President Obama’s announcement during a Nov. 14 press conference that he would like to see insurance carriers extend non-complying health coverage after Jan. 1 may be the event that unravels the Affordable Care Act (ACA). Carriers and health plans have worked hard for several years, have spent millions of dollars complying with ACA, have fought with insurance department regulators getting policies approved and, in many cases, have notified consumers of the need to terminate non-compliant policies. Now, carriers and health plans have a new wrinkle thrown their way. What is going to happen next?
Some of the key principles of ACA are:
- Clear definition of Essential Health Benefits (i.e., EHB)
- Clear definition of metallic or metal level plans based upon the actuarial value of the benefit plan
- Restrictions on premium format and methods to derive premium rates
- Rigorous rate review and approval process coordinated by a combination of state insurance departments and federal oversight
- Mandates for participation in some type of health coverage
- Large number of taxes and fees to help fund ACA
- Assumption that there would be a reasonable risk pool so carriers could appropriately price and predict future costs of care
Minimum loss ratio requirements to ensure that a reasonable portion of the premium rate goes toward the payment of claims
Carriers have worked hard to comply with the new regulations, which for many have involved significant shifts in the methods used to conduct business. The rate development process for a typical carrier follows this process:
- Review of prior claims experience and profitability
- Determination of what rate increase will be required to maintain a profitable product offering
- Development of proposed rate for various rate cohorts with competitive comparisons
- Potential benefit redesign to meet regulatory changes or competitive pressures in the marketplace
- Obtaining independent actuarial certification regarding proposed rates as a reasonableness test (e.g., Section 1163 required in California)
- Filing of rates with regulators for approval and follow-up with regulators until rates are formally approved
- Communication of rates to those insured, and implementation of the new rates
This process can require four to six months to complete. It is actuarially complex and requires careful analysis of many factors and variables.
As ACA emerged, carriers had to adjust benefits covered in prior products where they failed to meet the minimum EHB required. In some cases, products were terminated because they did not meet either the EHB or the minimum actuarial value of 60%. Carriers worked hard to develop replacement products, filed these with regulators and started to present these to their customers.
It was obvious that some customers would be concerned about the impact of rate changes associated with ACA-approved benefit programs. Rates would increase for a variety of reasons:
- Health care inflation continues
- Mandated benefits required broader coverage than previously purchased
- Elimination of gender rating generally increased rates for insured males
- Minimum Actuarial Values (i.e., > 60% AV) raised benefits for some insureds
- Assumed average risk score for the individual market was higher than in the past because medical underwriting is no longer appropriate, and, in some cases, carriers raised the average assumed health status built into the rates to reflect the enrollment of additional Medicaid- or Medicaid-like lives.
- Age rating was affected, requiring higher rates at younger ages to offset some of the reductions at the older ages (i.e., 3:1 limits on age rating curve).
The concerns expressed by the public on higher rates, the concerns expressed about policy cancellations, the delays caused by website challenges, the continued frustrations about ACA all combined into a situation where a large portion of public were frustrated with ACA. The president’s announcement was a response to many of these concerns and frustrations.
However, there are several complications facing the carrier community as a result of this suggestion or proposal to the insurance departments and affected carriers.
- Rates for terminated programs were not updated for 2014. Rates can’t be extended without adjustment because rates were established for a previous time period, and there has been inflation. Updating would require a minimum of 4 – 6 months. The software implemented by the federal government and used at the local insurance department level is built around the new ACA requirements and would likely reject restored versions of terminated policies.
- The risk pool for all of the ACA-approved rates will be changed significantly if individuals are able to continue their prior programs. Selection bias issues would be significant.
- The individual mandate for credible health coverage would be compromised if individuals continued their prior, non-compliant coverage. The anticipated tax base would be jeopardized with the continued offering of non-compliant coverage if penalties were forgiven.
- The disruption to the insurance industry involved in the exchanges would be significant and potentially would permanently damage the risk pool.
- More importantly, the public’s perception of the benefit of ACA to them will be affected as changes were required, then they weren’t, then they will be, etc.
Although there are many features of ACA that potentially provide value to the public, the flawed rollout, the delays in implementation and now radical changes to the structure of the ACA program very likely start to unravel the viability of the program. Only time will tell.