Care Act also places strict limits on how much premiums can vary based on a person's age. These limits are expected to lead to significantly higher premiums for young adults even though this is the very group the ACA targeted for coverage because healthy young adults often forgo health insurance for other financial priorities.
Historically, in California, premiums for older people, who were more likely to have costly health issues, could be five times greater than premiums for younger, healthier people, who are less likely to incur expensive medical bills. The ACA will limit the difference to 3-1, so that older people may see declines in their premiums. The trade-off is that young adults may see significant increases.
Even more troubling is the very real possibility that young people will wait to purchase health insurance until after they get sick or injured, thus driving up costs for everyone else.
In addition, the ACA will require all health insurance policies sold in the individual market and to small employers to offer a broad range of mandated benefits, many of which are not included in some policies today. Millions of Californians may be required to purchase health insurance that is far more costly than they currently have and that offers benefits they may never use, such as required pediatric dental coverage for everyone, regardless of whether they have young children.
With slim net profit margins and limited administrative overhead, and the vast majority of premiums going directly to medical care, there's often no room in existing premiums to absorb the rising health care costs. Unfortunately, this means that consumers are ultimately sharing the increased cost of health care through higher premiums.
California's health plans are committed to working with the governor, Covered California, the Legislature and all other stakeholders to expand coverage to millions more Californians through the Affordable Care Act. But as we move forward with these significant expansions in health care coverage, we must all work together to lower the underlying costs of care to ensure that coverage is affordable.