Tag Archives: Keep Your Health Plan Act

How much will it cost to restabilize the Exchange insurance markets?

Short answer: My best order-of-magnitude estimate is between $500 million and $1 billion for the coming year of which a third to a half could be attributed to the President’s decision to honor his promise to let Americans keep their existing health insurance.

Insurers are rightfully complaining that the move by the President to fulfill a promise he made to permit Americans with “substandard” but previously grandfathered policies to keep their health insurance is going to destabilize insurance markets.  There were such complaints going in to a meeting on November 15 between President Obama and selected insurance leaders and there were somewhat muted complaints coming out of the meeting. Insurers are concerned because the people who are now being given access to another market in which insurance policies may be cheaper are likely to be precisely the healthy people that insurers who wrote policies in the Exchanges assumed would be in those Exchanges.  Their concerns are important because unhappy and unprofitable insurers have a tendency either to stop writing insurance or to raise rates.  That hurts policyholders and it also hurts politicians who assured the public that the rates would be affordable. (The insurers are also upset because it’s a little challenging to uncancel policies on short notice, but we’ll leave that grievance for others right now.)

The instrument by which some are proposing to pacify the insurance industry for the surprise deprivation of healthy insureds is the hitherto obscure “Risk Corridors” provision baked into the Affordable Care Act (section 1342, 42 U.S.C. § 18062, for those scoring at home). It provides that the government cover up to 80% of losses an insurer incurs on an Exchange. It was always assumed — foolishly in my opinion, but assumed nonetheless — that this backstop would be costless because the government would also effectively tax up to 80% of profits via the same provision. If the insurers systematically lose money, however, because many of the people they thought would improve the Exchange pools with their good health are being given an option to separate themselves out and keep their old often-less-expensive and often-less-generous insurance policies, the Risk Corridors provision could cost the government a fair amount of money.

So, the question is, how much money is Risk Corridors likely to cost? To use the language from my prior post, how much VOOM?  If it’s a relatively small amount, that would suggest that the President (and others’) proposal to honor a campaign commitment to let people who liked their health plans keep them is a better idea than if it’s a relatively large amount of previously unbudgeted money. I thought we might try a back of the envelope computation to see what’s involved.

Time to trot out some calculus.  The Risk Corridors provision basically creates a mathematical function between profitability (as defined in that provision) and the size of a positive or negative transfer payment from the government to insurers writing policies in the Exchange.  So, if we knew the distribution of profitability of insurers under the Exchange we would calculate the mean payment (an “expectation” for those with some statistics background) the government would make (or receive). Of course, we don’t know that distribution yet, but we can make some guesses and get some order-of-magnitude estimates.

If one assumes that the distribution of the ratio between claims and premiums has a mean value of one (i.e. that insurers on average break even), the the expected payment of the government is zero.  That’s the assumption on which the Congressional Budget Office worked when it asserted that Risk Corridors would cost nothing. But what if one assumes that the distribution of the ratio between claims and premiums has a mean value of 1.1, i.e. insurers on average lose 10%.  We’ll also assume for the moment that the distribution of the ratio is “log normal” and that 95% of insurers have a claims/premiums ratio of between 0.922 and 1.22. If we do the math — here’s the link to the Mathematica notebook that stands behind these computations — it turns out that the average payment of the government is about 3% of the average premium (before subsidies).  If the mean of the distribution were 0.5, i.e. insurers on average have claims 50% higher than profits, and we hold everything else the same, the average payment of the government is about 34% of the average premium (again, before subsidies). So if, just for the sake of discussion, one assumed there were 2 million people in the Exchanges and that the average gross premium was $3,500, the government would end up shelling out $210 million per year to provide insurers with some relief if they lose 10% on average and would end up shelling out $2.37 billion per year to provide insurers with similar relief if they lose 50% on average.

