Analysis: Non-group market faces adverse selection failure starting in thinly populated states with repeal of ACA individual mandate

The Senate Republican plan to use tax legislation to repeal the federal requirement that Americans have health coverage threatens to derail insurance markets in conservative, rural swaths of the country, according to a Los Angeles Times data analysis.That could leave consumers in these regions — including most or all of Alaska, Iowa, Missouri, Nebraska, Nevada and Wyoming, as well as parts of many other states — with either no options for coverage or health plans that are prohibitively expensive.

Source: Republicans’ latest plan to repeal Obamacare’s insurance requirement could wreak havoc in some very red states – LA Times

A New York Times analysis finds repeal of the individual mandate would spur sales of medically underwritten and rescindable short term plans with narrower coverage benefits than mandated for non-group plans by the Patient Protection and Affordable Care Act — particularly if an executive order issued by President Donald Trump in October that would extend the current three month term limit on such policies to one year is fully implemented.

According to this article from The Hill, state regulators are worried if this plays out, non-group markets could fall into an adverse selection death spiral and collapse.

Return to high risk pools implies failure of ACA’s single statewide risk pool

The return to state high risk pools encouraged by Trump administration executive action and as proposed in the American Health Reform Act pending in the Senate — mechanisms phased out with the Patient Protection and Affordable Care Act reforms of the non-group segment effective in 2014 — carries with it a critical implication. Specifically, the individual market even with single statewide risk pools mandated by Section 1312(c) the Affordable Care Act are too small —  in some less populous states at least — to achieve a sufficient spread of risk. Therefore, the logic implies, individuals with conditions who use largely disproportionate amounts of medical care must be excluded from the statewide pool and cordoned off in high risk pools in order to maintain the pool’s actuarial viability and ward off adverse selection in the individual market.

That cuts against a core assumption of the Affordable Care Act — that by having all individuals and family members in a given state treated as one large risk pool, a sufficient spread of risk would be achieved. In addition, the law’s premium stabilization programs and an ongoing risk adjustment mechanism to compensate health plan issuers who take on members with costly, complex chronic conditions would act as buffers to ensure the actuarial integrity of the pool and reduce the likelihood of adverse selection. The proposed revival of high risk pools would suggest that’s not the case and the amount of medical care utilized by some pool members is so costly that it skews an entire state’s risk pool.

This in turn leads to a far larger implication. If 5 percent of the pool population account for 50 percent of the costs — or 1 percent accounting for 20 percent to use another expression of the ratio cited in this National Institute for Health Care Management data brief — then medical care may not be an insurable risk due to insufficient spread of risk. If that’s the case, it could result in plan issuers ceding most or all of the loss risk to the government as is currently the case in Medicare and Medicaid managed care. Notably, Aetna CEO Mark Bertolini reportedly suggested just that, according to this account at Reason.com, with nominal insurers taking on the role of plan administrators handling “back room” transactions:

The government doesn’t administer anything. The first thing they’ve ever tried to administer in social programs was the ACA, and that didn’t go so well. So the industry has always been the back room for government. If the government wants to pay all the bills, and employers want to stop offering coverage, and we can be there in a public private partnership to do the work we do today with Medicare, and with Medicaid at every state level, we run the Medicaid programs for them, then let’s have that conversation.

Note the second condition in Bertolini’s statement: If employers want to stop offering coverage. Complain as they may about rising premiums in group coverage, there’s no indication that the highly entrenched employee benefit model of covering medical care for the non-elderly is going to be abandoned by employers anytime soon. Even if the Affordable Care Act’s mandate on employers of 50 or more to offer coverage is repealed given favorable tax treatment of employer-sponsored medical care plans.

Fate of 2018 individual market could turn on plan issuer response to proposed Market Stabilization rulemaking

With efforts to enact a successor to the Patient Protection and Affordable Care Act bogging down in the legislative process as health plan issuers must soon make decisions on their participation in the individual market and state health benefit exchanges for plan year 2018, much could ride on the Trump administration’s pending Market Stabilization administrative rulemaking and whether it will instill sufficient market confidence among plan issuers worried about losses and adverse selection. Indeed, the outcome of the rulemaking could well determine whether an individual market exists at all in many states next year as Congress debates changes to the Affordable Care Act’s commercial medical insurance market reforms but also the scope and financing of the six-decade-old Medicaid program.

