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.
Barnes’ proposal would go beyond that, requiring that administrative costs for insurance plans on the individual and small group markets also be limited to no more than 15 percent of the money collected in premiums.
The proposal was intended to lower premiums at a time when many people are concerned about how much insurance will cost beginning next year, when many provisions of Obamacare take effect.
“I’m deeply concerned that the success of the Affordable Care Act nationally and in Connecticut will be undermined if there is rate shock that so many people have called on,” Barnes said.
This proposal invokes the right of states under Section 2718(b)(1)(a)(ii) of the Patient Protection and Affordable Care Act to set a minimum medical loss ratio (MLR) for payers above the 80 percent level specified in the law for individual and small group plan issuers. It would effectively standardize Connecticut’s minimum MLR ratio — the portion of plan issuer revenues that go toward paying medical claims — at a uniform 85 percent across all market segments. That is the minimum MLR specified in the ACA for the large group market. The ACA also provides that the minimum individual and small group MLR adopted by a state is subject to adjustment by the federal Health and Human Services Department if it determines its use would destabilize the state’s individual health insurance market.
The Los Angeles Times reports Blue Shield of California is proposing to up individual plan premiums by an average of 12 percent in 2013, the penultimate year heading up to the launch of the California Health Benefit Exchange (Covered California) in 2014. Blue Shield’s rate hike is somewhat lower than California’s individual market share leader, Anthem Blue Cross, which last month informed regulators it would boost 2013 rates between 15 and 18 percent for its plans.
Both payers cite rising medical treatment costs for the rate increases. According to the Times story, Blue Shield is also boosting its reserves to cover claims costs from an expected influx of new customers in 2014, when payers must accept all applicants without medical underwriting and the state’s health benefit exchange will offer income tax credit subsidies to defray premium costs. “It’s a once-in-a-lifetime change in the healthcare market that will bring a lot of volatility, and we need higher reserves for that,” Blue Shield spokeswoman Lindy Wagner told the Times.
In its rate request, Anthem said its medical costs for this segment of the business are increasing nearly 11% and what it actually pays is rising 13.5% after adjusting for its portion after customer deductibles.
With those cost pressures, Anthem said that the profit margin on its individual insurance business in California is less than 1% this year and that it expects to lose money next year even with these proposed rate increases.
In addition to the 18% rate increase for about 630,000 customers, Anthem is seeking a separate rate hike of 15%, on average, for an additional 100,000 policyholders whose plans are regulated by the California Department of Managed Health Care. An agency spokeswoman said it is reviewing Anthem’s proposed rate increase and those of other companies.
Last week’s Supreme Court decision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) and specifically the so-called individual mandate turned on the penalty for not having minimum essential coverage under Section 1501 of the PPACA. While the court ruled the government cannot compel all Americans have health coverage, the government may require payment of a penalty for not having it as a permissible exercise of Congress’s power to levy taxes. The penalty gives the mandate real teeth. Without it, the mandate would be a paper tiger.
The individual mandate in turn is designed to work with upfront tax credits to subsidize the cost of coverage for those who earn above 133 percent of the federal poverty level and are thus ineligible for Medicaid. The penalty for not having coverage is the disincentive or stick and the tax subsidy to defray plan premiums or fees is the incentive — the carrot. Insurers and health plans also have a mandate to sell coverage to whoever is willing to buy it starting in January 2014 regardless of their medical condition.
Together, the carrot and stick built into the individual mandate along with the requirement insurers and health plans accept all applicants (per sections 2701 and 2704 of the Act) is intended to save the individual and small group health insurance market segments from the black hole of adverse selection and ultimately market failure. The acceleration in adverse selection in recent years occurred in the individual market due to increasingly selective medical underwriting standards in states where payers are permitted to screen out people likely to incur high medical treatment costs. Adverse selection also threatens the viability of the small group market due to poor spread of risk among employers of 50 or fewer employees— and particularly numerous micro businesses with five or fewer workers.
In order to preserve these market segments and to also reduce rising premiums in the large group market due to the shifting of medical treatment costs incurred by those without coverage to the insured population, the PPACA has created an alternative and far more compulsory health insurance market than existed prior to its enactment in early 2010. Daniel Weintraub, a veteran Sacramento print journalist with deep knowledge of the health care market, described the new market landscape that will fully emerge in 2014 as one in which insurers and managed care plans will effectively become a “quasi-public utility.”
The question going forward is whether this government-drawn and enforced market can achieve sufficient savings and spread of risk to ward off market failure in the individual and small group market segments. In addition, given that health insurance functions as a pass through mechanism, whether the chronic disease prevention provisions of Title IV of the PPACA will meaningfully slow the relentless rise in medical costs driving up premiums.
While about another development, buried in this San Francisco Chronicle story published today is a revealing disclosure by Janice Rocco, deputy commissioner of the California Department of Insurance. Rocco told the Chronicle Blue Shield of California will have only three individual insurance plans open for enrollment after it closes nearly two dozen existing plans next month. Rocco is quoted as saying the insurer is seeking approval from the Golden State’s managed care plan regulator, the Department of Managed Health Care, to nearly double the number of managed care plans to 20.
This development is counter to the market trend of the previous decade in which individual market consumers shifted out of more comprehensive and costlier managed care plans to cheaper, high deductible insurance plans overseen by the Department of Insurance. Blue Shield could be preparing to offer richer, lower deductible managed care plans that can meet the essential health benefit requirements of the Patient Protection and Affordable Care Act in order to potentially qualify them for the California Health Benefit Exchange in 2014. Blue Shield’s shuttering of the nearly two dozen individual insurance plans is likely due to their falling into the death spiral of adverse selection.