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.
The rest of this year and next will reveal in greater detail how competing market forces under the Patient Protection and Affordable Care Act (PPACA) play out in the individual and small group market segments. Health plans are making their opening gambit by warning in a Wall Street Journal story published this week that premiums will rise in response to new market rules that take effect in January 2014 requiring them to offer specified categories of benefits and use community-based rating instead of medical underwriting.
The PPACA’s managed competition scheme for these market segments will create countervailing downward pressure in addition to the reinsurance and risk adjustment mechanisms mentioned in the WSJ story to offset pressure for higher rates to account for taking on higher risk populations under community rating. That scheme is based on concentrating much of the market in state health benefit exchanges that will aggregate the purchasing power of individuals and small businesses, spurred along in the individual segment with generous income tax subsidies for those with adjusted gross incomes at 400 percent and lower of the federal poverty level. Small employers won’t get these subsidies (enhanced income tax credits will be available for very small, low wage employers) but would be able to pool their market power into one large purchasing entity, the exchanges’ Small Business Health Options Program (SHOP).
The test of that aggregated market power will begin over the next few months in about a half dozen states where the exchanges have opted to actively screen and select which plans can participate in their individual and SHOP marketplaces. Of these, the most illustrative market is the nation’s largest health insurance market — California — where that state’s exchange, Covered California, has established standardized benefit designs and cost sharing levels for plans it will offer. Covered California is utilizing a competitive bidding and negotiation process based on these standard designs that provides incentive to plans to moderate premiums.
Also part of the PPACA managed competition model and designed to boost competition to exert downward pressure on premiums are the large Multi-State Plans administered by the federal Office of Personnel Management. Multi-State Plans will also be sold on the state exchange marketplaces, initially available in 60 percent of the states once introduced. The PPACA mandates at least two Multi-State Plans be offered in each state exchange and be available in all state exchanges by 2017. Plus the PPACA allows cooperative health plans owned and operated by consumers to compete in the exchange marketplaces with investor-owned commercial health plans.
Individuals and families who purchase health coverage through state health benefit exchanges using advance tax credit subsidies under Section 1401 of the Patient Protection and Affordable Care Act will pay no more than 2 to 9.5 percent of their income towards premiums. Section 1401 delineates a sliding scale range of income maximums in six brackets and percentages for each level.
In 2015 and future years, however, those percentages could rise under a little noticed and discussed provision at Section 1401 amending Section 36B(b)(3)(A)(ii) of the Internal Revenue Code. It states the maximum income amounts “shall be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year.” Then for calendar years 2018 and beyond, should premium tax credits and cost sharing reductions reach .504 percent of the gross domestic product for the preceding calendar year, the maximum income amounts are subject to an additional bump.
In 2011, the Congressional Budget Office (CBO) interpreted the clause to mean that “the maximum percentages of income that enrollees at a given income level will have to pay will increase over time.” By how much, exactly? “CBO and JCT (Joint Committee on Taxation) interpret that adjustment (relative only to premiums) as being equal to the difference between (1) the percentage change in average premiums for private health insurance for the nonelderly nationwide between the prior year and the year before that and (2) the percentage change in average U.S. household income.” (Final U.S. Treasury Department Regulations issued in May 2012 governing the Premium Tax Credit are silent on the provision)
CBO explained the need for the adjustment mechanism as follows: “Because private health insurance premiums generally grow faster than income, the regular indexing provision will keep the share of the premium paid by an enrollee at a given income level and the government roughly constant from year to year.” A report issued last month by the Commonwealth Fund noted that between 2003 to 2011, premiums for family coverage increased 62 percent across states—rising far faster than income for the middle- and low-income families comprising the population expected to buy coverage through the exchanges.
In conclusion, this means if premiums continue to rise as most observers expect, those purchasing subsidized coverage through state benefit exchanges won’t be protected from those increases and will have to pay a larger share of their incomes toward premium rates. (I apologize for a previous post in 2012 that asserted otherwise) This has enormous implications for the exchanges since they must offer affordable coverage in order to attract and retain sufficiently large numbers of enrollees in order to restore a functional individual health insurance market.
