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Health plans concerned ACA’s age rating rule could spawn adverse selection

February 17, 2013 Leave a comment

Health plans worry the limitation on using age as a basis for setting premiums in the individual health insurance market come January 2014 could jeopardize its financial viability and lead to adverse risk selection the Patient Protection and Affordable Care Act is intended to alleviate.

The ACA requires individual health insurers to deemphasize age as a rating factor by reducing the current five or six age rating bands currently used to a maximum of three, meaning the oldest plan members would pay premium rates not exceeding triple those of the youngest.  The goal under the ACA’s modified community-based rating scheme is to flatten out premiums to make them more affordable to middle aged people who over the past several years have seen them rise to a level rivaling the amount of a modest mortgage payment.

According to this Washington Post article, while older people would enjoy lower rates, younger people would consequently experience rate increases.  Particularly those under age 30 that modified community-based rating envisions balancing out state risk pools by bringing in a typically healthier population with lower medical utilization.

The Post article contains contrasting analyses on the how this so-called “young invincible” demographic will respond to higher premiums.  Consulting firm Oliver Wyman – which the article notes has been retained by the health plans’ dominant trade association – predicts the age rating limitation will result in 80 percent of those in their 20s paying more for tax subsidized coverage purchased through state health benefit exchanges than they now pay for even basic, low cost coverage.  But economist Jonathan Gruber – who consulted in the drafting of the ACA – expects plans sold on the exchanges notwithstanding higher premium rates will appeal to this cohort when income tax credits to offset premiums are taken into account. More so than going bare and paying a penalty — and even more than low cost, high deductible catastrophic plans available only to those under age 30.

Which prognostication ends up being more on target won’t be known until plan issuers release premium information this summer and the exchanges gear up for open enrollment in the fall for coverage effective in January 2014.

ACA definition of full time work: Twilight of the Industrial Age work week?

January 26, 2013 1 comment

In 1938, the U.S. Fair Labor Standards Act (FLSA) set the full time work week at 40 hours. The 40-hour work week became a hallmark of the modern Industrial Age.  Over the decades since then and especially since 1985, our socio-economy has shifted toward the next phase: a more automated and sedentary Information Age economy.

In this new economy, people move around a lot less.  Consequently, many health experts agree, the health of the population has worsened, expanding waistlines and health care costs to treat complex and chronic conditions that are largely preventable with more activity and exercise.  As a society, we are negotiating the transition from the Industrial to the Information Age with a large degree of difficulty as shown by the deteriorating overall health status of the population.

It is therefore interesting to note the Patient Protection and Affordable Care Act (ACA) at Section 4980H(c)(4) reduces the 40-hour work week standard to 30 hours for the purpose of defining a full time worker under ACA’s large employer “shared responsibility” mandate requiring large employers to provide employer-sponsored health coverage.  While the policy intent is likely to get large employers (defined as having 51 or more workers) to cover a greater portion of their work forces and thus expand health coverage, this little noticed provision could offer a larger, longer term benefit if it becomes a new standard work week in the emerging Information/Internet socio-economy.  Especially if it is accompanied by a widespread social realization and acceptance of the notion that people would greatly benefit from one to two hours of sustained activity on most days – especially for those engaged in knowledge and information work that has them mostly seated for the balance of their waking hours.

But would the 10 fewer hours worked each week translate into lost productivity that would truly harm the economy and standard of living? Or would the 30 hours that are spent working be more productive ones such that working 10 less hours would be largely offset?  And if people used the extra time for daily activity (yes, housework counts) and exercise, how much savings could be realized in bending the infamous health care utilization cost curve and would they outweigh any cost associated with working a shorter work week? This is an enormously important question considering the high cost of poor health to the U.S. economy.  Finally, for knowledge workers is measuring the hours worked even the right metric to gauge their productivity given the view that the results are what really count?