The Department of Health and Human Services is fast tracking the rulemaking and currently reviewing about 4,000 comments received by the March 7 comment deadline. The scope of the rulemaking would directly apply to plans offered on state health benefit exchanges in states where the federal government operates the exchange or provides the online enrollment platform. As for the dozen states that operate their own exchanges, HHS states in the proposed rulemaking it understands those exchanges may not be able to implement the rule in 2017. It asked for comment on an appropriate transitional period for state-based exchanges and whether the rule should be optional for them. HHS also sought comment on how the rulemaking should apply to plans sold outside the exchanges.

The proposed rule is aimed at reducing the likelihood of enrollee gaming and adverse selection by requiring verification of eligibility for special enrollment periods and supporting continuous enrollment. It would more closely conform individual coverage to employer-sponsored and Medicare coverage by establishing the plan year 2018 open enrollment period as November 1 to December 15, 2017. The rulemaking would require those seeking to enroll outside this period to provide documented evidence of life events such as a change in family status or loss of employer-sponsored coverage. It also would make it easier for health plan issuers to collect lapsed premium payments from the prior year upon renewal, liberalizes the actuarial value definitions of all but silver plans as affords states and plan issuers greater leeway for determining provider network adequacy.

“Continued uncertainty around the future of the markets and concerns regarding the risk pools are two of the primary reasons issuer participation in some areas around the country has been limited,” HHS stated in the preamble to the proposed rule. “The proposed changes in this rule are intended to promote issuer participation in these markets and to address concerns raised by issuers, states, and consumers. We believe such changes would result in broader choices and more affordable coverage.”

While the rulemaking is intended to provide a degree of certainty to plan issuers, it can’t provide a full remedy. The lack of quick legislative progress on an ACA successor has increased the likelihood a federal court ruling finding executive branch funding of out of pocket cost subsidies for silver plans sold on the exchanges unconstitutional will take effect. Implementation of the ruling is temporarily on hold pending legislative action. With both inter and intra party legislative gridlock on health care reform, the Trump administration is far less likely to appeal the decision, allowing it to stand.

Immediate ACA repeal rhetoric mooted as Trump administration issues rulemaking to reinforce law’s individual market reforms

With only about six weeks left to enact any comprehensive replacement for the Patient Protection and Affordable Care Act, the Trump administration has sent a clear signal it won’t happen this year by introducing proposed rules today reinforcing the law’s individual insurance market reforms rather than a wholesale repeal of the omnibus statute. The Market Stabilization rulemaking is a confidence building measure aimed at calming nervous individual health plan issuers as they plan their market participation for 2018 amid worries over adverse selection.

The rulemaking comes just 10 days after President Trump said in a televised interview his administration’s comprehensive successor to the Affordable Care Act would take the rest of 2017 and likely into next year to finalize and move through Congress. That’s realistic considering the Affordable Care Act contains ten titles and runs more than 2,000 pages. It will take time to determine which to keep, which to amend and which to eliminate — and attract sufficient support from across the aisle for any overhaul.

The proposed rule would more closely conform individual coverage to employer-sponsored and Medicare coverage by establishing the plan year 2018 open enrollment period as November 1 to December 15, 2017. The rulemaking would require those seeking to enroll outside this period to provide documented evidence of life events such as a change in family status or loss of employer sponsored coverage. It also would make it easier for health plan issuers to collect lapsed premium payments upon renewal, liberalizes the actuarial value definitions of all but silver plans as well as network adequacy standards.

The proposed rule also indicates the federal government plans to revise the timeline for the certification of qualified health plans (QHPs) sold on state health benefit exchanges and rate review process for plan year 2018. “In light of the need for issuers to make modifications to their products and applications to accommodate the changes proposed in this rule, should they be finalized, we would issue separate guidance to update the QHP certification calendar and the rate review submission deadlines to give additional time for issuers to develop, and states to review, form and rate filings for the 2018 plan year that reflect these changes,” the Centers for Medicare & Medicaid Services (CMS) stated. Comment on the proposed rule is due March 7, 2017.

The issuance of the proposed rule renders moot campaign rhetoric leading up to the November 2016 elections to immediately repeal the Affordable Care Act and highlights the lack of a ready Republican plan to replace the law. The party’s opposition is less about genuine policy differences but more about ongoing hard feelings arising from the process (versus substance) of the Affordable Care Act’s enactment in early 2010 that essentially steamrolled then minority Republicans. With no clearly articulated GOP policy alternative, there cannot be a true policy debate.

