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The American Academy of Actuaries is the nonpartisan professional organization for actuaries in the United States. Actuaries are risk professionals who quantify and assist in managing risk, and apply their expertise and knowledge to a wide range of problems facing people in their everyday lives and businesses. In their work of estimating the costs of uncertain future events, actuaries utilize objective data in their modeling of risk.

HEALTH INSURANCE COVERAGE

Most people younger than age 65 with private health insurance coverage obtain that coverage through their job or as a dependent on a family member’s employer group plan. The individual health insurance market is a source of coverage for those without access to employer coverage or public coverage such as Medicaid. However, prior to the enactment of the Affordable Care Act (ACA), uninsured rates among the nonelderly were historically high, fluctuating between 16 and 18 percent in the 1990s and 2000s,[1] due in part to high health insurance premiums and the difficulty of people with pre-existing conditions to obtain coverage in the individual market.

 

The ACA, referred to by some as “Obamacare,” was enacted to expand health insurance coverage to more Americans. The ACA provides premium and cost-sharing subsidies to low- and moderate-income families to make coverage in the individual market more affordable. It also prohibits insurers from denying coverage or charging higher premiums to people with pre-existing medical conditions, such as cancer or heart problems. In addition, at each state’s option, expanded Medicaid eligibility was authorized; as of April 2018, 32 states and the District of Columbia expanded Medicaid. Several recent legislative changes to the ACA, as well as pending regulatory changes, will affect access and affordability of coverage.

 

This election guide will provide information on what is necessary for a sustainable individual health insurance market, how recent policy changes will affect the health insurance markets, potential federal and state actions to improve the markets, and underlying drivers of health costs and options to control them.

 

Conditions for a Stable and Sustainable Individual Health Insurance Market

 

The ACA expanded access to health insurance coverage in the individual market by requiring insurers to accept all applicants, regardless of any pre-existing conditions, and prohibiting premium variations based on health status. To reduce the adverse selection arising from such requirements, the ACA included other provisions, such as premium and cost-sharing subsidies and an individual mandate,[2] designed to increase overall participation in health insurance plans.

 

Achieving a stable and sustainable individual health insurance market that provides these consumer protections requires:

  • Enrollment at sufficient levels for stable and predictable claims. In addition, when protections for individuals with pre-existing conditions are provided, it’s important to attract healthy individuals for a balanced risk pool.

  • A stable regulatory environment that facilitates fair competition.

  • Sufficient insurer participation and plan offerings to provide insurer competition and consumer choice. Sufficient enrollment levels, a balanced risk pool, and a stable regulatory environment help encourage insurer participation.

  • Low spending growth and high quality of care, because most premium dollars go toward paying medical claims.

 

As a result of the ACA, nationwide enrollment in the individual market increased. Yet in general, enrollment in the individual market has been lower than originally projected when the ACA was enacted and enrollees have been less healthy than expected. Competing plans generally face the same rules, but the uncertain and changing legislative and regulatory environments have contributed to adverse experience among insurers. This uncertainty and adverse experience led to a decrease in insurer participation in 2016 and 2017 and additional insurer withdrawals for 2018. Among remaining insurers there have been signs that experience has begun to stabilize or even improve somewhat,[3] but the market remains fragile.

 

Recent and Pending Policy Changes

 

Many recent policy decisions will likely affect coverage access and affordability as well as the stability of the markets. In addition, several policy changes are being pursued based on an executive order from President Trump, but will not be implemented unless and until regulations are finalized.

 

Termination of cost-sharing reduction (CSR) payments to insurers. Under the ACA, individual market plan enrollees with household incomes between 100 percent and 250 percent of the federal poverty level are eligible for cost-sharing reductions to decrease their out-of-pocket spending requirements (i.e., lower deductibles and copayments). By lowering out-of-pocket costs, the cost-sharing subsidies reduce financial barriers to care for lower-income individuals. The federal government had been making payments directly to insurers to offset the cost of lowering cost-sharing requirements, but those payments were terminated in late 2017. As a result, 2018 premiums in nearly all states were increased; which premiums were increased varied by state. Most states increased premiums only for silver plans. Enrollees eligible for premium tax credits are protected from the premium increases, because their premium subsidies would increase to cover the premium increase. Because of the premium increases, federal premium subsidies increased and more individuals became eligible for subsidies and zero-premium plans. In most states, individuals not eligible for premium subsidies have access to coverage without the premium increases.

