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Limited tax subsidy could diminish market power of active purchaser health benefit exchanges

April 6, 2013 2 comments

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.)

Where the state health benefit exchanges stand at beginning of 2012

January 22, 2012 Leave a comment

As to be expected from the Kaiser Family Foundation, the organization has prepared a thorough and excellent report on the status of state health benefit exchanges two years before the deadline established in the Patient Protection and Affordable Care Act (PPACA) for the exchanges to open for business.

Political uncertainty related to the pending U.S Supreme Court decision this year on the constitutionality of a keystone component of the PPACA — the requirement that all Americans be covered by or purchase some form of health insurance including from state benefit exchanges  — has some states sitting on the sidelines.  Other states are operating on the assumption the PPACA is good law until the Supreme Court rules otherwise and are attending to the complexities of getting their exchanges ready for business come January 2014.

Click here for the Kaiser Family Foundation report.

PPACA likely to institutionalize “major medical” coverage for individuals, small business employees

The Kaiser Family Foundation has published an excellent primer on the actuarial foundation upon which “qualified health plans” must be based under Section 1301 et seq of the Patient Protection and Affordable Care Act (PPACA).  The plans will be sold through state health benefit exchanges starting Jan. 1, 2014.  The exchanges will serve as marketplaces aggregating purchasing power among the small group and individual markets — the most distressed health insurance market segments where coverage is far less accessible and affordable than large group and government insurance plans.

These plans that cover from 60 percent (bronze) to 90 percent (gold) of an individual’s projected medical costs show the era of health coverage with minimal cost sharing and out of pocket costs has come to an end for individuals and those employed by small businesses.  That new reality that emerged in recent years is now institutionalized as public policy in the PPACA.  That policy is reinforced by tax policy allowing individuals to establish tax deductible Health Savings Accounts, which have been in existence only since 2004.

The bronze plan’s 60 percent coverage level could be equated to “major medical” plans of decades past that covered as the name implies only major expenses such as hospitalizations but not routine doctor visits.  As medical treatment and pharmaceutical costs continue to push up health coverage rates leading up to 2014, it remains to be seen if the higher level silver, gold and platinum (90 percent of projected actuarial costs) will be affordable for individuals and small businesses even with their new purchasing power via the benefit exchanges.  Many could find their budgets can handle only the low end bronze plan, shifting the bulk of these market segments to a major medical level of coverage.

Interim High Risk Pool could speed depopulation of individual market

By the time individuals become eligible to buy coverage through the Patient Protection and Affordability Act’s (H.R. 3590) American Health Benefit Exchanges on Jan. 1, 2014, the individual market risk pool could undergo a major depopulation particularly among individuals with pre-existing conditions.

According to a Kaiser Family Foundation survey released this week of people with individual coverage aged 18-64 conducted between March 19 and April 2, annual premium increases are averaging about 20 percent.  Given that individual rates are already high and remain headed upward in a weak economy, such increases are unsustainable and will likely be seen in retrospect as the tipping point of market failure in the individual health insurance market. Individuals can only trade down so much before premiums for a higher deductible, less generous plan also become unaffordable.  Sixty five percent of the Kaiser Family Foundation survey respondents reported they worry their premiums will rise out of reach as do 81 percent of those with medical conditions.

If premium rates for the Act’s Interim High Risk Pool provide even modest relief, it could spark a migration of those with preexisting conditions out of the individual market into the Interim High Risk Pool.  The pool took effect this month and is intended to provide coverage for those with preexisting medical conditions who have been uninsured for at least six months until insurers must accept all applicants in 2014.  It remains to be seen exactly what members of the pool will be charged for coverage.  While the Act requires the pool to set premiums at a “standard rate for a standard population,” those premiums may also end up being unaffordable as I’ve previously speculated.

Nevertheless, individuals with medical conditions may soon be knocking on the pool’s door as this item from the New York Times Prescriptions blog illustrates.  In the blog post, Deborah Chollet, a senior fellow at Mathematica Policy Research, suggests a self employed individual with cancer who fears he’ll no longer be able to afford rising premiums may wish to consider the pool as an alternative to dropping his coverage.  But under the Act, he’ll have to go medically uninsured for six months in order to qualify for coverage.

There’s another aspect that bears watching.  If the premiums charged in the Interim High Risk Pool are significantly lower than those charged by health plans and insurers in the individual market or lag their recently sharp premium hikes, it could produce a so-called “crowd out” effect in which individuals drop coverage for six months in order to qualify for coverage in the Interim High Risk Pool.  Many — probably most people over age 45 — would meet the Act’s expansive definition of a pre-existing condition.

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