Health economists predict that in states that already have robust competition among insurance companies—states such as Colorado, Minnesota and Oregon — the exchanges are likely to stimulate more. But according to Linda Blumberg of the Urban Institute, “There are still going to be states with virtual monopolies.” Currently Alabama, Hawaii, Michigan, Delaware, Alaska, North Dakota, South Carolina, Rhode Island, Wyoming and Nebraska all are dominated by a single insurance company. The advent of the exchanges is unlikely to change that, according to Blumberg.
This story needs some additional context. Section 1334 of the Patient Protection and Affordable Care Act establishes a shared federal-state regulatory regime requiring health benefit exchanges to offer at least two “multi-state plans” (one must be a nonprofit) in their individual and small business exchanges. These plans would be established under federal charter through the Office of Personnel Management (OPM) and licensed in all states. The idea behind multi-state plans is to bolster competition in state markets, particularly those with smaller populations and fewer payers, as well as to create a larger risk pool to help assure affordability of premiums and ward off adverse selection.
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.
The sale and regulation of commercial health insurance is essentially an intrastate affair. States serve as discrete markets and each have their own rules governing health insurers and managed care plans. However, several provisions of the Patient Protection and Affordable Care Act (ACA) are apparently intended to give the industry a more interstate flavor starting in 2014 when state health benefit exchanges chartered by the ACA open for business in each state.
Section 1334 of the ACA establishes a shared federal-state regulatory regime requiring health benefit exchanges to offer two “multi-state plans” (one must be a nonprofit) in their individual and small business exchanges. These plans would be established under federal charter through the Office of Personnel Management (OPM) and licensed in all states. The idea behind multi-state plans is to bolster competition in state markets, particularly those with smaller populations and fewer payers, as well as to create a larger risk pool to help assure affordability of premiums and ward off adverse selection. At the same time, multi-state plans could raise fears among payers since by virtue of their large size (and thus their potential ability to offer more favorable coverage terms and rates), they could “crowd out” smaller, state-based players.
However, the Section 1333 of the ACA also provides a mechanism for health insurers and plans to pool risk and sell across state lines via “health care choice compacts” starting in January, 2016. It allows two or more states to enter into an agreement under which health plans could be offered in state individual markets but subject only regulation by the state in which the plan was written or issued. Plans sold outside their state of domicile would still however be subject to licensure and rules in the state in which the purchaser resides relative to market conduct, unfair trade practices, network adequacy, and consumer protection standards including standards relating to rating and handling of disputed claims. The ACA requires the federal Department of Health and Human Services (HHS) to issue regulations governing health care choice compacts by July 1, 2013 and additionally mandates that states must enact legislation authorizing their formation.
Finally, the ACA allows the exchanges themselves to operate across state lines. Section 1311(f) provides for “Regional or Other Interstate Exchanges” operating in more than one state if the involved states and the federal HHS approve.
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.
For health insurers and health care service plans, state health benefit exchanges represent a major business opportunity that will generate an estimated $205 billion in premiums by 2021, according to a report issued this month by PwC’s Health Research Institute.
“Public exchanges will create an irreversible shift in the insurance market that will ultimately change the way medical care is sold in the U.S.,” the report notes. It adds the caveat that managing this large new cohort of covered lives poses challenges. “Insurers will continue their battle to keep a balance of healthy and sick members to limit adverse selection. Providers and insurers will face clear challenges in serving a new customer base with a demographic profile and health needs that differ from today’s insured population in meaningful ways.”
In addition, many of the newly covered will churn between Medicaid and commercial coverage sold in the state exchanges as their incomes and life circumstances change. The full report, Health Insurance Exchanges: Long on options, short on time, can be downloaded here. (Registration required)