I'm a law professor at the University of Houston Law Center with an emphasis on insurance law. I also have a long-standing and profound interest in the use of mathematics, and Mathematica, in studying law and policy.
Note: this entry will likely be updated today as new information comes in.
President Obama is stating right now that the Executive branch of the federal government will fix the problems created by insurer cancellation of many individual health policies by forcing insurers to renew cancelled policies. It may be that state insurance commissioners will be able to veto this imposition within their own states.
A number of legal and economic issues are created by this proposal. I sketch them here.
1. Where does President Obama get the authority to issue such a regulation? The President can not rule by decree and it will be challenging to figure out what statute authorizes him to undo parts of the Affordable Care Act that would have prohibited insurers from selling such policies. Perhaps the President will argue that all he is doing is directing the Secretary of HHS and other executive officials not to prosecute or otherwise punish insurers for selling policies without Essential Health Benefits but only with respect to policies they had just recently cancelled? Or possibly he might expand the definition of what it means to be “grandfathered.” In any event, there is a separation of powers issue here worth thinking about.
But, if I am hearing the President correctly and reading news accounts properly, I am wondering who will have “standing” to challenge the ruling since no one appears to be forced to do anything. If I’m reading things incorrectly and insurers are indeed going to be forced to uncancel, then, unlike earlier expansionist views of executive authority such as delay of the employer mandate, there will definitely be institutions with “standing” — some insurer that does not want to renew — to challenge the ruling.
As one might expect, law professors are opining on the legality of the President acting here without congressional authority. Professor Eugene Kontorovich from Northwestern University Law School has published a quick piece on The Volokh Conspiracy, a leading conservative-libertarian blog, arguing that the President’s fix violates separation of powers. He also cites to the letter actually sent by CMS to State Insurance Commissioners explaining the President’s ruling.
2. From what I am now hearing, it appears that insurers will not be forced to reissue these policies. Nor will state insurance commissioners be forced to authorize sale of these policies. That should eliminate federalism issues or possibly due process issues. Otherwise there would have been a question as to whether forced insurance by the federal government — whether done by a legislature or through executive action — violates any independent protections of the Constitution? Assuming this is regulation of interstate commerce, nonetheless neither the executive nor the legislature can take property without just compensation and, on occasion, this provision has been interpreted to encompass regulations that effectively take property.
3. Assuming insurers accept the President’s invitation, doesn’t this create more problems for the Exchange? The hundreds of thousands or millions of people who are potentially being helped here are people who have recently been medically underwritten and are most likely healthy. If these people have the chance of being forced into a pool in which there is no medical underwriting and one in which there is, many will opt — even if there is no subsidy — into the underwritten pool, particularly if the Exchange policies offers a feature/price mix that they do not want. But the withdrawal of these people from the Exchange pools makes it ever more likely that an adverse selection death spiral could develop in the Exchange. The horse journalists and others should be beating now is not about breaches of promise — that’s been thoroughly discussed — but about how insurers who have agreed to write policies in the Exchange on one set of assumptions about the pool are going to react when those assumptions change.
One of the fixes being seriously considered this week to address the “discovery” that the Affordable Care Act will not permit all people to keep the health insurance plan they may previously had in effect is H.R. 3350, a bill that would permit — though not require — insurers to continue to offer all individual insurance plans they had in effect at the start of 2013 and to treat such plans as “grandfathered” even when, perhaps, they would not be so treated under either the existing Affordable Care Act or the regulations promulgated thereunder. Unfortunately, this “Keep Your Health Plan Act of 2013” is likely to cause more problems than it solves. I also think there may be some technical problems with the bill that someone ought to think about.
The reason the Keep Your Health Plan Act will create problems is that, contrary to the rhetoric formerly used by its supporter-in-chief, the success of the Act depends precisely on many people not being able to keep their healthcare plans. And contrary to the Renaultian shock now being exclaimed by many politicians, depriving people of their existing individual health insurance plans, was part of the plan all along. Since the Affordable Care Act is an intricately woven web of provisions, it may well not be possible simply to excise one part without fatally destabilizing the remainder of the bill.
First, as to the allegation that depriving people of their individual healthcare plans was part of the plan all along, I offer several exhibits. To set the background for the evidence, consider that a central philosophical tenet of what became the Affordable Care Act was that medical underwriting of health insurance was unfair because it punished those who, often through no fault of their own, had poor health to begin with, and created needless hardship as a result of their resulting inability to obtain efficiently delivered American-style healthcare. The “genius” of the Affordable Care Act was the notion that one could remedy this problem not just through the previously advanced — and previously rejected — idea of expanding single payor systems such as Medicare in which the government provides insurance, but in a way that preserved at least the fig leaf of a private, entrepreneurial insurance system. And the intellectual key to that alternative path of assuring insurance equality was to show, contrary to the prevailing wisdom, that private insurance could in fact function in an appropriately structured health insurance marketplace notwithstanding the absence of medical underwriting ordinarily thought necessary to prevent an adverse selection death spiral.