Congress and the administration have incentive to back off the immediate repeal talk given the likelihood they’d face political blow back from payers and providers vexed by the enormous uncertainty of gutting the law without a clear replacement as well as constituents fearing their coverage might be disrupted. The political consequences of inchoate policy outweigh any immediate policymaking in Congress, particularly since unhappy voters could punish some members of Congress in the 2018 mid-term elections.

In addition to this proposed rule, expect Congress to make a rapid appropriation to stave off another issue threatening the stability of the individual market stemming from ongoing hard feelings over the law’s enactment its implementation by the Obama administration: House v. Burwell. An appropriation is necessary because a federal court ruled in that case funding for out of pocket cost sharing subsidies for low income households purchasing silver plans on state health benefit exchanges requires an appropriation by Congress and that the required appropriation is absent. The House of Representatives challenged the constitutionality of the Obama administration’s funding of the subsidies without an explicit appropriation by Congress. Implementation of the federal court ruling is on hold until at least this month as it’s not expected the Trump administration will pursue an appeal.

ACA provisions to restore individual health insurance market may have missed target

One of the major reforms of the individual health insurance market segment put in place by the Patient Protection and Affordable Care Act is pooling people into statewide risk pools to achieve greater spread of risk. In addition, the law reinforces the fundamental insurance principle of risk spreading by creating incentives for people to get into the pool. Those include advance tax credit premium and reduced cost sharing subsidies for individual plans offered on state health benefit exchanges and tax penalties applied to everyone not covered under some minimum form of coverage for hospital and physician care. Also, requiring health plans to accept all applicants for coverage regardless of medical history.

The goal is to restore what was a struggling market segment circling the drain of runaway adverse selection prior to the reforms going into effect in 2014. Few might have thought such a sweeping overhaul of the market wouldn’t restore it to a healthy, viable segment of the health insurance market. But as the reforms are about to enter their fourth year, it’s unclear whether they will achieve the goal of improved spread of risk. Health plan issuers complain the risk pool is imbalanced with too few young people and too many older and higher utilizing folks. They’ve openly expressed concern that’s driving adverse selection – the very problem the reforms intended to remedy.

Other factors that jeopardize the sustained actuarial viability of the individual market:

• Poor overall population health status and low health education levels (i.e. how to stay healthy, minimize need for medical care), generally increasing utilization and cost trend.
• Inadequate market forces exerting downward pressure on medical costs. The Affordable Care Act includes provisions to shift to value-based medical provider reimbursement reform for Medicare, but not the individual or small group market segments.
• A high level of churn as people’s life situations change, moving them into and out of the individual health insurance market.

Aetna CEO warns of adverse selection in individual health insurance market — what the ACA intended to cure

Healthier people will avoid buying Affordable Care Act health insurance plans as premiums climb, threatening the stability of the market, Aetna Inc. Chief Executive Officer Mark Bertolini said.

“As the rates rise, the healthier people pull out because the out-of-pocket costs aren’t worth it,” Bertolini said at Bloomberg’s The Year Ahead Summit in New York. “Young people can do the math. Gas for the car, beer on Fridays and Saturdays, health insurance.”

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“What happens is the population gets sicker and sicker and sicker and sicker,” Bertolini said. “The rates keep rising to try and catch it. It’s a fruitless chase, and ultimately you end up with a very bad pool of risk.”

Source: Aetna CEO Says Young People Pick Weekend Beer Over Obamacare

That “fruitless chase” as Bertolini terms it refers to adverse selection. In plain words, adverse selection means risk pooling and risk spreading — the essential functions of insurance — fundamentally break down. As time goes on, the pool shrinks and those left in it are increasingly adverse risks more inclined to need payments for losses. The demand for coverage dollars paid out of the risk pool outpaces premium dollars flowing in. Premiums must increase substantially to restore balance, driving away those the pool needs to remain viable.

If Bertolini’s characterization of the individual health insurance market segment holds true going forward, it would mean the Patient Protection and Affordable Care Act’s reforms have failed since they were specifically designed to restore an individual health insurance market trapped in the death spiral of adverse selection and rising premiums. The goal of the reforms is to restore the functionality and stability of the individual market risk pool by enhancing the spread of risk and ensuring members remain in the pool year round.