The graphic below shows the size of the government’s Risk Corridors obligation as a function of the mean of the claims/premiums ratio under the continued assumption that the distribution is log normal and that the spread of the distribution is similar to that described above. With a little wiggle when the mean of the claims/premium ratio is close to one, the relationship is pretty linear.

 

Relationship between mean insurer claims/premiums and risk corridor payments
Relationship between mean insurer claims/premiums and risk corridor payments

To get the total bill for the government, however, we not only have to calculate risk corridor payments in relation to a premium amount, we also have to make a guess about how many people will enroll in the Exchanges and what their premiums will be.  It’s complicated because, precisely because of adverse selection, there’s likely an inverse relationship between the number of people that enroll and the mean of the claims/premiums ratio.  But since all we are trying to do here is get some order of magnitude estimates — the discussion of this Act has been hurt all along by false claims of precision — we can try to make some reasonable guesses.

Suppose, for example, that the relationship between the mean of the claims/premium distribution and the number of people enrolling in the Exchanges looks something like this.

Hypothesized ratio between enrollment and mean of claims/premium distribution
Hypothesized ratio between enrollment and mean of claims/premium distribution

What we can now do is graph the government’s overall risk corridor payments as a function of enrollment.  I’m going to assume that the average premium is $4,000 per enrollee.  That’s roughly the average $328 per month that Kathleen Sebelius reported for a silver plan.  If people flock to the gold and platinum plans, the average could be somewhat higher. This graph is essentially the headline of this blog entry.

Hypothetical relationship between enrollment and risk corridor payments
Hypothetical relationship between enrollment and risk corridor payments

So, what we we see is that if, for example, enrollment for this year were to be 1 million, the total risk corridor payments might be somewhat in excess of $1 billion. If enrollment were 2 million, risk corridor payments might be $500 million.  One enrollment crosses 3 million, the government actually could gain money via the risk corridors program.

There are a lot of unknowns going in to the graphic above.  I do not pretend that it is precise.  I do not even contend that it is accurate.  Nonetheless, I believe it is useful.  I do believe it provides a plausible order-of-magnitude estimate of an unforseen cost of the Affordable Care Act.  If you asked for my best guess, I would tell you the Risk Corridor payments will likely be between $500 million and $1 billion this coming year as I would guess enrollment in the Exchanges will come out between 1 and 2 million (assuming they ever fix healthcare.gov).  This does not mean, by the way, that the cost of the President’s fix (or of the similar bills now in Congress) is the full amount of the Risk Corridor payments. Some of these risk corridor payments might have been made even without the Obamafix. That is so because enrollments in the Exchanges may always have been overestimated and may have been made considerably lower as a result of all the fallout from the debacle of the healthcare.gov website rollout.

In the end, then, I suspect that for the coming year the price tag for the President keeping his promise that “If you like your health plan, you can keep your health plan” is going to be somewhere in the $200 million to $400 million range for the coming year.  That’s about a third of the overall stabilization bill. And we’ll never know for sure because we won’t know how many of those that in fact do keep their health plan would have enrolled on the Exchange.  In one sense, the money cited above may be seen as a rather inexpensive price to pay to make good on an alluring promise.  On the other hand, it may also be seen as yet another unforeseen or unadvertised cost of a bill to transform American healthcare. It’s easy to make feel-good campaign promises when you aren’t fully honest about the cost.

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Can its reinsurance and risk adjustment provisions salvage the Affordable Care Act?