 

Elimination of the individual mandate penalty. The ACA had required most Americans to obtain a minimum amount of health insurance coverage through employer-sponsored plans, the individual insurance market, or public programs such as Medicare or Medicaid, or pay a penalty. The provision was intended to encourage young and healthy, as well as the older and sicker, to obtain coverage, thus achieving the balanced risk pool required to keep premiums affordable and stable. The recently enacted Tax Cuts and Jobs Act eliminated the financial penalty beginning in 2019. Although the individual mandate was not as effective as intended, it likely increased enrollment. Unless adequate alternative mechanisms are implemented the risk pool could deteriorate, premiums could increase, and insurers could reconsider future participation. The expanded availability of association health plans and short-term plans, discussed below, could exacerbate these outcomes.

 

Expanding the availability of association health plans. Rules are currently being written to implement President Trump’s executive order to expand the availability of association health plans (AHPs). In general, AHPs allow individuals and small groups to band together to purchase health insurance. If allowed to avoid the ACA issue and rating rules or benefit coverage requirements, expanded AHP access could create adverse selection concerns. In particular, AHPs could offer lower premiums to healthier and/or younger enrollees, deteriorating ACA markets and raising ACA premiums as healthier groups leave ACA plans for AHPs. Although thought to be a way for individuals and groups to exert more negotiating power, AHPs are unlikely to obtain lower provider payment rates than larger insurance companies. In addition, AHPs would face increased insolvency risk without clearly defined regulatory authority.

 

Expanding the availability of short-term plans. Rules are currently being written to implement President Trump’s executive order to lengthen the maximum duration of short-term limited-duration (STLD) plans from three months to 12 months. Such plans have traditionally been used by people who know they only have a short-term loss of coverage, for instance between jobs. Short-term plans are not required to follow ACA issue and rating rules or benefit coverage requirements. As a result, STLD plans would be more attractive to lower-cost individuals, because of lower premiums for STLD plans compared with ACA plans. Market segmentation and adverse selection for ACA plans could result, leading to higher premiums for ACA plans. These effects would be dampened in states that implement additional rules limiting the availability of short-term policies or requiring that they meet rules governing ACA plans.

 

Expanding the availability of health reimbursement arrangements (HRAs). Rules are currently being written to implement President Trump’s executive order to expand the availability of Health Reimbursement Arrangements (HRAs). HRAs are employer-funded health spending accounts that employees can use toward paying qualified medical expenses with pre-tax dollars. Small employers are currently allowed to use HRA contributions toward individual market premiums for their employees. The executive order would extend that ability to large employers. The impact on the individual market depends on which employers and employees choose this option. It could improve the individual market risk pool if a broad cross-section of employers choose this approach. On the other hand, it could worsen the individual market risk pool if employers with less-healthy employees choose this approach.

 

Delaying the Cadillac tax. The ACA established a tax on high-cost, employer-sponsored health plans, often referred to as the “Cadillac tax.” The 40 percent tax on a health plan’s value that exceeds a certain threshold is intended to reduce health care spending by discouraging overly generous plans. The implementation of this provision has been delayed to 2022.