Too early to declare failure of individual health insurance market statewide risk pooling

One of the primary reforms of the individual health insurance market under the Patient Protection and Affordable Care Act was to create a single risk pool for entire states for individual health plans effective 2014 and later. The purpose was to rescue the individual market from a death spiral crisis of adverse selection that threatened its existence. To keep their individual plans solvent pre-2014, plan issuers resorted to playing a game of whack a mole with their plans. As losses mounted in existing plans, they would shut them down and place them into runoff mode by closing them off to new enrollees. Then they set up new plans containing new enrollees stringently screened via medical underwriting in an attempt to hold down claims costs.

The result was widespread market failure. Many consumers in the individual health insurance market couldn’t purchase coverage because they couldn’t meet the increasingly strict medical underwriting criteria. Those already in existing plans faced steep premium rate increases making coverage unaffordable.

There are widely differing views on whether the Affordable Care Act’s single statewide risk pooling mechanism is achieving adequate spread of risk to remedy the adverse selection that plagued the market pre-2014. Media coverage is sloppy. Accounts such as this one conflate the statewide risk pool with the health benefit exchange marketplace. They are not one and the same. Individual plans are sold both on and off the exchanges. There is no separate risk pool for those enrolling in the individual market through exchanges and another for those who do not.

Many media reports frequently report individual market enrollees are “sicker than expected.” Higher medical utilization as the 2014 reforms kicked in was in fact expected. The Affordable Care Act contained premium stabilization mechanisms that took into account the possibility of high utilization due to pent up demand from those who were previously without coverage either voluntarily or because they fell short of medical underwriting standards or couldn’t afford the premium increases as the market imploded.

A problematic issue with current mainstream media coverage is the tendency to jump to the conclusion that high anticipated medical utilization in the early years of the individual market reforms are indicative of its long term viability. As the standard investment exculpatory disclaimer goes, past performance doesn’t guarantee future results, good or poor. Ditto short term volatility.

Respected health care industry blogger Timothy Jost offers a sharply contrasting perspective to bearish sentiment that the statewide risk pooling mechanism is a failure. He cites a report issued this week by the Centers for Medicare and Medicaid Service indicating claims costs were flat year over year from 2014 to 2015 as evidence the statewide risk pools are functional. Higher premiums for 2017, he writes, are due to health plan issuers adjusting rates to comport with actual experience in 2014 and 2015 plan years instead of the educated guessing they employed for 2014, the first year of the major individual market reforms. Also being factored in is the end of the reinsurance component of the Affordable Care Act’s premium stabilization mechanisms starting in 2017.

“Waiting to get sick:” In depth research, more info needed

The biggest problem with the exchanges reflects a basic insurance rule: Insurers need healthy, premium-paying customers to balance claims they cover from the sick. Insurers have struggled in many markets because people who couldn’t get coverage previously due to a condition were among the first to sign up when the exchanges opened a few years ago. Healthy customers have been slower to enroll.Insurers say they’ve also been hurt by customers who appear to be waiting until they become sick to buy coverage. The companies blame liberal enforcement of the ACA’s special enrollment exceptions

Source: Insurer warnings cast doubt on ACA exchange future

This is a topic that cries out for in depth research and more information. The critical question that needs answering is how are those who apply for coverage outside of annual open enrollment able to time a serious illness or accident in order to plan when to buy coverage for it as this analysis prepared for America’s Health Insurance Plans and the Blue Cross Blue Shield Association suggests? While the analysis shows significantly higher medical utilization among those who enrolled in individual plans outside of open enrollment periods, it does not definitively demonstrate that these individuals waited until they needed medical care before enrolling. They could well simply be in poorer overall health compared to those enrolling in the open enrollment period and also have difficulty managing their household finances.

The urgency of the issue relative to the individual health insurance market reforms and the viability of the state exchanges as well as simple logic demand an answer. It makes no sense, for example, that an applicant for coverage could know in advance they were going to suffer a costly care event such as a heart attack or stroke, a bout of appendicitis or kidney stone and purchased coverage to take effect shortly before the event.