Health benefit exchanges: A market intervention mechanism aimed at preserving individual, small group health coverage

December 22, 2012 1 comment

State health benefit exchanges mandated by the federal Patient Protection and Affordable Care Act of 2010 have been commonly described as online marketplaces where buying a health insurance policy or managed care plan can be done as easily as booking a flight or vacation.  Ease of purchase, however, is not the driving policy rationale behind the exchanges.  They came about in response to market failure in the individual and small group market segments, particularly in the former.  In insurance terms, market failure means the dreaded death spiral of adverse selection.

Insurance fundamentally is about spreading costs across a group of insureds, known as the insurance principle.  The principle is based on the law of large numbers.  If too few people purchase an insurance or health plan, the law of large numbers is violated and the insurance principle breaks down.  For those insureds left in the group, their share of the group’s costs – paid as premiums or membership dues – must be sharply increased.  The pool shrinks and only those most likely to use medical services remain since they need coverage, putting further upward pressure on premiums.

There is a limit what any insured can afford to pay.  Eventually market failure results and the insurance or managed care plan becomes economically unviable.  As plans close, the fewer remaining health plans pass along relentlessly rising medical care costs and the unvirtious cycle proliferates until the entire marketplace is at risk.  That was — and still is — the situation the individual and small group health insurance markets leading up to the enactment of the ACA in 2010.  Ultimately, health benefit exchanges are an attempt to preserve these markets by concentrating plan issuers and purchasers into a government-sponsored marketplace with incentives and disincentives for individuals to participate in the form of tax credit subsidies and tax penalties, respectively.

Whether the exchanges are able do so won’t be known for several years after the exchanges begin pre-enrolling individuals and small businesses for 2014 coverage starting in October 2013.  What is certain is the exchanges as insurance marketplaces – like the failed market they seek to remedy — are also subject to the insurance principle. They must attract sufficiently large numbers of individuals and small businesses if they are to successfully achieve the market aggregation solution that led to their inclusion in the ACA.

ACA provides regulatory, market framework for sale of health insurance across state lines

November 11, 2012 Leave a comment

The sale and regulation of commercial health insurance is essentially an intrastate affair.  States serve as discrete markets and each have their own rules governing health insurers and managed care plans.  However, several provisions of the Patient Protection and Affordable Care Act (ACA) are apparently intended to give the industry a more interstate flavor starting in 2014 when state health benefit exchanges chartered by the ACA open for business in each state.

Section 1334 of the ACA establishes a shared federal-state regulatory regime requiring health benefit exchanges to offer two “multi-state plans” (one must be a nonprofit) in their individual and small business exchanges.  These plans would be established under federal charter through the Office of Personnel Management (OPM) and licensed in all states.  The idea behind multi-state plans is to bolster competition in state markets, particularly those with smaller populations and fewer payers, as well as to create a larger risk pool to help assure affordability of premiums and ward off adverse selection.  At the same time, multi-state plans could raise fears among payers since by virtue of their large size (and thus their potential ability to offer more favorable coverage terms and rates), they could “crowd out” smaller, state-based players.

However, the Section 1333 of the ACA also provides a mechanism for health insurers and plans to pool risk and sell across state lines via “health care choice compacts” starting in January, 2016.   It allows two or more states to enter into an agreement under which health plans could be offered in state individual markets but subject only regulation by the state in which the plan was written or issued.  Plans sold outside their state of domicile would still however be subject to licensure and rules in the state in which the purchaser resides relative to market conduct, unfair trade practices, network adequacy, and consumer protection standards including standards relating to rating and handling of disputed claims.  The ACA requires the federal Department of Health and Human Services (HHS) to issue regulations governing health care choice compacts by July 1, 2013 and additionally mandates that states must enact legislation authorizing their formation.

Finally, the ACA allows the exchanges themselves to operate across state lines.  Section 1311(f) provides for “Regional or Other Interstate Exchanges” operating in more than one state if the involved states and the federal HHS approve.

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