ECONOMIC REPORT OF THE PRESIDENT

Box 4-2: Dynamics in the Individual Health Insurance Market
After two years of moderate premium growth for plans offered
through the Health Insurance Marketplace, premiums are increasing at
a faster pace for 2017, though experience will vary widely across states
(ASPE 2016b). This box discusses the factors that are driving changes
in Marketplace premiums in 2017, as well as their implications for the
future of the individual market. Contrary to some recent claims, a range
of evidence demonstrates that this year’s premium changes are part of
the ordinary process of adjustment in a new market, not a harbinger of
future market instability.
Factors Driving 2017 Premium Changes
Insurers faced significant challenges in setting premiums in the
years immediately following implementation of the ACA’s reforms to
the individual market. The ACA brought many new people into the
individual market, including people with pre-existing health conditions
who had previously been locked out of the market and people who could
newly afford coverage because of the law’s financial assistance. These
major changes made predicting average medical costs in the reformed
market difficult. This in turn created a significant risk that insurers
would underestimate or overestimate the level of premiums required
to finance those claims. In addition, some insurers may have intentionally
underpriced when setting premiums in an attempt to attract the
many new consumers who have entered the individual health insurance
market during its first few years, accepting losses in the short run in
exchange for higher market shares in the long run.
It is now clear that, on average, insurers underpriced in the early
years of the new market. Insurers are estimated to have incurred losses of
around 5 percent of premium revenue on ACA-compliant health insurance
policies in 2014, the market’s first year (McKinsey 2016). To achieve
sustainable pricing in subsequent years, insurers needed to make up for
these initial losses while also accommodating two additional factors. The
first was the ordinary upward trend in medical costs, which averaged
around 4 percent a year, though, as discussed below, this has likely been
partially offset by ongoing improvements in the ACA-compliant risk
pool relative to 2014. The second was the scheduled phasedown of the
ACA’s transitional reinsurance program, which defrayed a portion of
insurers’ claims spending on high-cost enrollees in 2014 through 2016.
The decline in payments from this program added around 7 percent to
premium growth in each of 2015, 2016, and 2017. The net effect of these
various factors is that returning premiums to a sustainable level by 2017
likely required premium increases averaging a bit more than 10 percent
per year in 2015, 2016, and 2017. But the premium for the second-lowest
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