The ACA, It Is a-Changin’

“In this scenario, the government would conclude that if it allows Idaho to offer non-ACA-compliant plans, soon all “red” states will join the bandwagon and increasingly “push the envelope” to move more individuals from the ACA essential health benefits and other consumer protections.”

William G. (Bill) Stuart

Director of Strategy and Compliance

March 1, 2018

As the Affordable Care Act celebrates its eighth birthday later this month, the sweeping law that serves as President Obama’s signature domestic legislation is undergoing changes. President Trump and a Western governor are proposing changes to the way  Americans buy coverage and what types of plans they can buy. This ongoing activity, after a year of legislative failure in 2017, shows that medical coverage remains an important topic with the general public as well as elected and appointed government officials.

To some, President Trump’s two administrative actions are a Republican attempt to dismantle the ACA piece by piece after the GOP was unsuccessful in attempts to repeal the ACA (Congress passed a repeal bill that President Obama vetoed in 2016) or amend it (an effort that passed the House of Representatives but died in the Senate in 2017).

To others, the president is trying to reduce the burden that the law imposes on individuals and employers by redefining some key terms and issuing regulations that allow insurers to sell a wider variety of plans than is permitted under the heavily prescriptive ACA.

And out West, a governor who shares a last name with a small carnivorous mammal found in the state’s many pristine forests and waterways is taking a more controversial step toward improving his state’s medical coverage marketplace.

Change without Congress

You may wonder how the administration can make substantive changes to the ACA without congressional action. After all, the ACA is a law passed by Congress, and only Congress can amend a law (notwithstanding the many unilateral amendments that President Obama made to the law with the goal of making it more workable).

The ACA actually gives broad power to the Secretary of Health and Human Services (a department within the executive branch) to define terms and write rules. The law itself is essentially a framework (who knew that 2,000 pages of text would represent only a framework?). Congress left it to the executive branch to determine the details.

President Obama and his secretaries of HHS spent six and a half years issuing various regulations to effectively put skin on the skeleton that Congress passed. Now Republicans control those same levers.

President Trump previously used this authority to reduce the open-enrollment period for ACA marketplaces (public exchanges) and tightened the criteria for enrollment in marketplace plans outside the Jan. 1 anniversary date. His latest actions are likely to have a bigger impact.

Association Health Plans

Federal law allows employers to band together and purchase medical coverage. And small groups have been doing so for decades. The ACA restricted the use of multiple-employer arrangements by imposing reporting requirements, tightening anti-fraud rules and prescribing minimum benefits that must be offered.

In October, President Trump issued an executive order directing officials to propose new regulations that allowed for more flexibility. In early January, the Department of Labor issued proposed regulations to make association health plans a more viable option for employers.

In particular, the proposed regulations allow businesses to form associations when they have no bona fide business relationship other than to purchase coverage. Associations may not have to offer all the essential health benefits prescribed by the ACA, which concerns some industry experts who fear that they will skim good risk from small-group community-rating pools and drive premium increases for all small non-association employers. And the proposed regulations allow for the purchase of coverage across state lines, long a goal of market-oriented Republicans.

The benefit of association health plans is that banding together allows companies to purchase insurance as a single large group. For example, 100 small companies with 10 employees each currently purchase insurance in their states’ small-group markets. These plans are community rated, so claims experience is not a factor in determining premiums. If these same companies band together, they are now a single entity with 1,000 employees. The single group represents less of a risk to an insurer than small groups of 10. And their premiums are now based on their experience, rather than the claims experience of all small employers in their state or states.

The downside of any coalition of buyers is that the organization remains intact only when all its members believe that they receive a better deal on coverage than they would by purchasing separately. As soon as some larger member organizations realize that they have good risk and can seek coverage outside the association, the program begins a death spiral. The remaining businesses experience higher average claims, which in turn leads to accelerating premium increases, which leads more businesses to find better coverage outside the association, which in turn leads to accelerating premium increases, etc.

The potential impact of the proposed rules is difficult to project. The Department of Labor says that up to 11 million Americans may receive coverage through association health plans. The final figure likely will be a fraction of that number.

Limited-Duration Coverage

Limited-duration (temporary) coverage allows individuals who have lost insurance (usually employer-based coverage) to purchase a policy to cover them against catastrophic financial loss due to medical care until they again qualify to purchase more comprehensive coverage. Under the ACA, these limited-duration plans don’t have to meet certain requirements of the law, including coverage for all “essential health benefits.”

