A Blue Shield of California executive is urging California lawmakers in an op-ed article in today’s Sacramento Bee to close a loophole sanctioned by federal regulations that could front load the exchange marketplace with high cost individuals and families. That could leave plans participating in California’s exchange marketplace, Covered California, carrying an inequitable cost burden in the first year of its operation, asserts Janet Widmann, the health insurer’s executive vice president of markets. It would do so by allowing plans to elect to continue to operate into 2014 under current rules that allow plans to medically underwrite applicants and reject those with potentially costly medical conditions. Unless the loophole is closed, Widmann warns, all health plan issuers would be tempted to exploit it since they could still medically underwrite and select applicants for plans sold off the exchange marketplace so as to not initially end up with a disproportionate share of high cost insureds. Widmann explains:
Since these loophole policies will enroll only those who are healthy enough to obtain coverage under the current discriminatory system, policies that meet the requirements of the new law will be left to cover a disproportionate number of less healthy people. As a result, premiums for coverage offered through the insurance exchange will be significantly higher. Even insurers that have supported reform and want to see the exchange succeed will be pressured to sell the loophole policies to avoid losing healthy customers to competitors.
Plans sold in the Covered California marketplace would be unable to exploit the loophole under policy adopted by Covered California last week requiring qualified health plans with which it contracts to terminate plans they currently offer that are not compliant with the Affordable Care Act as of December 31, 2013. The “level playing field” provision is at section 3.04(b) of the Covered California QHP Model Contract:
(b) Contractor agrees that, to the extent not already required to do so by law, effective no later than December 31, 2013, it shall terminate or arrange for the termination of all of its non-grandfathered individual health insurance plan contracts or policies which are not compliant with the applicable provisions of the Affordable Care Act. Contractor agrees to promote ways to offer, market and sell or otherwise transition its current members into plans or policies which meet the applicable Affordable Care Act requirements. This obligation applies to all non-grandfathered individual insurance products in force or for sale by Contractor whether or not the individuals covered by such products are eligible for subsidies in the Exchange. All terminations made pursuant to this section shall be in accord with cancellation and nonrenewal provisions and notice requirements in California Health and Safety Code Section 1365, California Insurance Code Sections 10273.4, 10273.6 and 10713, and relevant state regulations and guidance.
Last week, California enacted two bills, ABX1-2 and SBX1-2, establishing 2014 market rules for the individual and small group markets and conforming state law to Affordable Care Act provisions. The measures did not include a provision that would close the loophole. Widmann suggests legislation mandating all non-grandfathered health plans (those not in effect when the Affordable Care Act was enacted in March 2010) play under the 2014 market rules barring medical underwriting of applicants. That would require new special session or urgency legislation that would take effect before the end of 2013.
Changes in the individual market, adverse selection to have largest impact on 2014 premiums, Milliman projects
One month after it produced a projection of factors affecting 2014 premiums in California’s individual health insurance market segment for the Golden State’s health benefits exchange, Covered California, the actuarial consulting firm Milliman has issued a similar study with a national focus. Like its analysis of the California market, Milliman’s review examined the impact of new coverage requirements under the Patient Protection and Affordable Care Act as well as individuals opting to “buy up” to plans with richer benefits, premium and benefit subsidies and the underlying upward trend in the cost of medical treatment. It was commissioned by America’s Health Insurance Plans.
Milliman’s national study took into account additional factors including new taxes and fees on health plan issuers and premium stabilization programs including a transitional reinsurance program to protect plans from unexpectedly high care costs. It concludes “average individual market pre-subsidy premiums are anticipated to increase significantly from what standard rates are today.” It adds advance tax credit premium subsidies for coverage purchased through state benefit exchanges for those earning 400 percent or lower of the federal poverty level will produce “significant reductions from current premium levels.”
The Milliman study projects that Affordable Care Act changes in the individual risk pool and adverse selection — largely due to the law’s ban on medical underwriting of individuals looking to purchase or upgrade coverage — will have the largest impact on premiums. Those factors including the potential for younger, healthier individuals to remain in plans issued prior to 2014 and sicker people opting for 2014 plans with more extensive coverage could increase premiums by 20 to 45 percent, according to Milliman.
The study raises a red flag over the law’s restriction on the use of age as a rating factor for older individuals, predicting it will boost premiums for younger people and thus potentially drive adverse selection if they opt to forgo coverage until they need it — notwithstanding the Affordable Care Act’s tax penalties for not having some form of health coverage. “For the individual market risk pool to remain a stable market in 2014 and beyond, it is vital that young and healthy individuals enter and remain in the insurance market in addition to individuals with an immediate need for healthcare services,” the study concludes.