The Problem

Let us suppose, for the moment, that enrollment in the Exchanges increases as healthcare.gov becomes less dysfunctional and as we get closer to the January 1, 2014 and March 1, 2014 deadlines. It is, after all, unrealistic to think that enrollment will remain at the pathetic/paltry/miserable levels recounted by today’s testimony from Kathleen Sebelius,  notwithstanding her counting of people who merely put a plan in their shopping cart.  But it does seem likely to many , including me, that

  1. sticker shock,
  2. the small and difficult-to-enforce penalties for 2014,
  3. President Obama’s decision to let insurers “uncancel” ungrandfatherable policies and let some of those insureds stay out the Exchanges,
  4. the website debacle, and
  5. whatever short-sightedness or financial liquidity issues led to most of even the sickest uninsured Americans not enrolling in the Pre-existing Condition Insurance Plan

will likewise lead the enrollment in the Exchanges to be considerably smaller than projected. This is particularly likely to remain true, I believe, in states such as Texas in which institutional forces and political culture often do not encourage participation and in which fewer than 3,000 out the estimated 3,000,000 eligible to do so have enrolled thus far.

The key question is how resilient are the Exchanges to low enrollments in which, one would expect, the enrollees are — even more than they were projected to be — disproportionately older and disproportionately less healthy. And have the Exchanges been rendered yet more fragile by what many cheered as the surprisingly low premiums charged by many insurers? Could those insurers, who are likely to swoop up most of the business in a price sensitive market, in fact be about to face the winners curse? The answer to these questions may lie deep in the details of one of the least studied and yet one of the most important set of provisions in the Affordable Care Act: the reinsurance and risk adjustment provisions contained in sections 1341-1343 of that Act and now codified at 42 U.S.C. §§ 18061-18063.

Here’s the (long) paragraph-length explanation of how these reinsurance and risk adjustment provisions work. 42 U.S.C. § 18061 basically creates a transitional (2014-16) government operated stop-loss reinsurance program funded out of a special tax on other health plans ($63 per covered life). The reinsurance attaches when a person covered by a plan in an Exchange incurs $60,000 or more in claims per year.  After that point, the reinsurer pays for 80% of the claims up to a cap of $250,000.  Thus, if an individual had claims of $180,000 in a year, the government would reimburse the insurer for $96,000, which is 80% of the difference between $180,000 and $60,000. What this provision appears to do is make insurer profit and loss less sensitive to attracting high claims insureds. 42 U.S.C. § 18062 basically redistributes money in a complex way from insurers whose Exchange plans profit to insurers whose Exchange plans lose money. Again, the idea is to reduce the insurer anxiety either that their plan and their marketing (if any) happens to attract an unhealthy pool or that they selected a premium too low for the actual risk that materializes.  Finally, 42 U.S.C. § 18063, the only program that is supposed to persist past 2016, imagines an incredibly complex system in which the risk posed by an insurer’s pool is assessed and the states or, in their default, the federal government (see 42 U.S.C. 18041(c)(1)(B)(ii)(II)), transfers at least some money from those with the riskiest pools to those with the least.

Will these provisions really rescue the insurers?

All of this might seem a comfort to insurers that might permit them to survive and continue in the Exchanges even if the pools are, on average, considerably more expensive than originally projected. But to get a better handle on the degree of solace these provisions might provide, we need to look at some of the limitations of these programs and the actual numbers.

Stop-loss reinsurance under 42 U.S.C.  § 18061

First, let’s look at how much risk the transitional reinsurance provided by 42 U.S.C. § 18061 really slurps up. What I contend is that while this provision should — and probably did — lower the premiums the insurer would otherwise need to charge to avoid losing money, it does less to rescue insurers if the pool is less healthy than they foresaw.  While to really see this, we need to get deep into the weeds and do some math, I’m going to hold off on that fun for now. We have to save some things, such as the Actuarial Value Calculator, for other blog entries. I believe I have developed a plain English explanation that gets us most of the way there.