The RAND studies
And studies there were that supported the idea that, with appropriate penalties for failing to purchase insurance and with a large enough pool enrolling in the nascent Health Insurance Exchanges, the market could stabilize without a fatal adverse selection death spiral taking place. Consider the various studies undertaken by the RAND corporation, one of the nation’s longest standing think tanks and one not known for being given to sentimentality. The first study undertaken by RAND in 2010 found that the number of persons in the “Nongroup” (a/k/a individual) market for health insurance would decline as a result of enactment of an ACA predecessor from the existing 17 million in 2013, to 5 million in 2014 and then down to 0 by 2016.
RAND does a second study as the actual Patient Protection and Affordable Care Act (which is the same thing as the Affordable Care Act and the same thing as Obamacare) is enacted. This one is commissioned by the United States Department of Labor. As shown below, the study likewise concludes that of the 18 million they now believe will be enrolled in nongroup health insurance prior to 2014 essentially none will be left; 14 million will migrate to the Exchanges and 4 million will find their way into employer-sponsored insurance. No one will have “kept their plan.”
The CBO and Other Government Assertions
But it was not just RAND that was assuming that many persons with individual health insurance policies would be impelled to enter the Exchanges, in which policies with Essential Health Benefits and other expensive protections would prevail, it was also Congressional Budget Office, another source relied upon critically in forecasting the effects of what was becoming the Affordable Care Act. Consider the CBO’s letter of November 30, 2009, to Senator Evan Bayh. It estimates that 5 million people (14 million now outside Exchanges; 9 million left by 2016) will be move from nongroup coverage to coverage inside the Exchanges. While some of these may move voluntarily, there is no assertion that all will cheerfully accept the “better” coverage offered inside the Exchanges. The key quote comes in an explanation of why the ACA will actually lower premiums.
CBO and JCT estimate that about 32 million people would obtain coverage in the nongroup market in 2016 under the proposal, consisting of about 23 million who would obtain coverage through the insurance exchanges and about 9 million who would obtain coverage outside the exchanges. Relative to the situation under current law, with about 14 million people buying nongroup coverage, the different mix of enrollees would yield average premiums per person in that market that are about 7 percent to 10 percent lower.
That estimate of 5 million people is reiterated in a March 2010 letter from the CBO to Senator Harry Reid in which the CBO attempts to compute the costs of the ACA. The table below (a screen capture edited to delete unimportant parts) shows the computation.
Finally, there is what some have called the “smoking gun” contained in the pages of the June 17, 2010 Federal Register, a document (shown below with yellow highlighting) that captures the official views of the Department of Health and Human Services. Although the document does not state the movement out of non-group policies and into the Exchanges would be entirely voluntary, it is difficult to believe that with 40 to 67% moving, all would be doing so cheerfully and because they just “did not like” their existing healthcare plan.
Whether President Obama knew of this issue or at what level of detail is unclear. The Republican party is currently running an emotionally charged “stray cats and dogs video” containing some remarks of the President in 2010 from which those undisposed towards him might infer that he was aware of the issue. There are, however, a number of ways of interpreting the President’s elliptical and metaphorical remarks and it may remain to future historians to discern whether the President was simply unaware of the detail that some Americans might be forced from health plans that they truly liked to dispreferred coverage in the Exchanges or whether he, perhaps like some around him, simply regarded that inevitability as a cost of reforming a major American institution in which it was completely bizarre to think that no one at all would be hurt.
The MIT/Gruber Analysis
A leading academic proponent of the Affordable Care Act and consultant to the Obama administration during its development has been MIT economics professor Jonathan Gruber. (He’s also, by the way, the author by the way of a fantastic (if sometimes fairy tale-esque) graphic novel on Health Care Reform). Professor Gruber’s work has been instrumental in persuading people that an appropriately structured health insurance market can function even in the absence of medical underwriting. In 2011 and under the auspices of the National Bureau of Economic Research, Professor Gruber attempted to assess how reasonable were the projections made regarding the Affordable Care Act and the CBO’s earlier contention that it would actually lower the federal deficit. Here is what he thought would happen with the individual market. He thought those who moved from the existing nongroup market to the exchanges would find their premiums increasing 27-30% as a result. (page 16). He deprecated the potentially significant negative implications many might draw from such a finding by contending, however, that the purchasers would be rewarded with somewhat better policies: “[g]iven that the minimum standards are fairly modest, however, it seems likely that most of the increase in plan quality reflects voluntary upgrades.” (page 16). Thus, Professor Gruber did not contend that all would be better off as a result of the prohibition on non-grandfathered policies sold without Essential Health Benefits; he simply contended (possibly with some accuracy) that most would.
