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What makes insurance rates jump?

ST. PAUL -- Minnesotans got a shock Thursday when the state’s health insurers proposed “eye-popping” rate increases for people who buy health insurance on the individual market — premium increases as high as 70 percent.

Democratic-Farmer-Labor Gov. Mark Dayton condemned the increases as “outrageous” and suggested they should be scaled back. Republicans saw them as reason to criticize the state-run portion of that market, MNsure.

Here’s the background about these premium increases, why they’re happening and what they mean:

What’s proposed?

Federal law requires health insurers to disclose any premium increases above 10 percent. Those were released Wednesday, and in Minnesota, there are 27 plans proposing an average premium increase of 43 percent. The highest increase was 74 percent, from a plan offered by Time Insurance Co.

“It is eye-popping,” said Jim Schowalter, president and CEO of the Minnesota Council of Health Plans.

Not every plan on the individual marketplace was listed because some insurers, such as Medica, are proposing increases less than 10 percent. Medica’s increases are lower because they charged higher premiums last year and so needed smaller increases to account for costs.

Who’s affected?

These proposed increases affect only people who buy their insurance on the individual marketplace, rather than receiving health care from an employer. Just 6 percent of Minnesota’s total health insurance population is on the individual market — about 300,000 people.

Why are rates going up so much?

It’s complicated, but there are a few key reasons:

  •  Federal subsidies designed to ease insurance companies’ adoption of the Affordable Care Act have been phased out.
  •  High costs for certain prescription drugs that can cost $1,000 per pill to treat conditions such as Hepatitis C, diabetes or rheumatoid arthritis.
  • More people with expensive health conditions than expected signed up for individual health insurance plans.

This last point is a big one. Health insurance works by spreading costs among a large group, with inexpensive healthy people offsetting the huge costs of people with expensive medical conditions. The more sick people in a health insurance pool, the higher everyone’s costs are.

One big cluster of sick people came from Minnesota’s “high-risk pool,” the Minnesota Comprehensive Health Association. Under the Affordable Care Act, it closed Dec. 31, 2014, and its 26,000 members largely moved to the individual market. Of everyone in Minnesota with health coverage, these were “the people who were the most sick,” said Eileen Smith of the Council of Health Plans.

In addition, people moving from employer plans to the individual market have tended to be sicker than usual. Scott Keefer, Blue Cross and Blue Shield of Minnesota’s vice president of public policy and legislative affairs, said 14,000 people moved from Blue Cross’ employer plans to its individual plans since 2013 — and those 14,000 people on average are 30 percent more costly than typical Blue Cross members.

Blue Cross’ plans are seeing an average premium increase of about 55 percent.

All of this combined to cost health insurers money last year. Minnesota’s individual health insurance providers collected about $1 billion in premiums last year but paid out about $1.3 billion in expenses, Schowalter said.

Is there any good news?

First, Minnesota is not alone in this. Individual market insurers across the country are proposing major premium increases.

Second, Minnesota had cheaper plans to begin with, so these big increases aren’t as much as the same percent increase would be on a typical Wisconsin plan.

Third, most of the factors behind the increases are specific to the individual market. These big increases aren’t likely a sign of similar increases to come for employer-based plans — though things such as high-cost prescription drugs could push everyone’s insurance up. Overall in Minnesota, health costs have increased by just 3 percent per year recently — though increases have been higher in the individual marketplace.

For some consumers, the rate increases could mean bigger subsidies from federal taxpayers. Under the Affordable Care Act, people buying through government-run exchanges such as MNsure can get tax credits to offset some of their health care costs. Those credits are based both on income and on the cost of the plans. So cheaper plans mean fewer subsidies.

“As the premiums increase, more Minnesotans will get the premium subsidy to help them pay for the coverage,” Smith said.

That might not offset all the increase — and higher-income individuals are still out of luck — but it could save some individual market customers money.

What does this mean for MNsure?

First, despite its public prominence, MNsure is actually just a small player in Minnesota’s individual health insurance world. Just 14 percent of the roughly 300,000 individual customers in the state get their insurance through MNsure. It’s the only place where customers can get federal subsidies for their individual insurance plans. So changes to the individual marketplace aren’t necessarily synonymous with changes to MNsure’s population.

But experts said there’s reason to at least take note of the increases.

Theoretically, big rate increases can destroy a health insurance marketplace such as MNsure. It’s called a “death spiral”: premium increases lead healthy people to leave the plan, leaving just sicker people behind — and thus raising prices even higher, until it’s too expensive for anyone.

That happened in some health marketplaces established over recent decades, said Jean Abraham, a health economist at the University of Minnesota who has studied insurance. So far, she said, it’s “too early to suggest that this particular shock … is telling us that there’s a real threat,” though she added that it’s “not good news.”

Keefer said a “death spiral” for MNsure or the broader individual marketplace isn’t inevitable. But he said changes in health policy might be needed.

“We as a state … have to think about midcourse corrections,” Keefer said. “I’m definitely concerned, but I have confidence that as a state, we’ll come together.”

What happens next?

Under the Affordable Care Act, premium increases don’t take effect automatically. They have to be approved by the Minnesota Department of Commerce, which can deny or modify any rates it deems “excessive.”

Dayton suggested the department should do just that, calling for a “rigorous review” of the “outrageous” rate increases.

The Commerce Department is accepting public comment on the increases through

July 31, via email to healthinsurance.ratecomments@state.mn.us.

It will announce approved rates Oct. 1. Those rates will then take effect Jan. 1, 2016.

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