The key concept is to recognize that sophisticated insurers (are there other kinds?) took the free reinsurance into account when they priced their policies.  They computed an expected value of the reinsurance reimbursements and lowered their rates by something approximating that amount. They were able to charge lower rates than they otherwise would because some of the claims bill would be picked up by the government. But this does not mean that the insurers end up having profits that are insensitive to the actual claims incurred by their pool.  Unless all of the higher-than-expected claims are stuffed into the zone in which the reinsurance kicks in ($60,000 to $250,000), the insurers will be hurt when the pool has higher claims than expected.  But such an assumption is incredibly implausible.  If the insurer assumed that only, say, 2% of its insureds would have claims between $20,000 and $25,000 but, as it turns out, 4% of its insureds have such claims, nothing in 42 U.S.C. § 18061 will help such an insurer with that unanticipated loss. Moreover, because the reinsurance even within the relevant zone is incomplete, the insurer will lose money if claims between $60,000 and $250,000 are higher than expected.  The effect of the transitional stop-loss reinsurance on reducing the consequences of adverse selection is thus likely to be small.

In the end, what this transitional reinsurance mostly does is mostly to tax non-Exchange policies $63 per covered life in order to make policies within the Exchange more attractive to policyholders.  And, yes, that fact should make Exchange-based policies cheaper and reduce the problem of adverse selection.  After all, if the insurance were free presumably there would be little adverse selection — everyone would get it. But the reinsurance fails to reduce insurer vulnerability to adverse selection much more than, say, providing more generous tax credits and cost sharing reductions would have done. If the pool ends up being less healthy than the insurer anticipated — an almost certain consequence of lower-than-expected enrollments, 42 U.S.C. § 18061 is hardly going to end up relieving the insurer of most of the unhappy consequences of having written policies in that environment.

Footnote: There is one more wrinkle, but it only means that the transitional reinsurance is a yet weaker rescue vehicle: the government’s obligations under the transitional reinsurance provisions are limited.  There’s “only” $12 billion in 2014 and this ramps down to $4 billion in 2015.  If those amounts aren’t adequate to pay reinsurance claims, each claim gets reduced pro rata.  The reason I relegate this point to a “footnote,” however, is that if the pools are really small then even if claims per person are way higher than expected, the aggregate amount of claims in the reinsured zone of $60,000 to $250,000 aren’t going to be that big. My back-of-the-envelope computation suggests that the $12 billion allocated for transitional reinsurance should not be insufficient unless at least 2 million people enroll on the exchanges; since right now we are almost certainly at less than 100,000, 2 million seems a lot of insureds away.

“Risk Corridors” under 42 U.S.C. § 18062

The biggie in this field is the “Risk Corridors” provisions contained in 42 U.S.C. § 18062. It essentially creates this massive transfer scheme, taking money from insurers who had profitable pools and giving it to those who did not.  In some sense, it converts insurers from entities bearing risk to mere fronts for government funded health insurance.  If I were prone to accuse the Affordable Care Act of creating “socialized medicine,”  my Exhibit A would be the stealth “Risk Corridors” provision of 42 U.S.C. § 18062.

The graphic below shows how the scheme works. The x-axis of the graph shows hypothetical aggregate net premiums (what 18062 calls “the target amount”) an insurer might receive for some plan in some state.  The y-axis shows the profits the insurer receives as a function of those aggregate net premiums assuming that claims (a/k/a “allowable costs”) are $11.4 million. The purple line shows what profits would have been as a function of premiums if 42 U.S.C. sec. 18062 did not exist. The blue line shows what profits will be after the payments required by 42 U.S.C. 18062 are taken into account.  The khaki-shaded zone shows the payments insurers are supposed to receive (and the Secretary of HHS supposed to pay) under the statute. The green zone shows the payments insurers are supposed to make (and the Secretary of HHS supposed to receive) under the statute.

Profit as a function of premiums before and after 42 USC 18062
Profit as a function of premiums before and after 42 USC 18062

We can create a similar graphic in which the role of claims and premiums is reversed. The x-axis of the graph shows hypothetical aggregate claims costs (what 18062 calls “the allowable costs”) an insurer might receive for some plan in some state.  The y-axis shows the profits the insurer receives as a function of those aggregate claims costs assuming that net premiums are $8.6 million. The purple line again shows what profits would have been as a function of premiums if 42 U.S.C. sec. 18062 did not exist. The blue line again shows what profits will be after the payments required by 42 U.S.C. 18062 are taken into account.  The khaki-shaded zone again shows the payments insurers are supposed to receive (and the Secretary of HHS supposed to pay) under the statute. The green zone again shows the payments insurers are supposed to make (and the Secretary of HHS supposed to receive) under the statute.