They knew and they understandably did nothing
So, if the people in the know knew, why did they do nothing about it.? Why did they not insist that the people be able to keep their health plans even if they evolved and not be impelled to purchase possibly better but possibly more expensive policies inside the Exchanges? And the answer is that they did nothing about it because they needed those people to sacrifice in order to make the whole scheme work. And so long as those people were the faceless masses — the anonymous red shirts of a Star Trek landing mission — it all made sense. They needed those people inside the Exchanges because many of them would have been recently medically underwritten and have low medical costs. They needed them because pushing people with low medical costs inside the Exchange was what was needed — and is still needed today — to make a health insurance marketplace without medical underwriting work. They needed them to prevent the adverse selection death spiral. They were, in short, expendables, and, besides, were getting something better than they had even if they did not value it properly.
And what was perhaps sadly true back in 2010 is sadly true today. The Exchanges are already unbelievably fragile and becoming more unstable each day that healthcare.gov stays more the butt of jokes than of a system for purchasing insurance. They are even more likely to break if people — the ones with low expected medical expenses — are permitted to separate themselves out and permitted to purchase cheaper and possibly less lavish policies outside the Exchanges. In economics, one might think of the availability of off-the-Exchange lower-benefit policies as permitting a “separating equilibrium” in which the healthier group stay in the tin policies found outside the Exchanges and the more expensive group head for the bronze, silver, gold and platinum to be found inside the Exchanges. And while one might think that everyone would be happy with this broader set of choices, the problem is that the removal of a large chunk of healthy people from the Exchanges means that there will be tremendous pressure on prices inside the Exchange to go up. The discrimination against the unhealthy, opposition to which formed an intellectual premise of the Affordable Care Act, will reappear.
So, do not expect insurers to take the Keep Your Plan Act lying down. Insurers priced their policies inside the Exchanges on the assumption — that sophisticated people knew about — that the Exchanges would be receiving an influx of generally healthy people that had recently been underwritten for insurance outside the Exchanges. Insurers knew — because they had the power to make it so — that those people would be receiving cancellation notices from their insurers and would thus have a choice either to go bare or to purchase policies inside the Exchanges. Insurers banked that many of them would invigorate the pools inside the Exchanges by choosing to purchase policies there. Take all that away, and many insurers will begin to regret — even more than I suspect many of them do as the debacle of healthcare.gov and the enrollment figures become ever more clear — that they ever supported the Affordable Care Act or thought there was gold in the hills of the Exchanges.
Insurers are not without recourse. There is little I know of that prevents the insurers from walking out of the Exchanges. Some have cancellation clauses built in to their contracts and it would create interesting contract litigation if some insurers decided, notwithstanding the existence of such cancellation clauses, simply to refund the advance premiums of prospective policyholders and say that they were not going to play. Note for contracts professors only: voluntary restitution in lieu of performance where performance is prevented by government order under Restatement (Second) of Contracts section 264?
But even if the spectre of mass cancellations for 2014 is unrealistic, insurers have to start planning real soon if they want to continue in the Exchanges in 2015. One expert at a conference in which I served as moderator contended that insurers will likely need to make a decision in April 2014 because that is when they will need to start submitting proposed new rates to insurance regulators. And every single day brings a new alarm bell suggesting they should not. The individual mandate might be delayed or cancelled. And although the individual mandate for 2014 is rather weak, still, such a delay will dilute further any otherwise existing incentives for the healthy to enroll in the Exchange. Healthcare.gov continues not to work well — it is revealed today that even the poor “Glitch Girl” apparently hasn’t tried to sign up. And now a broad spectrum of legislators and at least one former Democratic President — either embarrassed by what now appears to have been an untruth and/or cowed by the faces of earnest Americans being attached to what was heretofore treated as “statistics” — want to remove a source of potentially healthy insureds from the Exchange pools.
To be sure, there remain some protections for insurers who stay in. The little-discussed but, as it may turn out, unbelievably important “reinsurance and risk adjustment” provisions of the Affordable Care Act (42 U.S.C. 18061-063) may limit the losses insurers will suffer even if horrible adverse selection results from the confluence of events and hasty reforms. And, of course, if the enrollment numbers remain as infinitesimal as they now appear to be, not much matters. Even if premiums are off by a factor of 2, insurers in an absolute sense can’t lose all that much money if only 100,000 people ever enroll.
