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.
“Loophole” has potential to delay health insurance market rules, disrupt exchange marketplace in 2014
Health insurers could have the option to take an extra year to overhaul their individual and small group offerings to meet Patient Protection and Affordable Care Act requirements effective in 2014 and to decide if they want to participate in the state exchange marketplace. Such are the startling implications of a Los Angeles Times story early this month that reported that some health plan issuers are considering waiting until 2014 to revamp their plans to comply with the law. The Times story cites “a little-known loophole” in the Affordable Care Act “that enables health insurers to extend existing policies for nearly all of 2014.” The story quotes Timothy Stoltzfus Jost, a law professor and health policy expert at Washington and Lee University as saying that insurers have discovered the loophole, raising the question of “how many will try to game the system.”
The likely loophole? The Affordable Care Act qualifies certain health plan requirements as applying in “plan years beginning on after January 1, 2014.” So when does a plan year – the key operative term – begin? 45 Code of Federal Regulations 144.103 defines “plan year” relative to employer-sponsored coverage (such as would be offered through the exchange marketplace Small Business Health Options Program) as follows:
Plan year means the year that is designated as the plan year in the plan document (emphasis added) of a group health plan, except that if the plan document does not designate a plan year or if there is no plan document, the plan year is—
(1) The deductible or limit year used under the plan;
(2) If the plan does not impose deductibles or limits on a yearly basis, then the plan year is the policy year;
(3) If the plan does not impose deductibles or limits on a yearly basis, and either the plan is not insured or the insurance policy is not renewed on an annual basis, then the plan year is the employer’s taxable year; or
(4) In any other case, the plan year is the calendar year.
For individual coverage:
Policy Year means in the individual health insurance market the 12-month period that is designated as the policy year in the policy documents (emphasis added) of the individual health insurance coverage. If there is no designation of a policy year in the policy document (or no such policy document is available), then the policy year is the deductible or limit year used under the coverage. If deductibles or other limits are not imposed on a yearly basis, the policy year is the calendar year.
Here’s my read on how the loophole might come into play. The italicized text basically allows plan issuers to define the plan or policy year as they choose. Theoretically, they could issue coverage on December 31, 2013 and designate it for plan or policy year 2013, thereby avoiding Affordable Care Act requirements for plan years beginning on or after January 1, 2014.
If health plan issuers opt exploit the loophole, there could well be litigation over how the relevant provisions of law are to be interpreted and applied, creating uncertainty and delay in the application of the Affordable Care Act’s health insurance market rules as well as the planned rollout of the exchange marketplace in 2014. The uncertainty also has the potential to complicate contract negotiations currently underway between “active purchaser” state exchanges and health plans seeking qualified health plan status with those exchanges. Plan issuers could opt to exercise the so-called loophole and issue “plan year 2013” coverage as late as December 31, 2013 if they are unable to reach negotiated contracts with these exchanges.
A study prepared for the health plan industry group America’s Health Insurance Plans by the actuarial consulting firm Milliman would appear to support the notion of having plans designated plan year 2013 still in force in 2014 and exempt from Affordable Care Act provisions such as offering essential health benefits (EHB) and minimum actuarial value of 60 percent of projected claims costs. “The final market and rating regulation released by the (federal) HHS at the end of February made clear that individual policies can stay in place until their scheduled renewals in 2014 instead of requiring all individual plans to convert to an ACA-compliant EHB plan on January 1, 2014,” Milliman opined in its projection of factors affecting premium rates in 2014 dated April 25, 2013.
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.
Health benefit exchanges: A market intervention mechanism aimed at preserving individual, small group health coverage
State health benefit exchanges mandated by the federal Patient Protection and Affordable Care Act of 2010 have been commonly described as online marketplaces where buying a health insurance policy or managed care plan can be done as easily as booking a flight or vacation. Ease of purchase, however, is not the driving policy rationale behind the exchanges. They came about in response to market failure in the individual and small group market segments, particularly in the former. In insurance terms, market failure means the dreaded death spiral of adverse selection.
Insurance fundamentally is about spreading costs across a group of insureds, known as the insurance principle. The principle is based on the law of large numbers. If too few people purchase an insurance or health plan, the law of large numbers is violated and the insurance principle breaks down. For those insureds left in the group, their share of the group’s costs – paid as premiums or membership dues – must be sharply increased. The pool shrinks and only those most likely to use medical services remain since they need coverage, putting further upward pressure on premiums.
There is a limit what any insured can afford to pay. Eventually market failure results and the insurance or managed care plan becomes economically unviable. As plans close, the fewer remaining health plans pass along relentlessly rising medical care costs and the unvirtious cycle proliferates until the entire marketplace is at risk. That was — and still is — the situation the individual and small group health insurance markets leading up to the enactment of the ACA in 2010. Ultimately, health benefit exchanges are an attempt to preserve these markets by concentrating plan issuers and purchasers into a government-sponsored marketplace with incentives and disincentives for individuals to participate in the form of tax credit subsidies and tax penalties, respectively.
Whether the exchanges are able do so won’t be known for several years after the exchanges begin pre-enrolling individuals and small businesses for 2014 coverage starting in October 2013. What is certain is the exchanges as insurance marketplaces – like the failed market they seek to remedy — are also subject to the insurance principle. They must attract sufficiently large numbers of individuals and small businesses if they are to successfully achieve the market aggregation solution that led to their inclusion in the ACA.
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.
Aetna CEO Mark Bertolini reveals to Sarah Kliff of The Washington Post’s Wonkblog that a strategic review Aetna undertook in 2005 showed the individual health insurance market segment failing and the small group segment in decline. Market failure can be a strong motivator to act — and will remain a mortal threat notwithstanding how the U.S. Supreme Court opines this week on the constitutionality of the Patient Protection and Affordable Care Act.
Some excerpts from Kliff’s post:
“We saw an individual market in inexorable decline and, on the small group side, fewer were offering benefits and costs were rising. We knew we had to change something,” Bertolini said.
Aetna has a strong business reason to create a cheaper insurance product: Namely, getting more people to buy it. That motivation stays in place regardless of what happens with the Supreme Court this month.
“We’re really working right now on the underlying cost of health care,” he says. “These investments we’re making are about finding a different way to make models work. We’re committed to fixing that, and feel like we need to fix that.”
California legislation limiting self-insured small employer medical stop loss coverage moves forward
California lawmakers are concerned a trend of small employers self insuring their employee health benefits and purchasing stop loss coverage for cases when a given worker incurs high medical bills will play havoc with the state’s small group health insurance market. The chief concern is the arrangement will further reduce an already shrinking and distressed market segment and foster adverse selection as the state prepares to bolster the market starting in 2014 with a Small Business Health Options Program (SHOP) offered through the California Health Benefit Exchange.
Lawmakers are responding by imposing restrictions on medical stop loss coverage with SB 1431, legislation sponsored by California Insurance Commissioner Dave Jones and approved this week by the Senate Health Committee setting higher attachment points for the insurance. Stop loss coverage has been reportedly offered with attachment points as low as $10,000 to $20,000. Combined with a $1,000 to $2,000 deductible, employers would be responsible for an employee’s medical bills in a relatively narrow window above the employee deductible and below the stop loss attachment point. Stop loss insurance kicks in when an employee’s medical costs exceed the attachment point.
“SB 1431 is necessary to prevent the state’s small group market from falling victim to adverse selection and unsustainable premium levels and protecting California’s small businesses, its employees, and the success of the post-ACA (Affordable Care Act) insurance market,” the committee’s analysis notes.