High premiums for catastrophic coverage violate consumer expectations

Levine has a Bronze plan, which has a $6,800 deductible, up from $6,500 last year. This year, Anthem has ended out-of-network coverage in its Bronze plans, turning them into EPOs, throughout much of the state.

That means Levine will be paying $517 month for a policy he says he may not even use.

“It has turned into a catastrophic policy,” he said, referring to plans intended to only cover large unexpected medical bills.

Source: As Obamacare enrollment nears, some Californians see big hikes in health premiums

This goes to the heart of the low value perception of bronze-rated individual health plans. When people are paying their own costs out of pocket for routine and minor medical care, they reasonably expect their premiums to be lower. Paying more than $500 a month for catastrophic coverage violently upends that expectation.

Debate over future of ACA shifts to adequacy and affordability of coverage

Henry J. Aaron of the Brookings Institution has boiled down the future policy debate around the Patient Protection and Affordable Care Act. Now that the law is firmly in place – at least for the near term – and is meeting a primary policy goal of reducing the number of medically uninsured Americans, the next debate will be over the adequacy and affordability of coverage. Specifically, whether it’s too much, too little or just about right.

Conservatives, Aaron writes, prefer increasing the financial exposure of patients when they buy insurance and when they use care. By comparison, those of a more liberal bent prefer no insurance whatsoever to protect against financial exposure to medical bills but rather Canadian-style “single payer” where a government monopsony pays the nation’s collective health care bill.

Likely to fuel the debate are reports like this recent Kaiser Health News item. It reported that even with advance tax credit premium subsidies for coverage sold on state health benefit exchanges, premiums alone for some moderate income households approach nearly a tenth of their gross incomes and can really add up when out of pocket costs are included:

For instance, families of three earning $73,000 have to pay nearly $7,000 on premiums despite also receiving subsidies They still face deductibles, which this year averaged around $2,500 for the most common types of insurance plans, known as silver tiers. If a family required extensive medical care and reached the maximum they would be held responsible for—$13,200 this year—their total health care-related bills, including premiums, would exceed $20,000, or 28 percent of their gross incomes. “Even some of those who are eligible for financial assistance are still finding the coverage not to be affordable for them,” said Linda Blumberg, a senior fellow at the Urban Institute, Washington think tank.

All individual and small group plans that originated after the enactment of the ACA now basically operate as major medical plans of the pre-HMO days, minus the lifetime limits. They do so by virtue of calendar year maximum out of pocket limits: $6,600 for self-only coverage $13,200 for family coverage for 2015 plans (rising to $6,850 for self-only coverage $13,700 for family coverage for 2016). The annual premium is partly to cover catastrophic risk above these amounts. The amount of the premium paid by individuals and families depends on how much risk short of the calendar year OOP limits they want to assume. If they want less exposure to co-insurance, deductibles and co-pays, the premium is higher. If they’re willing to assume more, the premium is lower and lowest for “bronze” rated plans that cover 60 percent of expected annual medical utilization as well as pure catastrophic plans available to individuals under age 30 or households that would have to spend more than eight percent of their incomes to buy the lowest cost bronze plan offered in their area.

Herein is a primary element of the near term debate over the ACA: whether it provides affordable coverage regardless of whether households assume a high deductible and pay more out of pocket for non-catastrophic care or pay a higher premium in order to pay less out of pocket for these services. In a still fraught economy that has placed particular financial stress on moderate income households falling somewhat below and above the 400 percent of federal poverty cut off for advance tax credit subsidies for coverage sold on state health benefit exchanges – and those that have not or cannot easily afford to set aside money in health savings accounts to defray out of pocket costs — these costs and tradeoffs come into sharp focus.

AHIP’s catastrophic plan proposal needs rethinking

America’s Health Insurance Plans (AHIP) has proposed the creation of a new Patient Protection and Affordable Care Act-compliant catastrophic individual health plan. (Link here) According to AHIP:

The new catastrophic plan would offer an AV (actuarial value) just below the current minimum requirement (covering an average of 60 percent of medical utilization costs) allowing for lower premiums, but would still include coverage of the law’s mandated essential health benefits, have no annual or lifetime benefit limits, and cover all preventive health services with zero cost-sharing for consumers. This would allow individuals and families eligible for premium subsidies to use that financial assistance to purchase the new plan, an option currently unavailable to consumers purchasing the ACA catastrophic plan.