Insurers profits as a function of claims before and after 42 USC 18062
Insurers profits as a function of claims before and after 42 USC 18062

If one looks at the slope of the blue lines — the ones that show profits after 18062 risk corridors are taken into account — they are much less steep for most of the domain than the purple lines — the one that show profits before 18062 risk corridors are taken into account.  What this means is that, in some sense, it doesn’t matter to insurers all that much whether they price too low or too high, whether claims are lower than they thought or — due to adverse selection or otherwise — higher than they thought.  Either they are going to pay money to the government or they are going to get money from the government.  The risk of writing policies in the Exchange is greatly diminished.

In some sense, then, if section 18062 (1342) is fully implemented — an issue to which I will shortly return — insurers don’t act very much as profit-making enterprises within the Exchange making or losing money on the spread between premiums and claims.  (This is even more true after the corporate income tax is taken into account) Instead, they are almost fronting for the government, providing their license, their claims processing abilities and their credibility to a scheme in which the government really bears the risk associated with the new Exchange-based system of providing insurance.  A cynic might term the Exchanges as having gone 80% of the way towards a single payor system in which there is but minor variation in the benefits offered by insurance policies and claims processing contracted out to various insurance companies with the experience to do so.

The incentives issue

There are several implications of this consideration of 42 U.S.C. 18062. The first is to consider what incentives the system sets up for insurers.  My tentative belief is that it incentivizes insurers to offer a low premium if they want to go into the Exchanges and this statutory provision may explain in substantial part why insurers priced their policies at rates lower than most expected. Let me see if I can sketch out the argument.  If the insurer prices high, they are going to get very little business.  Other insurers will take their business away by going low.  If they price low, they will get a lot of the business.  Sure, they may lose money if they price too low, but, if so, the government will reimburse them for most of their losses.  And if they price right or still too high, they can make some money.

The graphic below illustrates this concept.  The x-axis shows possible premiums the insurer might charge. The y-axis shows the profit of the insurer associated with that profit.  As one can see, before section 18062, the insurer does best to charge about $2,840 in premiums; after 18062, the insurer does best to charge about $2,677 in premiums.  Although the assumptions chosen to produce this graphic were somewhat arbitrary, it is interesting and suggestive to me that the magnitude of the reduction in premiums is roughly similar to that observed in the actual market place in which premiums came in several hundred dollars below that originally projected.

Profit as a function of premiums in a competitive market before and after 42 USC 18062
Profit as a function of premiums in a competitive market before and after 42 USC 18062

The imbalance issue

There’s a second issue suggested by the two graphics above (the ones with the shading) showing the effect of premiums and claims on profitability.  They highlight that there is is no reason to think that the amount the Secretary receives will be equal to the amount the Secretary takes in.  That would be true only if insurers happen, in aggregate, to price the policies just right. If insurers have underpriced the policies because they expected a larger — and correlatively healthier — pool, the graphics may quite accurately reflect what occurs and the Secretary will be obligated to pay out far more than the Secretary takes in.  I have found no one who has written on this problem, no one who can explain where the money will come from to make the needed payments, or what mechanism will be used to reduce payments in the event, as I suspect, there will be an imbalance between the money collected and the money the Secretary is supposed to pay out.

 And one final thing

Extra credit: Can anyone spot the uncorrected typo in 42 U.S.C. 18062? For answer, look here.