 

Policy Options Moving Forward

 

Expand mechanisms to encourage enrollment. As noted above, the elimination of the individual mandate penalty along with access to noncompliant plans, such as AHPs or short-term plans, could lead to more adverse selection and a further deterioration of the ACA risk pool. To offset these effects, alternative mechanisms to the mandate that would encourage ACA plan enrollment among younger and healthier individuals are needed. Depending on how they are structured, continuous coverage requirements could mitigate the impact of adverse selection. For instance, if individuals with a coverage gap were subject to a waiting period before coverage becomes effective, enrollment could increase slightly as there would be less opportunity to sign up for coverage as a health need arises. Another version of a continuous coverage requirement would be to levy a premium surcharge for individuals with a coverage gap. But if the associated penalty is too low, it won’t do enough to encourage healthy individuals to enroll sooner rather than later. If the penalty is too high, then the people with prior gaps in coverage willing to pay the penalty will be primarily those who have high health care needs. Auto-enrollment, successful in increasing participation in retirement savings plans, has the potential to achieve higher participation rates if logistical hurdles, such as how to identify eligible enrollees, could be overcome.

 

Provide external stability funding. If the individual mandate was a “stick” to encourage enrollment and achieve a balanced risk pool, then lowering premiums through subsidies or other means is a “carrot.” Weaker sticks could be offset by stronger carrots. Among the approaches is increasing premium subsidies by extending premium tax credits to all enrollees; increasing premium tax credits for currently subsidy-eligible enrollees; or increasing them for specific subgroups, such as young adults. External funding to offset insurer costs for high-cost enrollees, for instance through a reinsurance program, would be another way to lower premiums, increase enrollment, and improve the risk pool. For instance, during the first year of the ACA’s transitional reinsurance program, the $10 billion reinsurance fund was estimated to reduce premiums by about 10 to 14 percent.[4] Several states have pursued innovation waivers for state-based reinsurance, varying how eligible enrollees are identified and the parameters defining what portion of a plan’s claims are reimbursed. Alaska’s approved waiver was expected to result in 2018 individual market premiums being 20 percent lower than they would have been without the reinsurance program.[5] More recent analysis suggests that states could leverage $5 billion in federal reinsurance funds into $15 billion, when the pass-through savings from reduced federal premium subsidies are included.[6]

 

Increase access to catastrophic coverage or add a lower-tier “copper” plan. Less-generous coverage could be appealing to younger adults and healthier people of all ages more generally. The ACA offers a catastrophic plan option to adults under age 30 and older adults who have a hardship exemption from the individual mandate. However, individuals are not allowed to use premium tax credits toward catastrophic plans and the actuarial value of catastrophic plans is similar to bronze plans. As a result, current participation in catastrophic plans is quite low.

 

Allowing broader access to “copper” coverage with even lower actuarial values and allowing premium tax credits to be used toward this coverage could increase enrollment, especially among healthy individuals. Adding a copper tier plan, with an actuarial value lower than that of the bronze tier plans, could result in increased enrollment among young and healthy individuals. By their design, copper tier plans would have higher out-of-pocket cost-sharing requirements than other plans. Currently, catastrophic plans are treated separately in the risk adjustment program, which transfers money among plans to reflect the underlying risk. If a goal is for higher enrollment in catastrophic plans to help lower premiums and stabilize the market as a whole, they would need to be treated together with other plans in the risk adjustment program.

 

Include a Medicaid or Medicare buy-in option. To provide consumers with another plan option, perhaps with a lower premium, some policymakers have proposed to allow individuals to buy in to Medicaid or Medicare coverage. For instance, a Medicaid plan could be offered alongside other private insurance plans in a state’s health insurance exchange. Another option would be to allow Medicare to set a lower age for general eligibility, such as 50 or 55, at which age individuals can opt to buy in. The impact on individuals and the insurance markets would depend on the details of how the public plan option would compare to the private plans in terms of the benefits covered and the underlying provider payment rates, whether the public plans would be part of the state marketplaces including the risk adjustment program, and whether the public plan options would be available everywhere or only in areas with no other participating plans. For instance, Medicare, and to an even greater extent Medicaid, have lower provider payment rates than private insurance plans. Therefore, including a public option in the marketplaces could provide coverage with lower premiums. However, health care providers might be less willing to participate in the plan, potentially threatening access to care, and insurers might be less apt to participate in the market if they can’t negotiate similar provider payment rates.

