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.)
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.
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.