Is Obamacare heading for a premium hike disaster?

One of the major criticisms levied against the Affordable Care Act, known more popularly as Obamacare, is that as a result of its wide web of regulations, premiums on personal health insurance options could rise dramatically. Since the law was first conceived in the beginning of the Obama presidency, detractors have said that it was too early to say precisely how the insurance industry would react to tighter rules and requirements from the federal government.

California is set to open the first-ever federally mandated insurance exchange known as Covered California. This program will make it easy for residents in the Golden State to shop and compare policies based on their specific needs. As wonderful as this system may seem, the reality is that many Californians could face drastically higher insurance costs as a result of the president's signature health care reform law.

According to an analysis published earlier this week by Forbes, participants in California's individual insurance market – which is different from the so-called group exchange where most folks will do their shopping – could see rate hikes in excess of 100 percent. This revelation was partly exposed during statements by Peter Lee, the chief executive for Covered California. Avik Roy, a contributor to Forbes, wrote that the state government's claim that rates would drop significantly are largely circumstantial and these savings are only achieved in subsidized markets. The reality, therefore, is that most folks who buy their own health insurance solutions may be forced to pay hundreds of dollars extra in order to fund some of the benefits awarded to lower-income Californians. 

"How did Lee and his colleagues explain the sleight-of-hand they used to make it seem like they were bringing prices down, instead of up? 'It is difficult to make a direct comparison of these rates to existing premiums in the commercial individual market,' Covered California explained in last week's press release, 'because in 2014, there will be new standard benefit designs under the Affordable Care Act.' That's a polite way of saying that Obamacare's mandates and regulations will drive up the cost of premiums in the individual market for health insurance," Roy explained.

Simply put, the issue here is that Obamacare creates distortions in the insurance market because of requirements levied on insurers over what type of care needs to be provided. This problem is compounded by the fact that everyone's medical needs are varied, yet carriers are no longer allowed to differentiate between the levels of need in their client base. The result is a system where costs have to be shared in order to make sure that everyone is covered, but by doing so, some folks may actually be priced out of the market altogether even though they do not qualify for income-based assistance from the state or federal governments.

Is there a solution here? Unfortunately, it may be some time before the problems truly bubble to the surface and Americans see Obamacare as little more than a government overreach into what used to be a purely private market. The next nine months are critical for the rollout of the Affordable Care Act, and depending on its performance in California, similar efforts may be stymied in other states. It should be noted, however, that California has a particularly vibrant and diversified personal insurance market, so it's tough to extrapolate data from that system with other regional economies. Yet these developments highlight a looming financial issue that many hard-working Americans could soon face.

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