California’s individual health insurance marketplace is shaping as a bifurcated one for 2014 and beyond based on household income and whether coverage is purchased through the state’s health benefit exchange marketplace, Covered California, or outside of it.
California households earning 400 percent or less of federal poverty level will be eligible for advance tax credit subsidies that can be applied toward Covered California plan premiums. While those with incomes above this level ($45,960 for singles; $92,200 for a family of four) can purchase unsubsidized coverage thorough state exchanges, health plans appear to be preparing to offer plans outside the exchange aimed at households earning above 400 percent of federal poverty. Without directly referring to the Covered California plans, Charles Bacchi, executive VP of the California Association of Health Plans, said there may be more variation among these plan products than Covered California plans, which are based on standard benefit designs for each of the metal tier plan values (bronze, silver, gold and platinum). Bacchi, who spoke on a panel of speakers at the annual State of Health Care Conference held earlier this week in Sacramento, added there may be “certain advantages” to plans purchased outside of Covered California but didn’t elaborate.
Bacchi’s comments came the same day Covered California Executive Director Peter V. Lee reported at the organization’s board meeting that plan issuers were invited to submit alternative benefit designs and those alternative plans differed significantly from the standard plan designs Covered California adopted in February, 2013. Plan issuers and Covered California continue to negotiate to the terms of the contract that will govern qualified health plans sold in the Covered California marketplace for coverage effective in 2014. The Covered California board has scheduled a special meeting in Sacramento for May 7 to discuss the contract.
A 2011 paper by The Commonwealth Fund warned of the possibility of higher cost individuals concentrating in the exchange market, noting that exchanges could face adverse selection if predominantly high-risk individuals and groups enroll in the exchange while younger, healthier people and groups purchase coverage in the individual or small-group markets outside of it:
This type of market-level adverse selection would primarily stem from the existence of different rules for health plans inside and outside of the exchange. If non-exchange plans are permitted greater flexibility around benefit design and rate setting, those plans could offer lower prices to attract lower-risk individuals.
While the Affordable Care Act consolidates individuals and small employers into a single state risk pool, thus barring plan issuers from segmenting their exchange population risk, adverse selection against the exchange marketplace could reduce plan issuers’ interest in exchange participation despite tax subsidies for individuals and potentially jeopardize the market’s long term viability.
Health benefit exchanges: A market intervention mechanism aimed at preserving individual, small group health coverage
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.
The death spiral of California’s individual health insurance market appears to be speeding up. The market segment — which covers about eight percent of working age Californians — has been plagued by adverse selection as relatively healthy people drop coverage. That in turn forces managed care plans and insurers to boost premiums to make up for the lost dollars when healthier people pull out of the pool and to cover the costs incurred by the less healthy who feel they must keep their coverage in place. Exacerbating the problem, payers attempt to staunch claims with strict medical underwriting guidelines that reject relatively healthy individuals whose premiums could bolster the solvency of the pool. As premiums keep rising, even more people question the value of paying the higher rates. Or can’t afford them even if they want coverage as monthly premiums equal the size of modest home mortgage payments. As the state’s individual market fails, self-employment is becoming synonymous with being medically self-insured.
Take for example, the Libresco family of San Rafael, California, mentioned in this recent Los Angeles Times story on the latest round of rate increases by the state’s largest individual market payer, Anthem Blue Cross:
Last month, Anthem notified Josh Libresco, a 57-year-old marketing researcher in San Rafael, that his family’s monthly premium would increase 29% to $1,636, effective May 1. This is after Anthem raised the deductible for the family of four to $5,900 from $5,000 last fall as well as increasing co-payments for doctor visits and prescription drugs.
“I don’t know how people can afford these increases every year. We are about at our limit,” Libresco said. “Whether it’s 20% or 29%, it’s still an enormous number.”
It’s not hard to see why this family might be inclined to drop its coverage. Especially when they are essentially getting only catastrophic coverage but not at a price they would expect to pay for it.
The Los Angeles Times reports on 2012 rate increases being taken by health plans and insurers in the Golden State’s individual market. According to The Times, premiums are headed up on average between 8 and 14 percent. The newspaper reported that outpaces the cost of medical care, citing federal government data showing the cost of goods and services associated with medical care increased by 3.6 percent over the past 12 months.
However, payers cite claims experience — and not underlying medical costs— to justify the rate hikes. That’s consistent with the adverse selection that is gripping the state’s individual market. Premiums increase to cover fewer and sicker people who keep their coverage, shrinking the pool as healthier people refuse to pay the higher premiums required to cover the claims costs of the former. The accelerating adverse selection calls into question whether the state will have a viable individual health insurance marketplace to participate in the California Health Benefit Exchange when it opens for business in January 2014.