An underlying economic principle of the health benefit exchange marketplace that kicks off this fall with open enrollment for 2014 is demand aggregation in the individual health insurance market. Individuals and families who would otherwise have no negotiating power with health plan issuers will be able to pool their purchasing power via the government-chartered purchasing mechanism of the state exchanges. That power will be strongest in those states – California, Oregon, Massachusetts, New York, Oregon, Rhode Island and Vermont according to an April 1 Kaiser Family Foundation compilation – that have opted to be “active purchaser” exchanges. Those exchanges will act as gatekeepers, using an actively managed competitive selection process to determine which plans will be offered on their exchanges — and which will not.
As voluntary markets, neither health plan issuers nor individuals are required to transact individual coverage through the state exchanges. Therefore to help concentrate the purchasing power of individuals in the exchange marketplace, the Patient Protection and Affordable Care Act provides for subsidies in the form of advance tax credits applied toward plan premiums to create incentive for individuals and families not covered by employer or government-sponsored plans to purchase coverage through the exchanges.
Those subsidies are not offered for individual coverage sold outside state exchanges. And as I recently blogged, the subsidies are unavailable to those earning more than 400 percent of the federal poverty level. Those individuals and families would have little incentive to purchase coverage in the exchanges, thus reducing the exchanges’ potential purchasing power relative to health plan issuers and by extension, their ability to bargain with plans for lower premium rates.
Going forward, it will be interesting to see how this policy manifests in states with active purchaser exchanges. Will it lead to a bifurcated individual market where plan issuers offer products exclusively outside the exchanges aimed at a higher income demographic such as high deductible, health savings account compatible plans? Or plans that bundle pre-paid direct primary care with insurance to cover high cost care? (Such plans would likely also have sold in the exchanges since the Affordable Care Act specifically recognizes them as qualified health plans eligible for sale through the exchanges.)
We are the 401%: Middle class households ineligible for exchange subsidies could reignite health reform
A little more than three years ago, steep premium increases in California’s individual market sparked outrage from Sacramento to Washington, providing a political tipping point for the enactment of the then-moribund Patient Protection and Affordable Care Act (PPACA). This fall and into 2014, those without government or employer-sponsored health coverage who earn more than 400 percent of the federal poverty level (FPL) ($45,960 for singles; $92,200 for a family of four) may find themselves outraged yet again by sharp double digit premium increases. Under the PPACA, those earning in excess of 400 percent of FPL are ineligible for income tax subsidies available for qualified health plans purchased through state health benefit exchanges. They will bear the full amount of higher premiums on their own.
Projections of the impact of the PPACA individual market reforms issued this week by the Society of Actuaries (on the medical cost impact of those newly insured under the law) and the actuarial consulting firm Milliman (on premiums in California) suggest premiums for plan year 2014 will rise significantly for these relatively higher income middle class households. The Society of Actuaries estimates the PPACA individual market reforms will drive up claims costs by an average of 32 percent nationally by 2017 and by double digits in as many as 43 states. The Milliman study commissioned by the California exchange, Covered California, estimates those currently insured with incomes exceeding 400 percent of FPL purchasing the lowest cost “bronze” rated plan covering 60 percent of expected costs can expect a 30.1 percent premium hike for 2014. “Currently insured individuals with incomes greater than 400% of FPL will experience the largest increases,” the Milliman study notes.
Those in this income range likely to be hit with the biggest increases are middle class people in their 50s and 60s – the large Baby Boomer demographic not yet Medicare eligible and not covered by employer-sponsored plans. A major potential implication of higher premiums on top of the already relatively high rates paid by this age group (new age rating rules under the PPACA will provide some relief) is many of them may find even bronze-rated coverage unaffordable and go uninsured, contrary to the policy goal of the PPACA to increase affordability and access to coverage.
If 2014 rate increases for 401+ percent FPL households boost the price of the cheapest plans too high, tax penalties built into the law for those without public or private coverage won’t provide incentive for these individuals to purchase coverage. The PPACA’s individual mandate expressly exempts those who have to spend more than eight percent of their incomes to purchase the cheapest bronze plan offered in their geographic rating region. The law also provides for a financial hardship exemption.
Because of the sheer size of the Boomer demographic and Boomers’ willingness to seek political redress of their grievances, if the premium increases for the 401 percenters predicted indirectly by the Society of Actuaries and directly by Milliman materialize, it could create impetus for further reforms in 2014.
Effective March 1, 2013, employers must notify new and existing employees in writing about their state’s health benefit exchange and advance premium tax credits available through the exchange to help them purchase individual coverage.
The requirement is contained in Section 218b of the federal Fair Labor Standards Act of 1938. The U.S. Department of Labor (DOL) is charged with issuing regulations providing more specific guidance on the notice but has not yet done so. Section 218b requires the following information be included in the notice:
- A description of the services provided by the exchange and the manner in which the employee may contact the exchange to request assistance.
- If an employer provides employer-sponsored health coverage that does not provide minimum actuarial value (60 percent of expected costs for benefits provided under the plan), the employee may be eligible for a premium tax credit and reduced cost sharing (deductibles, copayments, and coinsurance) if the employee purchases individual coverage through the exchange.
- If an employee purchases a qualified health plan through the exchange, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for federal income tax purposes.
Update: On January 24, DOL issued guidance stating employers are not required to comply with the employee notification requirement until the rules are issued.
In the meantime, DOL said it is considering “model, generic language” among alternative methods for employers to comply with the notice requirement, adding that forthcoming guidance will provide employers flexibility and adequate time to comply with the requirement. DOL added it expects the timing for distribution of notices will be the late summer or fall of 2013 to coordinate with the exchange open enrollment period beginning October 1, 2013.
