With the first year’s enrollment deadline just around the corner, millions of Americans are signing up for health insurance in new public marketplaces known as ‘exchanges.’ But for those who have never shopped for a health plan — or who have spent a long period of time without coverage — questions abound over how best to gauge the cost, quality, and value of an insurance package.
That’s no surprise. Health benefits plans are inherently complex, riddled with hard to understand jargon and oft-confusing details over price and coverage. Provisions in the Affordable Care Act try to clear up some of those complexities, requiring insurers to simplify coverage descriptions and offer instructions in multiple languages. But more help may be required for those who are new to the market.
One main area of confusion, however, has become clearer. Most people eyeing an exchange health plan want to know whether their monthly premiums are a ‘good deal.’ Generally, the answer is yes. Exchange premiums are priced competitively, and are often less expensive than what employees pay for coverage sponsored by their employers.
To analyze premium costs, first use a good proxy for market price. More than 156 million Americans receive coverage through their work, which makes employer-sponsored health plans a good benchmark for costs. When consumers shop for health insurance on an exchange, they can choose from four different levels, simply identified as bronze, silver, gold, and platinum. Each plan corresponds to actuarial value – roughly the amount of health costs the plan pays versus what the insured person chips in. Employer sponsored plans pay about 85 percent of healthcare costs, which corresponds to the gold and platinum levels on the exchange.
A recent analysis by PwC’s Health Research Institute found that the average employer premium this year is $6,119 for a single employee, while the median gold and platinum exchange plan premiums are $5,631 and $6,058, respectively. In both cases the employer premium is higher.
When comparing the average employer premium to those found in the exchanges offering similar actuarial value — 85 percent — health plans sold in the open marketplace are lower. In fact, premiums for the median exchange health plan are 4 percent lower than those offered by an employer, while the lower-level coverage option is 20 percent less expensive.
The analysis shows that the exchange plan premiums are not only competitive, but often lower than what employers are offering. The coverage is equivalent, too, because all plans must now include similar “essential health benefits” required under the health law. Even so, actual premium payments may vary. In the workplace, employers typically pay a portion of the premium for employees. Similarly, many Americans who purchase a health plan in an exchange will do so with a subsidy from the federal government.
So, why are premiums so competitive in the public exchanges? One reason may be in the way insurers have tried to lower costs. Many exchange plan offerings limit the pool of hospitals and physicians a person can visit ‘in network.’ The practice is known as a ‘narrow network,’ and it simply means that insurers want to steer their customers to lower-cost providers of care. When insurance plans contract with lower cost providers, premiums are lower. As a result, however, consumers will have limited choices of which hospitals and doctors are covered.
One other note: Since this is the first year exchange health plans are being offered, pricing may vary in 2015 and beyond, as insurers and providers strike new deals on payments and medical services.
If these price comparisons are sustained over time, the health industry will need to function under a new benchmark for premiums. Insurers may see more demand from employers for lower cost plans that bring premium prices closer to what’s offered on the exchanges. At the very least they will need to help educate employers on the variability in pricing. Insurers should also be ready to develop and implement more cost efficient provider networks that combine high quality with lower premiums. The interest in private health insurance exchanges, which operate separately from the state or federal government-run marketplaces, may spur this most as employers rethink their role in offering benefit plans.
Hospital and physician leaders are closely watching how this unfolds. Higher-cost medical centers are under pressure to explain their value and almost all hospitals are feeling pressure to reduce costs. Providers that can deliver care more efficiently without lowering quality could see a great opportunity to increase their market size if they are included in more insurer networks.
Finally, employers may see exchanges as a viable alternative for providing insurance. That interest is likely to increase in the coming years. The ACA allows states to determine whether large employers can join health insurance exchanges. If the current pricing structure holds, then more employers may do so.
Still, it’s too early to early to tell whether the current premium prices will become the norm. But if they stay competitive with employer coverage, then this new approach to health insurance may create an entirely different market.
Benjamin Isgur is a director in the PwC Health Research Institute.