Since bronze plans and catastrophic plans are quite close in actuarial value, have the actuaries found any potential for meaningfully lower premiums for these proposed catastrophic plans? In other words, is the medical services utilization of a population covered at 57 percent AV, for example, significantly lower than one covered at 60 percent such that it can produce meaningfully lower premiums? Especially given that the Affordable Care Act limits annual maximum out of pocket costs for in-network providers?

Not likely. But the apparent goal isn’t so much to reduce premium rates but rather to make catastrophic plans eligible to become qualified health plans (QHPs) sold in the state health benefit exchange marketplace and thereby eligible for advance premium tax credit subsidies. That has raised criticisms from some quarters that proposed catastrophic plans would not be beneficial to lower income individuals and families since the plans’ high cost sharing (deductibles, co-insurance and co-pays) would discourage their getting necessary care. But lower income people and especially those who utilize a lot of catastrophic (i.e. hospital inpatient) care aren’t likely to choose catastrophic plans and instead opt for plans with at least 70 percent AV (this level includes additional cost sharing subsidies for lower income earners).

If the goal however is to bring more relatively healthy people into state risk pools who are comfortable covering their own out of pocket costs for non-catastrophic care and using tax deductible health savings accounts to cover them, a more appealing catastrophic plan would be one that provides lower cost sharing for hospitalizations and other unexpected high cost medical events. Even with annual out of pocket cost limits of $6,350 for an individual plan and $12,700 for a family plan, a hospitalization can result in large medical bills, particularly for out of network hospitals used in an emergency situation that can double those limits.

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.

Will individuals ineligible for exchange premium subsidies turn to catastrophic plans?

Less than half (48 percent) of Americans who currently buy health coverage for themselves and their families in the individual market will qualify for advance tax credits to subsidize coverage purchased in the state health benefit exchange marketplace, according to a Kaiser Family Foundation paper issued this month. (That figure does not include those who qualify for Medicaid coverage in states that elect to expand coverage for households earning up to 133 percent of the federal poverty level.) The exchange advance tax credit subsidy is available in six income tranches for those with incomes between 100 and 400 percent of the federal poverty level. Those earning more than 400 percent of the federal poverty level ($45,960 for singles; $92,200 for a family of four) are ineligible for the subsidies.

A big question as the exchanges prepare to open for 2014 enrollment this October is to what extent this cohort will find their premiums exceed eight percent of their incomes. The Affordable Care Act and implementing regulations regard premiums at this level as unaffordable and exempt those meeting this test from the law’s individual responsibility requirement and associated penalties for not having coverage. They allow these individuals to obtain a certificate of exemption from state exchanges that entitles them to purchase lower cost “catastrophic” coverage on or off the exchange marketplace. (Pending California legislation, SB 639, would restrict off-exchange sales to plan issuers offering catastrophic plans through the exchange marketplace). Catastrophic plans must include the 10 essential benefits required for all individual plans beginning in plan year 2014 as well as at least three primary care visits – with a flat deductible of $6,250 for individuals and $12,500 for families.

Federal rules (45 CFR § 156.155(c)) specify that for family catastrophic coverage, each enrolled family member must meet the eight percent income to premium affordability exemption or be under age 30. Lower premiums for catastrophic plans would enable these individuals and families to avoid going without coverage in case of a major, unexpected accident or illness as well as potentially facing very costly standard hospital “rack rate” charges for those without insurance.

Broad adoption of consumer directed heath plans could save $57 billion annually, study concludes

The discussion of how Americans and their employers pay for increasingly costly health care coverage will likely be stoked by this recent study appearing in the journal Health Affairs that concludes consumer directed health plans — high deductible, catastrophic coverage combined with Health Savings Accounts (HSAs) — could achieve $57.1 billion savings annually if half of non-elderly U.S. population had them.  That’s because they operate as true insurance plans, covering medical costs for unexpected, catastrophic events with people paying out of their own pocket for routine care and prescriptions.  The study predicts the potential savings of such together with additional incentives in the Patient Protection and Affordable Care Act will encourage their growth.