These plans tend to offer a lower level of coverage at a much lower premium than traditional policies. They are attractive to individuals who have what they believe to be a temporary gap in coverage and are generally healthy. The policy protects them against unlimited risk at a cost often one-half to one-third the cost of ACA-compliant coverage.

These plans aren’t considered credible coverage under the ACA. Individuals covered by limited-duration plans were subject to the individual mandate penalty. That penalty in 2016 was $695 per adult and $2,085 for a family of two adults and two children. The penalty likely steered many potential limited-duration plan buyers to the ACA marketplaces because the penalties wiped out much of the cost advantage of enrolling in temporary coverage.

The Obama administration issued regulations limiting coverage under these policies to no more than three months. It wanted to discourage enrollment in these plans so that individuals who qualified would instead purchase a plan through an ACA marketplace. Since potential limited-duration policy buyers are younger and healthier than the population covered by ACA marketplace plans, the net effect would be to improve the financial health of the marketplace plans.

Critics of the three-month limit argued that for many individuals, three months simply wasn’t enough time. Some faced longer periods between employer-sponsored coverage, particularly during the slow rebound from the 2008-2009 recession that saw unemployment in the 6% to 7% range and an economy growing at only 1.0% to 1.5% annually. Others who lost coverage and didn’t have a qualifying event to join an ACA marketplace plan off-cycle needed more than three months of coverage to protect themselves financially until the next marketplace open-enrollment period.

In response, the Trump administration in February issued preliminary rules that expand the duration of coverage under these plans to up to 12 months. This change allows individuals who face a projected gap in coverage of more than three months to enroll in this less-expensive plan to manage their potential financial risk until they can enroll in permanent coverage, either employer-based or through the ACA marketplace.

In an unrelated move critical to this opportunity, The Tax Cuts and Jobs Act of 2017, which President Trump signed into law last December, made an important change to the individual mandate. While it didn’t eliminate the mandate that all individuals must carry credible insurance, it set to $0 the penalty for failing to have credible coverage. In addition to providing tax relief to millions of Americans with family incomes below $50,000 annually, this change in the law eliminated the tax that made limited-duration plans less attractive to potential buyers.

Critics of the proposed regulations argue that the proposed regulations make limited-duration plans more attractive (which is true). They express concern that a growing number of people will enroll in these plans rather than ACA marketplace coverage (which is probably true), which in turn will damage the risk pools in ACA marketplaces by diverting healthier individuals who would pay premiums that would subsidize the claims of less healthy individuals already enrolled in marketplace plans (which is true).

Supporters contend that individuals should be offered more choices. They question on moral grounds why people should be forced to work against their own economic interests to prop up a failed law. Due to its design (not adjusting premiums depending on projected risk, as all issuers of other types of insurance do), the ACA  gives healthy individuals with a temporary loss of coverage the choice of a dramatically overpriced (based on their claims experience) ACA market place plan or no coverage at all.

Extending the length of coverage of limited-duration plans from no more than three months to no more than 12 months gives individuals another option. And reducing the individual mandate penalty to $0 puts limited-duration plans on par with ACA marketplace plans.

Expect the Trump administration to review comments on the proposed plan and issue permanent guidance this summer.

And in Idaho . . .

Something fascinating is playing out in Idaho. In early January, Governor Butch Otter issued an executive order directing the state Department of Insurance to “seek creative options that encourage and permit health insurance carriers to offer health plans that expand access for Idahoans by providing benefits and plan designs to meet consumer needs at lower costs than those now available.”

The governor further directed the department “to approve options that follow all State based requirements, even if not all PPACA requirements are met, so long as the carrier offering the option also offers an exchange certified alternative in Idaho.”

In other words, the governor is authorizing the sale of non-ACA compliant medical coverage in Idaho.

This story bears watching. Premiums for individual coverage have more than doubled nationally since the ACA became effective Jan. 1, 2014. The reason is simple. As noted earlier, a key feature of ACA coverage is that insurers can’t adjust premiums to reflect risk. This provision is in sharp contrast to the laws that prevailed in many states prior to the ACA. It also contrasts with other insurance markets in which for example, a life insurer can charge different premiums to a 40-year-old vegetarian marathoner, a 40-year-old smoker with a drinking problem and a 40-year-old generally healthy recreational skydiver or cliff diver.