The Fix is not really a Fix
There are two other matters to discuss with respect to H.R. 3350. The first is use of the word “may” and the second is a technical problem.
“May” not “Must”
The key thing to recognize is that H.R. 3350 does not force insurers to restore insurance that they recently cancelled. Nowhere does H.R. 3350 say “must” or “shall.” Instead, it just says that insurers “may continue” to sell the policies they had in effect on January 1, 2013. It says only that, if they do so, they will not be treated as selling some sort of unlawful insurance prohibited by the Affordable Care Act. Thus, if insurers decide for whatever reason that they would rather not continue with those policies but would rather see those people inside the Exchanges, there is nothing in the Keep Your Health Plan Act that forces insurers to try and reverse their recent actions. As a result, some insureds will not be able to keep their health plans although failures in such respect will be more clearly the result of insurer choice than of federal compulsion. This, of course, may come as small consolation to those who truly liked their still cancelled old health insurance plans.
A Technical Problem
There may also be a technical problem with H.R. 3350, a bill that surely has been drafted in haste. The bill says that an insurer that had insurance in place on January 1, 2013, can continue to sell it notwithstanding the rest of the Affordable Care Act. And, if they do so, they will be treated as selling a grandfathered plan. The problem is that insurers could already do this. So long as the insurer did not change the policy a whit, the insurer could, under the existing ACA, continue to sell that policy in 2014. (A good source on grandfathered plans, by the way, is this Congressional Research Service report.) And that was true, even if the policy failed to provide Essential Health Benefits.
The question is whether an insurer can modify a plan that it sold in January 1, 2013 and still sell it in 2014 even though it does not provide Essential Health Benefits or afford other protections given to Exchange-traded policies. While one assumes it was the intent of the bill sponsors that an insurer be permitted to do so — otherwise what, exactly, is the point of the statute — such a reading places a strain on its language. The bill, after all, says, “may continue after such date to offer such coverage for sale during 2014.” But the “such coverage” is, at least grammatically, “health insurance coverage in the individual market as of January 1, 2013.” While I have doubts about the wisdom of the Keep Your Health Plan Act, I suppose I am majoritarian enough to believe that if it passes, it at least should do the minimum of what its sponsors intended.
The Real Problem with Reform
The real problem with reform of the Affordable Care Act is that is such a tightly integrated statute. It lacks a severability clause — a provision that says if one part of a statute is struck down the rest can go on — and although no one knows why omission of such a common provision occurred here, it is possible it occurred because the drafters knew much of the statute would be extremely difficult to sever in an intelligent way. If you make it easy for people to really keep their health plans, that makes it harder for Exchanges in which an anti-discrimination norm prevails to price policies affordably, which in turn creates a need for ever bigger federal subsidies. I suspect that as the flaws in the Affordable Care Act become ever more apparent in the days ahead, the difficulties of simply excising the disfavored parts will likewise become ever more clear. Healthcare reform in the United States can not be achieved by magic.
This blog is going to chronicle what I believe will be the implosion of the Affordable Care Act. I do not believe the Exchange based system of providing health insurance without medical underwriting is likely to work or that, if it does, it will not need far more massive propping up from federal taxes than is conventionally recognized. We’ll be looking at current events, the history of the Act, important court cases, and regulatory developments. Our tools will be a careful review of primary documents, some graphical and mathematical analyses, and references to important and insightful articles written by others.
Also, there is more to the Affordable Care Act than the Exchanges. There is more than the individual mandate. There is the employer mandate, the complex systems of federal reinsurance needed to backstop the Act, the reintroduction of medical underwriting under the “wellness label” and so much more. We’ll try as time permits to take a look at developments in these important areas too.
I recognize that many are writing on this topic and that it will be hard to stay a pace of such a fast moving target. But I do feel that there is a need for some hard and at least somewhat scientific look at what is going on. It will be my goal and burden to try to provide that in the months ahead.
Oh, and who am I? I’m Seth Chandler, a law professor at the University of Houston Law Center. I’ve taught insurance law, including life and health insurance law, for many years, been a co-director of the Health Law & Policy Institute, and done considerable work on the economics of insurance and its regulation. I’ve been very active using Mathematica, a system for doing mathematics by computer, and have shown how this tool can be used to analyze legal systems and many issues in insurance law such as adverse selection, moral hazard, correlated risk and a variety of issues in life, health, property and casualty insurance.
I should also add that the views expressed here are my own and do not necessarily reflect those of the University of Houston.
Exploring the likely implosion of the Affordable Care Act