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Brookings study reveals Minnesota’s individual insurance market is not faring well under ACA

A new study published by the Brookings Institution reveals the rollout of the Affordable Care Act (ACA) is imposing far more volatility and harm on people in Minnesota’s individual market than elsewhere.

The study, by Yale economist Amanda Kowalski, takes “an early look at the impact of the ACA on the individual health insurance market.”  It compares state-by-state coverage levels, insurance premiums and insurance costs in the first two quarters of 2014 to estimates of what they would have been if the ACA had not been implemented this year.  These estimates are created by extending pre-ACA trends going back to 2008.  Using this data, the study then estimates the welfare gain or loss from implementation across states.

The data and analysis from this study help fill in the real picture of what is happening in Minnesota’s individual insurance market and supports four main points.

  1. Average insurance premiums paid in Minnesota are lower than many states, but not the lowest in the nation.
  2. The ACA increased Minnesota’s average insurance premiums, but premiums grew substantially slower in the national average.
  3. Insurers set premium rates too low, making Minnesota the only state where insurance costs exceed premiums.
  4. Finally, the study estimates people participating in Minnesota’s individual market experienced the second largest welfare loss in the country.

Keep reading for more details on these four points.

Minnesota insurance premiums are not the lowest in the nation

When Minnesota’s Department of Commerce initially announced Minnesota would have the “lowest average health insurance rates in the country for MNsure” in 2014, many people familiar with Minnesota’s insurance industry scratched their heads wondering how.   As recent as 2010, according to the Kaiser Foundation, Minnesota had the 34th lowest average individual insurance rates in the country out of 44 states studied.

Commerce has now claimed the lowest rates in the nation multiple times and each time they provide a different point of rate comparison, such as comparing the average priced bronze plan for a 27-year-old or the second lowest silver plan for a 40-year-old.  Sometimes sources are provided and sometimes not.  It has been hard to argue with this moving target.

However, there is now actual premium data for the first six months of 2014.  Kowalski’s report helpfully takes this data and calculates enrollment-weighted average monthly premiums by state, which shows Minnesotans paid the 12th lowest average monthly premiums in the individual insurance market.  This is low, but clearly not the lowest in the nation.

No doubt the Dayton administration will call this just one more way to slice the data, but, unlike Commerce’s claims, it is clearly sourced and peer reviewed.

The ACA increased Minnesota insurance premiums, but premiums grew slower than the national average

Kowalski also estimates what premiums would have been in each state if they followed pre-ACA trends.  Nationally, average premiums grew “by 24.4% beyond what they would have had they simply followed state-level seasonally-adjusted trends.” By comparison, Minnesota rates grew by just 11.3 percent.  Importantly, this confirms the ACA indeed increased insurance premiums both in the U.S. and Minnesota.

Due to slower growth, Minnesota average premiums moved from the 23rd lowest to the 12th lowest.   Though not the lowest rates in the nation, it is a substantial move.

Insurers set premiums rates too low, making Minnesota the only state where insurance costs exceeded premiums

Having the 12th lowest premiums in the country would be great news for Minnesota if the premiums were actuarially sound and justified by insurance companies’ claims experience.  Unfortunately, Kowalski’s data proves Minnesota premiums are set too low.  The fact is, premium growth is not keeping pace with the substantial growth in costs incurred by insurers this year.  While Minnesota premiums grew 11.3 percent above trend, average costs grew by 35 percent.

Minnesota is the only state in the country where the average cost incurred by insurers exceeds the average premium paid in the first half of 2014.  Thus, Minnesota insurers collectively missed the mark—at least on the low end of setting premiums—more than any other state.  (Kowalski’s study reports costs also exceeded premiums in California, but she excludes both California and New Jersey from comparisons due to incomplete data.)

Why did insurers miss the mark so badly?  News breaking last week offers one explanation.  Reports from the Star Tribune and this author revealed state regulators at Commerce actually pressured insurers to lower rates.

By setting premiums too low, many Minnesotans with coverage in the individual market will experience rate shock when they go to renew this year.  And that may not be the only harm visiting the market.

Study estimates Minnesota experienced the second largest welfare loss

After constructing pre- and post-ACA data on coverage, premiums and costs, Kowalski used this data to estimate the welfare gains and losses from the implementation of the ACA experienced by people participating in the individual health insurance market.  The model specifically measures the welfare gains or losses from changes in adverse selection where insurance markets attract disproportionately high risks and changes in markups, the difference between premiums collected and costs incurred.

Based on this model, Minnesota experienced the second largest decrease in welfare in the country, declining by $70 per month, or $840 annually.  Only Oregon saw a larger decline.

Kowalski grouped states based on various characteristics of how they implemented the ACA, including whether states had “severe exchange glitches,” and found people in states with these glitches were far worse off than those in state with well-functioning state exchanges.

Thus, according to this study, Minnesota’s severely botched exchange rollout contributed to making people in the individual market substantially worse off.

This conclusion suffers from one major problem, the study fails to account for the number of people with coverage through a high risk pool in a state.  Prior to the ACA, many states had some sort of high risk pool to cover people with preexisting conditions.  Minnesota happened to have the largest and Oregon also had a relatively large pool.  People in Minnesota’s high risk pool clearly flowed into the individual market in 2014, which may provide a better explanation for Minnesota experiencing the second largest welfare loss.

Regardless of the explanation, Minnesotans experienced a substantial decline in welfare according to study’s model.

Altogether, Minnesota’s individual market has not fared well in the initial months of the ACA’s implementation.  Looking forward, all of this show Minnesota lawmakers need to pay special attention to the individual market.

Protecting this market is especially important because it offers the best opportunity to promote a competitive health insurance market.  It’s the only place individuals have the power to choose and own a health.  Choice and ownership is central to competition.

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