As the name suggests, the primary policy goal of Subtitle D, Part 2 of the Patient Protection and Affordable Care Act (PPACA), Consumer Choices and Insurance Competition Through Health Benefit Exchanges, is to restore America’s health insurance market to functionality. Functioning markets by definition offer buyers meaningful choice among competing sellers. The health benefit exchange mechanism would create a functional market by “leveling the playing field” to ensure health plan issuers offer the same benefits and otherwise comply with rules governing coverage contained in the PPACA. Second, the exchanges offer strong market participation incentive for plan issuers by making available millions of consumers who cannot afford relentlessly rising premiums by taking tax dollars these individuals would otherwise pay to the U.S. Treasury and giving them to plans to subsidize their premiums.
In addition to these market interventions, the PPACA — like the Clinton administration’s unenacted health care reform plan of the 1990s before it — takes the insurance out of health insurance. How? By outlawing medical underwriting of individuals and instead instituting modified community rating where rates vary only based on age, family size and residence and not medical history. Underwriting is the heart of insurance: selecting who is offered insurance and at what price. Without underwriting, health coverage can no longer be accurately described as an insurance product. Perhaps that’s why the PPACA refers to the new, government mandated state insurance markets as health benefit exchanges and not health insurance exchanges.
Since all health plans would be offering the same coverage as mandated by the PPACA come 2014 and can no longer underwrite to obtain the lowest risk (and lowest cost) individuals to cover, they are left to compete solely on service and price. How will this play out over the long term since the underlying costs of medical care continue to rise and show no signs of abating? Let’s explore some scenarios. Plans may compete by absorbing the increased cost of care in order to keep premiums down. Plans that can do that successfully will survive. Those that cannot will be forced to pass along increased costs to consumers through higher premiums. As consumers choose cheaper plans offered by competing plan issuers, less price competitive plans face the death spiral of adverse selection and/or insolvency, leaving only the biggest players to compete in the exchanges. Fewer players mean less choice, which is contrary to a key goal of the exchanges. Less choice and less competition in turn gives surviving plan issuers greater incentive to pass along rising costs to consumers.
But unlike in the current market, in the exchange market starting in 2014 and going forward, those increased premiums won’t be necessarily be completely absorbed by consumers or lead to their dropping coverage because it’s no longer affordable. The federal treasury will also share the burden because the advance tax credit subsidies for exchange-purchased coverage will absorb whatever the plans charge above a consumer’s income level (subject to federal review of the reasonability of rate increases), ranging from no more than two percent of income at the federal poverty level (FPL) to 9.5 percent at 400 percent of FPL. Since tax dollars will be subsidizing insurance rates, how much those rates go up in this soon to emerge market automatically become not only a market regulation issue, but also a matter of national fiscal policy.
Here’s a good analysis by the Associated Press of how the Patient Protection and Affordable Care Act (PPACA) might be affected by a Romney victory in next week’s presidential election.
In public health insurance, the Medicaid expansion might be curtailed. In commercial health coverage, payers are hoping for a repeal of the PPACA requirement they maintain minimum loss ratios of 80 percent and new tax levies on insurers.
But insurers aren’t keen on undoing the foundational political bargain of the PPACA’s individual insurance market reforms in which they must accept all applicants for coverage and individuals without other forms of public or private insurance must purchase coverage or face a tax penalty. There’s simply too much potential new business to be had with the mandate, the AP notes, citing a PricewaterhouseCoopers projection that it and state health benefit exchanges will generate $205 billion in new premium by 2021.
Nor is a Romney administration likely to pull the plug on state health benefit exchanges given the more than $2 billion invested in them thus far in the form of federal planning and establishment grants. Plus Romney has not publicly renounced the idea of public health insurance exchanges, a concept he innovated as governor of Massachusetts in 2006 by creating the nation’s first state run health benefit exchange, the Massachusetts Connector.
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.