Two new CO-OP plans face dreaded adverse selection death spiral

Before individual health insurers were prohibited from medically underwriting applicants for coverage one year ago this month, many faced the dreaded adverse selection death spiral and may have gone under without the intervention of the Patient Protection and Affordable Care Act. That’s when a health insurer ends up with less healthy people in its risk pool and must raise premium rates and cost sharing to cover their higher medical utilization costs. Those higher premiums in turn make the plan less able to attract new members and premium dollars to cover those rising costs. Once the adverse selection death spiral becomes established, it’s very difficult to reverse course. It’s the health insurance equivalent of a cosmic black hole.

The Patient Protection and Affordable Care Act sought to mitigate the death spiral by outlawing medical underwriting in individual health insurance, subsidizing premiums for low and moderate income households, creating single state risk pools and establishing reinsurance and risk adjustment programs to mitigate adverse selection risk.

But for some new health plans in the post-ACA world, adverse selection can occur right out of the gate if they can’t coordinate premium rates and cost sharing with medical utilization. Exhibit A is a couple of CO-OP (Consumer Operated and Oriented Plan) health insurers established under Section 1322 of the Affordable Care Act. Since CO-OP plans are new players in those states in which they operate, they face the temptation to set premiums at low levels in order to gain market share against the established health plan issuers.

Two days before Christmas, Iowa insurance regulators went to court to place Iowa and Nebraska-licensed CoOportunity Health in rehabilitation, citing “extremely high healthcare utilization.” The week before, the federal government declined CoOportunity Health additional loan funding, resulting in CoOportunity being deemed in hazardous financial condition and placed under the supervision of the Iowa Insurance Division. (Links related to the rehabilitation order here.) (Update 1/24/15: Iowa insurance commissioner initiates insolvency proceedings against CoOportunity.)

Meanwhile in Minnesota, another CO-OP plan, PreferredOne, sharply increased premium rates and pulled out of that state’s health benefit exchange marketplace for plan year 2015 despite a bang up 2014 in which it captured a majority of the 55,000 new exchange enrollees, according to this Bloomberg Businessweek story. Same problem as in Iowa with CoOportunity Health: premiums set too low relative to medical utilization.

Affordability concerns over unsubsidized premiums in individual market

As this blog as previously noted, the Patient Protection and Affordable Care Act’s reform of the individual health insurance market has the potential to generate middle class political blowback among what I’ve dubbed the “401 percenters.” These are households earning more than 400 percent of the federal poverty level — too much to qualify for advance tax credit subsidies to defray premiums for plans offered in the state benefit exchange marketplace. For individuals, that’s an annual income higher than $45,960 and $62,040 for couples.

Two newspaper stories published this month spotlight the 401 percenters with surveys pointing to premium affordability problems, particularly among those in their 50s and 60s. A New York Times analysis found premiums for this age group reaching as high as 20 percent of household income. Even younger people may find coverage unaffordable. For a hypothetical 40-year-old couple, a USA Today analysis found in half of the counties in 34 states where the federal government operates the exchange, the lowest cost bronze plan falls short of the Affordable Care Act’s definition of affordable coverage. Affordable coverage is defined as premiums not exceeding eight percent of income. For older individuals, it’s more problematic. The USA Today analysis found more than one third of the counties don’t offer an affordable plan for any of the four tiers of coverage — bronze, silver, gold or platinum — for those 50 or older and ineligible for subsidies in the exchange marketplace. Affordability is critical to the success of the risk pooling mechanism since affordable premiums bring more covered lives into the pool. Conversely when premiums are unaffordable, the size of the pool is limited, sharply increasing the likelihood of adverse selection taking hold.

The Affordable Care Act allows those whose premiums would place them within the law’s definition of unaffordable coverage to apply for a certificate of exemption from the state exchanges on the basis that payment of such premiums would constitute a financial hardship. In addition to exempting these individuals from the Affordable Care Act’s requirement that all individuals have some form of medical coverage or pay a penalty, the certification entitles them to purchase lower cost “catastrophic” coverage on or off the exchange marketplace. The income of each member of the household must meet the eight percent affordability threshold.

While catastrophic plans offer lower premiums, the tradeoff is high annual deductibles: $6,250 for individuals and $12,500 for families. At least three primary care visits are covered, however. For some households, a higher cost bronze plan that’s Health Savings Account (HSA) compatible may be a better value. Like catastrophic plans, they also come with high deductibles. Deductibles can be paid with pre-tax HSA dollars (but not the premiums). For the self-employed, HSA-compatible bronze plan premiums may be tax deductible. Those in the “401 percenter” cohort would be well advised to consult with their tax advisors for definitive guidance.