The ACA system works as long as insurers correctly predict the percentage of healthy enrollees (whose premiums exceed their claims costs, so that they subsidize sicker enrollees) and less healthy enrollees (whose claims costs exceed their premiums). The latter group has eagerly enrolled in ACA marketplace coverage, while the former group has been far less willing to pay inflated premiums based on their risk.

As a result, premiums have skyrocketed as insurers have raised rates to covert the claims incurred by a disproportionately older, sicker population. Advance-premium tax credits (“premium subsidies”) cover a portion of these sharp increases for individuals with incomes below 400% of the federal poverty level, but individuals and families who don’t qualify for the premium subsidies too often find themselves priced out of the market.

The problem isn’t unique to Idaho. Every state with an ACA marketplace (34 of 50 states that defaulted to the federal government program rather than build their own state-based marketplace) has experienced sharp increases in premiums. To help manage their financial risk in the absence of pricing variation, insurers have also narrowed networks (offering Medicaid-level reimbursements in some cases to discourage high-profile and expensive academic medical centers from caring for enrollees), limited access to non-contracted providers and increased out-of-pocket costs sharply.

While other states’ elected officials are trying to determine how to manage their insurance markets in the face of federal regulation, Gov. Otter has decided not to sit still. His stated goal is to allow insurers to sell non-ACA-compliant plans in Idaho’s ACA marketplace to attract younger, healthier individuals and families. Bringing them back into the insurance pool, he believes, will help stabilize premiums.

Is Gov. Otter correct? Only time will tell. If the products are priced properly to reflect anticipated claims costs, the program won’t stabilize the ACA-compliant market. Properly priced products by definition don’t generate enough of an excess of premiums over claims costs to subsidize another market.

Blue Cross of Idaho has responded to the governor’s challenge. It has introduced a menu of five Freedom Blue plans offering a menu of benefits that doesn’t meet the ACA standard.

How do these state-based plans differ from ACA-compliant plans? Cost-sharing is similar. Networks are narrower. One plan doesn’t cover maternity care (but the other four, as well as all ACA-compliant plans, do).

The state-based plans are subject to medical underwriting, a key distinction from ACA marketplace coverage. Blue Cross of Idaho will underwrite each individual applicant rather than extend coverage to everyone (the marathoner and the smoker/drinker in our earlier example) alike. Those who are approved enjoy lower rates. Those who don’t qualify for lower premiums can enroll in state-based plans at higher premiums or ACA-compliant plans.

How will the Trump administration respond to Idaho’s initiative? That’s the million-dollar question.

As an example, possession of marijuana is a federal offense. In recent years, a growing number of states have legalized possession of small quantities consistent with personal use. The Obama administration, generally sympathetic with personal use of marijuana, didn’t enforce the federal law to clamp down on legalizing possession. Current Attorney General Jeff Sessions announced in early January that he would remove barriers that prevented federal prosecutors from pursuing marijuana cases in these states.

The Trump administration could target Idaho, likely with the support of ACA supporters who don’t want to see any weakening of the law, even if it means greater consumer choice and more individuals enrolled in coverage. In this scenario, the government would conclude that if it allows Idaho to offer non-ACA-compliant plans, soon all “red” states will join the bandwagon and increasingly “push the envelope” to move more individuals from the ACA essential health benefits and other consumer protections.

Alex Azar, confirmed in February as the new Secretary of HHS, has indicated that he will uphold the ACA.

The other option for the Trump administration is to take a page from the Obama marijuana play book and not enforce the ACA. The rationale for this action (beyond general contempt for the ACA and a desire to repeal the law) is that offering more options to consumers increases coverage. These consumers are priced out of the ACA marketplace because of high premiums and, based on their incomes, low or no premium subsidies. It’s better to bring them into the coverage market than it is to stand on principle that consumers who don’t want or can’t afford an ACA policy with its rigid benefits and rating formulas can’t have any coverage.

As my friend David Shore commented on LinkedIn, “Get your popcorn . . .” He’s right, this battle will be the equivalent of “Must See TV.” The political and human stakes are enormous.

What We’re Reading

President Trump recently released his budget blueprint for the 2019 fiscal year, which begins Oct. 1. To learn what he is proposing for medical coverage, read pages 49 through 56 in the budget document.

Lawmakers in Maryland have been aggressive in their attempt to find political solutions to the high cost of medical care. They already have imposed cost controls on hospitals. Their next target: prescription drugs. Read more here.

One thought on “The ACA, It Is a-Changin’”

  1. Julie Jennings says:

    Well written and easy to explain to our benefits clients. Thanks Bill!

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