Trummel, grappling with his second increase of the year, isn’t holding his breath. But he’s hoping that the new state-run marketplace where people will be able to buy health insurance under the federal health law in 2014 will yield an option that offers him some relief until he qualifies for Medicare.
“If I could get into that (the marketplace), I might have only one more year of this agony with Anthem Blue Cross,” Trummel said. “I’m just holding on until either the health law or Medicare will kick in.”
Health reform law will boost entrepreneurship and lessen Americans’ dependence on employment and employer sponsored health coverage
A major and not yet fully appreciated benefit of the Patient Protection and Affordable Care Act is it will boost entrepreneurship by giving would be entrepreneurs greater confidence to strike out on their own. At the same time, it will reduce Americans’ reliance on employment for both income and health coverage. Anything that will bolster the confidence of those looking to start new enterprises or work for themselves is a great thing as the economy crawls out of a deep and long recession.
The health reform law does so by two key mechanisms beginning January 1, 2014: 1) Barring health plans from using an individual’s medical history in deciding who to accept and the amount of their premiums and; 2) Creating in each state health benefit exchanges, providing budding entrepreneurs and self employeds an online marketplace of high quality health plans. Advance tax credits make coverage affordable by limiting how much they’ll have to pay for coverage until their incomes exceed 400 percent of the federal poverty level.
Being able to buy affordable coverage on their own through health benefit exchanges without having to rely on an employer sponsored health plan also correlates nicely with the growth of self-employed “free agents” such as Kansas City’s Mike Farmer, whose one-person company was profiled in this New York Times article. The Times cites Census Bureau data showing the number of nonemployer businesses like Farmer’s grew by 33.8 percent from 2000 to 2010. “I think we’re all headed toward an agent economy, where everyone becomes an agent or a service provider instead of an employee at some big corporation,” Farmer, whose mobile search app, Leap2, now has 10,000 users, told the newspaper. “That’s just how the world is evolving. It’s like telecommuting, but it’s taken to the level of telecompanies.”
Farmer’s reference to “telecompanies” has another name: virtual companies. Regardless of the terminology, Farmer’s onto something. Working for a large employer that requires a daily commute to an office building is increasingly becoming obsolete, courtesy of that great disrupter: the Internet. It makes self-employment far easier than it was just five years ago and reduces reliance on traditional employment for both income and health coverage. From a health perspective, that’s a virtuous trend, given indications that self-employed people are happier and healthier than traditional workers.
To the extent the health reform law makes it easier for Americans to earn their own incomes and not have to rely on an employer for health coverage and access to health care, it could well also be reinforcing healthier lifestyles over the toxic, sedentary commuter lifestyle that typically accompanies traditional employment and can lead to costly chronic health conditions. That’s a huge health reform in and of itself.
In May 2011, federal Department of Health and Human Services (HHS) promulgated a final rule implementing Section 2794 of the Public Health Services Act requiring HHS to establish an annual rate review process to identify “unreasonable” health insurance rate increases. What’s considered reasonable (and not)? According to HHS, here’s how the regulation, found at 45 Code of Federal Regulations (CFR) Part 154 works:
Starting on September 1, 2011, health insurance companies in the small group and individual markets must submit information on all rate increases with an annual impact of 10 percent or greater for their non-grandfathered plans. Insurance companies cannot raise premium rates by 10 percent or more without first justifying the increase to a Rate Review Program. Insurers proposing increases of at or above 10 percent must submit for review clear information indicating the factors contributing to the proposed increases. HHS or Effective Rate Review Programs (see insert below) review insurers’ projections, data, and assumptions to assess whether premium increases are based on sound, up-to-date information on health care costs and use of covered services. Proposed rate increases may be determined to be unreasonable if for example, the proposed increase is based on faulty assumptions or unsubstantiated trends or if the rate increase charges different prices to people who pose similar cost risks to the insurer. Information collected through this program, including explanations of the final determination, is made available to the public on HealthCare.gov.
The regulation is enforced jointly by HHS and state regulators or HHS alone if states opt not to participate. HHS announced today that as a result of the review process used under the rule, one half of 2011 insurer rate increases resulted in consumers receiving either a lower rate increase than requested or no increase at all. In addition, HHS said 12 percent of the rate increases were withdrawn prior to review “in part because some insurers were not willing to have their proposed rate increase labeled as ‘unreasonable.’” According to HHS, states made the call on reasonability in 69 percent of the proposed increases and HHS reviewed the remaining 31 percent. HHS’s 2012 Annual Rate Review Report along with estimated savings for policyholders in the individual and small group markets can be viewed here.
In addition, the Section 1311(e)(2) of Part II the Patient Protection and Affordable Care Act (PPACA) gives state health benefit exchanges a degree of leverage over premium rates for health plans sold on the exchanges. It mandates exchanges to require health plans seeking certification for “listing” on the exchanges as qualified health plans to submit a justification for any premium increase prior to implementation and to prominently post the justification on exchange websites. The Act also allows exchanges to take into account insurer rate reviews under the abovementioned section 2794 of the Public Health Service Act when determining whether to allow the plans to be offered on an exchange as well as “any excess of premium growth outside the Exchange as compared to the rate of such growth inside the Exchange, including information reported by the states.”
Meanwhile, in November 2014 California voters will decide whether individual and small group health insurance rates should be regulated under a prior approval scheme like that created by 1988’s Proposition 103 for property/casualty insurance rather than the current retrospective rate review scheme. The initiative statute can be viewed by clicking here.