Risk Adjustment Under 42 U.S.C. §18063

The transitional reinsurance and risk corridors provisions only last until 2016. After that, assuming the Affordable Care Act survives in something like its present form for that long, insurers are protected from adverse selection only by the  sleeping giant among the trio of protection measures: the “risk adjustment” provisions in ACA section 1343, codified at 42 U.S.C. §18063. The idea here is to equalize the playing field for insurers not based on the amount they actually pay out in claims (stop-loss reinsurance) or their actual profits (risk corridors) but on the risk they took in accepting insureds.  It thus envisions this massive bureaucratic scheme whereby each individual purchasing a policy on an Exchange is scored (based on a complex federal methodology involving “Hierarchical Condition Codes“) and then, the insurers with high scores get paid by the insurers with low scores with the Secretary of HHS figuring out exactly how it works. To do this, the Secretary will need masses of sensitive information, including fairly granular accounts of the medical conditions of each person enrolled on an Exchange.  The idea in the end, though, is to calm insurer fears that because of peculiarities of their plans, bad luck, or other factors, they tend up with a worse than average pool.

This provision will not save the Affordable Care Act from an adverse selection death spiral if enrollment stays low.  This is because Risk Adjustment simply protects insurers from worse-than-average draws from the pool of insureds purchasing Exchange policies.  It does nothing to protect insurers from having an overall pool of insureds purchasing Exchange policies that is higher risk than anticipated. If that larger pool is high risk on average, however, insurers will need to price their policies high, which will lead the lesser risk insureds to drop out, which will result in prices being raised again — the death spiral story.

The Bottom Line

The bottom line here is that two of the provisions (18061 and 18063) that purport to protect insurers from adverse selection really do little to protect insurers from the sort of adverse selection that is now appearing quite likely to develop: lower risk persons staying out of the Exchanges, period. The remaining provision, 18062, “Risk Corridors” in theory could give insurers some confidence that they will not lose their shirts if the pool stays small and high risk.  But this is only true to the extent that insurers believe the Secretary of HHS will find some currently unknown pot of money with which to make payments when the number of insurer losers in the Exchanges far outstrips the number of insurer winners. If insurers doubt that the Secretary will be able to find the money and may simply resort to some pro-rata reduction in payouts under 18062(b)(1), they will have be less pacified in what must be their growing fears that the pool of insureds inside the Exchanges will, on balance, be far higher risk than they anticipated. And, if the Secretary finds money with which to honor the promises in section 18062, look for protests from those who were told that the Affordable Care Act would not have all that large a price tag.

Late Breaking News

As it turns out, the reinsurance and risk adjustment provisions are in the news today in an elliptical remark made at the end of a letter sent by the Center for Consumer Information & Insurance Oversight (CCIIO) that implements President Obama’s transitional “fix” with respect to canceled nongroup policies. He states:

Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance.

I believe this passage amounts to recognition by the President that providing a non-Exchange insurance substitute for generally healthy people who otherwise likely would have gone into the Exchanges will end up making adverse selection worse and further increase likely losses by insurers writing in the Exchanges.  This, by the way, is why insurers are apparently furious about the President’s “fix.”  The question, though, is where is the money going to come from to make the insurer’s whole.  The statute appears to envision a zero sum game in which the winners compensate the losers.  It does not appear to contemplate what seems ever more likely to occur: a game in which the only winning move is not to play.

Acknowledgements

If you are interesting in this topic, you should read the articles by Professor Mark Hall. I don’t alway agree with Professor Hall, but I have tremendous respect for his analysis.  He is, in my view, one of the leading scholars with a generally positive view about the Affordable Care Act. You can find the articles here and here.

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The unmagical H.R. 3350

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.

They Knew

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 Studies

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 prediction in 2010
RAND prediction in 2010

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.”

 

RAND: 2010 Establishing State Health Insurance Exchanges study
RAND: 2010 Establishing State Health Insurance Exchanges study (red box added by me)

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.

Table showing CBO prediction on nongroup policies
Table showing CBO prediction on nongroup policies

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.

June 17, 2010 Federal Register
June 17, 2010 Federal Register

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.

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