Widespread adoption of this scheme would return the nation to something akin to the “major medical” coverage model of health insurance that existed in the post World War II period until pre-paid plans such as health maintenance organizations (HMOs) became prevalent starting in the 1970s and 1980s.  Their growth created an expectation of no or minimal out of pocket costs for routine care and preventative screenings, leading the study’s authors to caution those in consumer directed health plans may forgo them, potentially leading to higher health care costs over the long term.

The authors also suggest that wider adoption of consumer directed health plans could be disruptive to the traditional health insurance and HMO markets and promote adverse selection in these product lines since healthier people may opt for consumer directed plans since their premiums tend to be lower.  A major challenge facing health insurers and plans, however, is setting premiums for consumer directed plans low enough to jibe with consumer expectations of lower, more affordable premiums in exchange for taking on first dollar exposure up to a high deductible limit.  Older albeit generally healthy people in the individual market have experienced sticker shock at rates for high deductible plans, deterring them from buying the coverage even though the premium rate reflects the actuarial risk of a catastrophic medical event.

PCIP serving as catastrophic market of last resort

The interim high risk pool created as part of the Patient Protection and Affordable Care Act (PPACA) to provide a market of last resort for people who buy their own health insurance but who can’t meet medical underwriting standards has become a catastrophic risk pool serving people with very high cost conditions.

According to a federal government report issued this week, those covered by the Pre-Existing Condition Insurance Plan (PCIP) are averaging annual costs more than double the $13,026 actuaries estimated in November 2010, The Washington Post reports.

A review of the report shows nearly 80 percent of claims costs are attributable to five medical conditions: cancer, cardiovascular disease, rehabilitative care and aftercare, and degenerative joint diseases.  The higher than expected costs indicate that after getting off to a slow start in 2010, the PCIP could spend all of the $5 billion the PPACA appropriated to it by 2014 when insurers must accept all applicants regardless of medical condition or history.  However, several factors are likely to moderate future enrollments.  They include high premiums, the requirement that applicants be medically uninsured for at least six months as well as pre-existing state run high risk pools already serving those deemed medically uninsurable by private insurers and health plans.

U.S. budget constraints could provide additional boost for catastrophic medical coverage

The increased use of catastrophic health insurance coverage could get a boost from the U.S. government’s fiscal woes as it looks to pare down deficit spending including potentially eliminating the tax break employers get for employee health insurance costs.  High deductible catastrophic coverage is increasingly a mainstay among the self-employed in the individual health insurance market and is now moving into employer paid insurance.  It’s already becoming prevalent among smaller employers with 100 or fewer employees.

Catastrophic coverage works similarly to what was known decades ago as “major medical.”  As the name suggests, it covers only high cost care such as hospitalizations and surgeries.  Routine doctor visits are paid out of patients’ pockets.

“The idea isn’t to just raise revenue, economists say, but finally to turn Americans into frugal health care consumers by having them face the full costs of their medical decisions,” an Associated Press story today notes. Health care policy wonks have long observed that as long as people’s medical care is largely paid by others — employers, health care service plans and insurers — there is little incentive for patients to be parsimonious when using medical services.

This logic would work if the market for health services functioned as a truly competitive market.  Inasmuch as there are many sellers and buyers of health services, the market is nominally a competitive one. But it doesn’t behave as a competitive market.  In fact, just the opposite. People tend to remain loyal to their doctors for routine care.  And for emergency or non-routine care, the motive is to get treatment quickly and not shop around for treatment options and prices.

Bottom line, the rise in catastrophic coverage isn’t emerging as a remedy to make the health care market more competitive in the hope doing will will drive down prices and bend the cost curve.  Rather, it reflects the fact that health care costs have reached a tipping point such that it’s no longer feasible to cover most routine services.