On March 23, the Patient Protection and Affordable Care Act of 2009, historical health care reform legislation, was signed into law. While there are a number of aspects to the reform package, a few key features will have a dramatic effect on private insurance markets. The bill mandates guaranteed issue of health insurance in the individual market, eliminates preexisting condition exclusions, prohibits annual and lifetime limits, reforms rating factors to eliminate rating based on health status, and requires the creation of health exchanges for individuals to purchase insurance in the individual insurance market. Plans that provide dependent coverage must extend coverage to unmarried adult children up to age 26. One of the most controversial provisions is the individual mandate: Individuals will be required to obtain health insurance, with penalties that increase in future years. Subsidies are provided to assist low income individuals.
The push for health care reform has been driven by three interconnected problems:
First, increases in health care costs have resulted in rapidly increasing premiums for employers and individuals and increased financial pressures on the public programs. Medicare’s funding deficit has been widely reported. In 2009, the Medicare Trustees issued–for the third consecutive year–a Medicare funding warning, noting that “(t)he projected exhaustion of the HI Trust Fund within the next eight years is an urgent concern.” A number of reasons have been suggested for the rapidly increasing costs, including medical technology, consolidation among health care providers and insurers, and inefficient processes throughout the system. Regardless of the cause, the long-term prospects are troublesome.
A second factor driving health reform is access. Increases in health insurance premiums have made it more difficult for individuals and businesses to afford coverage, and the uninsured population is now estimated to be over 45 million individuals, or roughly one-sixth of the nonelderly population. Much of the costs of care for the uninsured are borne by others throughout the system.
Finally, a third problem relates to the operation of the individual health insurance market. Typically, insurance companies set premiums on the basis of risk-based pricing. That is, where an individual is expected to incur higher costs, they pay a higher premium. This is important because, without risk-based pricing, higher cost individuals will tend to buy coverage, and lower cost individuals will drop out of the market, a phenomenon known as adverse selection. Risk-based pricing also generates other advantages to markets, including giving insureds an incentive to control their risk and lowering the volatility of insurer financial results.
In the case of individual health insurance, however, risk-based pricing can result in an individual being priced out of the market when they most need the coverage. Even where individuals purchase coverage that is guaranteed to renew, there is a risk that if they become sick, the other members of the group will seek lower cost coverage elsewhere or decide to go without coverage, leaving only the sick to share in the costs. Insurance practitioners refer to a group that is experiencing this sort of withdrawal and resulting premium increases as going through a “death spiral.” This is a problem that virtually anyone could eventually face, even those that are currently happy with their health insurance coverage. Because state insurance commissioners are a main point of contact with consumers, they have heard many troubling stories from their constituents and have supported efforts to find a solution.
In a broad sense, there are two possible solutions to this last problem–
The federal legislation attempts to take the second path--creating a market where low-risk individuals subsidize high-risk individuals--and the individual mandate is a response to the adverse selection problem created by deviating from risk-based pricing. Because the law also eliminates preexisting conditions exclusions and requires insurers to provide coverage to anyone that requests it (guaranteed issue), there are fewer disincentives to remaining uninsured, creating a real concern that individuals might drop out of the market until they need the coverage. The individual mandate is necessary to counter this tendency and ensure that low-risk individuals remain in the pool.
State insurance commissioners have expressed concerns that the bill’s individual mandate is too weak to overcome adverse selection, and that the limits on age rating exacerbate the problem. The legislation compresses age rating bands to 3:1 (i.e., age can only increase one’s rate by a factor of 3), an amount that is less than the actual difference in costs. This will tend to increase the rates of young individuals, while reducing the rates of older individuals. The increase in premiums for younger insureds, coupled with the relatively weak penalties for remaining uninsured, may lead many young and healthy individuals to forego coverage. This will tend to increase average premiums in the market.
Critics have also suggested that the legislation focuses largely on addressing the access problem and individual insurance market problem without dealing with underlying cost issues. To some extent, this is true. The legislation provides for a variety of demonstration projects that focus on reducing health care costs, and aims to change insurer incentives to focus on controlling medical costs rather than on underwriting and risk-based pricing. Its success in “bending the cost curve” remains to be seen, however.
Enactment of this legislation will create a dramatic change in the nature of federal involvement in commercial health insurance markets. Historically, private health insurance has been regulated by the states, typically through the state insurance commissioner. This reflected the local nature of health insurance markets and the belief that local insurance regulators were in a better position to understand the challenges and needs of their local markets and consumers. Self-funded plans offered by employers were exempt from state insurance regulation, however, and were instead subject to limited supervision by the U.S. Department of Labor. Given the growing role played by self-funded employer plans and by public plans such as Medicare and Medicaid, the portion of the market actually supervised by state insurance commissioners and subject to state insurance regulation has decreased considerably over the years.
With new federal legislation, a state/federal partnership to regulating health insurance plans could be emerging. The state role will continue to be important, albeit with a significant federal overlay, and the legislation dramatically expands the role of the U.S. Department of Health and Human Services. States will continue to license and regulate insurers, products sold, and the rates charged. (The legislation provides grants to states to strengthen rate review processes.) However, the legislation gives HHS the ability to define certain covered benefits, imposes a minimum loss ratio standard, and requires carriers to file a number of reports with the Secretary of HHS. (The loss ratio is the percentage of premium spent for clinical services and activities that improve health care quality.) The legislation requires insurers to provide a rebate to consumers if their loss ratio is less than 85% (80% in the small group and individual markets).
Enactment of the legislation is only the beginning--implementation will be a major undertaking. The final bill looks to the National Association of Insurance Commissioners (NAIC) and state insurance commissioners for assistance in developing the federal standards and regulations, and the details to be worked out during implementation will define the structure of this emerging federal/state partnership. Ultimately, only time will tell whether the legislation will be a success in controlling costs and improving access. But one thing is clear already: This legislation will fundamentally shape our health insurance markets for years to come.