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Health insurer worried that loophole could lead to adverse selection against exchange

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.

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California could opt to offer Medicaid “bridge plans” on exchange rather than expand Medicaid eligibility

Despite the assumption that California would opt to expand Medicaid eligibility to households with incomes between 100 and 133 percent of federal poverty guidelines as permitted under the Patient Protection and Affordable Care Act, the policy question remains open in the Golden State.  A number of sticking points remain as detailed in this story in today’s Los Angeles Times.  Chief among them is Gov. Jerry Brown’s expectation that since counties would benefit from the expansion through a reduced burden of caring for indigents not currently eligible for Medi-Cal as it’s called in California, they should help Sacramento shoulder the state’s future federal Medicaid cost share.

According to The Times, the Brown administration is also concerned that allowing people to enroll in Medi-Cal online could encourage fraud.  California is rushing to ready an online enrollment system, the California Eligibility, Enrollment and Retention System (CALHEERS), to implement the Affordable Care Act’s mandate that individuals and families be offered enrollment for both government insurance programs like Medi-Cal and private coverage offered through its health benefit exchange thorough a single, streamlined application process.  The unresolved policy question of whether to expand Medi-Cal eligibility poses significant potential to complicate an already complex process to prepare the online system and to provide enrollees what state officials expect to be a customer-friendly “no wrong door” experience.  Problems integrating the state’s legacy Medi-Cal eligibility computer software with CALHEERs have already delayed plans to have it functional by the October 1 pre-enrollment date for 2014 coverage until January 1, 2014.

While the Brown administration’s concerns over expanding eligibility for Medi-Cal have stalled legislation that would do so, the administration is sponsoring pending legislation, SBX1-3, that would authorize commercial Medicaid managed care “bridge plans” per federal guidance issued in December, 2012 for those earning up to 200 percent of federal poverty.  The plans would be available through the state’s exchange marketplace, Covered California.

Since the Affordable Care Act deems households with incomes of at least 100 percent of federal poverty eligible to buy coverage through the exchange marketplace, the bridge plan option provides policymakers an alternative to expanding Medi-Cal eligibility to 133 percent of federal poverty.  Some states that have declined to expand Medicaid eligibility including Tennessee, Arkansas and Oklahoma are negotiating with the federal Center for Medicare and Medicaid Services to obtain waivers to allow their Medicaid eligibles to purchase commercial coverage on their exchanges. Absent a near term political agreement to expand Medi-Cal eligibility, California could soon be among them.

If the trend continues, it could lead to a bifurcated Medicaid system: basic, legacy Medicaid for those households with incomes below 100 percent of federal poverty guidelines and a “super Medicaid” system of federally subsidized coverage for households with incomes above the poverty line that wouldn’t otherwise qualify for Medicaid.  It would also have fiscal implications for the states electing to “expand” Medicaid eligibility via Medicaid bridge plans sold on their health benefit exchange marketplaces since it would reduce their future federal Medicaid cost share burden, shifting subsidization fully to the federal government in the form of advance income tax credits.

California appears headed toward bifurcated individual health insurance market in 2014

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.

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