 

Move to a single-payer plan. Some policymakers have proposed moving to a single-payer system as a way to meet the goals of achieving universal health insurance coverage, lowering health spending, and improving health care quality. In general, “single-payer” means the health insurance system covers the health care spending for all of a specified population and is financed by the government, typically from tax revenues. Although the term describes how the system is financed, it does not define who employs the health care providers. The term “socialized medicine” differs from “single-payer” in that the former refers to a system in which the government not only pays for the medical spending, but also owns the health care facilities and employs the physicians and other health care workers.

 

Medicare is often referred to as a single-payer system, and some single-payer proposals are characterized as “Medicare for all.” Medicare is financed through federal income and payroll taxes as well as beneficiary premiums. The program covers medical services for eligible beneficiaries, and care is received from private health care providers. Medicare is not operated completely by the government, however, as private insurers participate through the Medicare Advantage and Part D prescription drug programs. In these Medicare programs, private insurers are paid by the federal government to provide insurance coverage and bear the risk if spending exceeds those payments.

 

The impact of a single-payer system on insurance coverage rates, health care spending, providers, consumers, and taxpayers depends on the details underlying the system. Potential implications include achieving universal or near-universal coverage, lower provider payment rates and lower administrative costs, higher taxes, a reduced role for private insurance, and reduced health care innovation.

 

Alternatives to the Cadillac Tax. There have been some calls to modify the tax or eliminate it altogether. One concern with the tax is that plans with high premiums are not necessarily overly generous. For instance, they could reflect plans with an older workforce or in industries or parts of the country with higher health costs. Some proposals to replace the Cadillac tax would change the tax treatment of employer-provided health coverage. Currently, employer premium contributions are tax-deductible as a business expense and excluded from employee income and payroll taxes. For many workers, savings due to the tax exclusion can be relatively substantial. The tax exclusion is more valuable to higher earners, however, because they face higher marginal tax rates. Not incurring these taxes provides a strong incentive for employers to sponsor health insurance.

 

One suggested alternative would cap the amount of premium payments that can be excluded from income for tax purposes (i.e., tax exclusion cap); this would be another way to encourage enrollment in less-generous plans. Another proposal would eliminate the tax exclusion altogether and replace it with a tax deduction or a tax credit for people with health insurance, regardless of whether it was received through an employer or purchased in the individual market. Such tax deductions or credits could be structured to vary based on income. The impact of such proposals on employers’ decisions to offer coverage, workers’ decisions to purchase coverage through their employers or elsewhere, the number of uninsured, and health spending growth would depend on how they are designed.

 

 

Additional Resources from the American Academy of Actuaries

 

Comment letter on promoting health care choice and competition (January 2018)

An Evaluation of the Individual Health Insurance Market and Implications of Potential Changes (January 2017)

Comments on executive order to expand AHPs, short-term duration plans, and HRAs (November 2017)

Comment letter on proposed AHP rules (March 2018)

Association Health Plans (February 2017)

Selling Insurance Across State Lines (February 2017)

Using High-Risk Pools to Cover High-Risk Enrollees (February 2017)

Risk Pooling: How Health Insurance in the Individual Market Works (July 2017)

 

[1] National Center for Health Statistics, Trends in Health Care Coverage and Insurance for 1968-2011.

[2] As will be discussed below, the individual mandate penalty has been eliminated beginning in 2019.

[3] Cynthia Cox, Ashley Semanskee, and Larry Levitt; “Individual Insurance Market Performance in Late 2017”; Kaiser Family Foundation; January 2018.

[4] American Academy of Actuaries; Drivers of 2015 Health Insurance Premium Changes; June 2014.

[5] Tammy Tomczyk, et al.; Alaska 1332 Waiver Application: Actuarial Analyses and Certification; Oliver Wyman; November 22, 2016.

[6] Tammy Tomczyk and Kurt Giesa; “How States Could Leverage $5 Billion into More Than $15 Billion to Stabilize the Individual Market”; Oliver Wyman; December 9, 2017.