ACA and Private Health Insurance

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Affordable Care Act (ACA) >> ACA and the Health Sector >> ACA and Private Health Insurance (last updated 6.18.17)

Immediate Improvements in Health Care Coverage

Unless otherwise stated, these provisions became effective for plan years beginning on or after 6 months after the date of ACA enactment (September 23, 2010).

• No Lifetime or Annual Limits. Sec. 2711 prohibits plans from establishing lifetime limits, and annual limits beginning in 2014, on the dollar value of benefits (caps on annual limits were gradually phased in starting in 2010).
• Prohibition on Rescissions. Sec. 2712 prohibits all plans from rescinding coverage except in instances of fraud or misrepresentation.
• Preventive Health Services Without Cost Sharing. Sec. 2713 requires all plans to cover without any cost-sharing all preventive services and immunizations recommended by the U.S. Preventive Services Task Force and the CDC, certain child preventive services recommended by the Health Resources and Services Administration (HRSA), and women’s preventive care and screening recommended by HRSA.
• Dependent Coverage to Age 26. Sec. 2714 requires all plans offering dependent coverage to allow unmarried individuals until age 26 to remain on their parents’ health insurance.
• Uniform Explanation of Coverage Documents. Sec. 2715 requires the Secretary to develop standards for use by health insurers in compiling and providing an accurate summary of benefits and explanation of coverage for applicants, policyholders or certificate holders, and enrollees.

Health Insurance Market Reforms

Overview

The following amendments were made to various sections of the Public Health Services Act effective Jan. 1, 2014:

• Modified Community Rating. Sec. 2701 prohibits higher premiums based on gender or health status; older adults cannot be charged more than 3 times the rate for the youngest adults. According to actuary Greg Fann at Wakely Consulting Group, “the allowable rating relationship of costs by age and gender varies across states, but the cost curve is generally thought to be in the 5:1 or 7:1 range. The ACA prescribes a 3:1 age rating limit, which is intended to lower the premium costs to older people. The ACA also prohibits rating differently based on gender starting in 2014. The ACA prescribes a common rate slope across issuers in each state, with the federal default slope adopted in most states.”
• Guaranteed Availability of Coverage. Sec. 2702 provides for guaranteed issue, i.e., prohibits denial of coverage due to a pre-existing medical condition.
• Guaranteed Renewability of Coverage. Sec. 2703 guarantees renewal of coverage even to those with pre-existing conditions.
• Prohibition of Pre-existing Condition Restrictions. Sec. 2704 prohibits pre-existing condition exclusions or other discrimination based on health status in the non-group market;
• Prohibition of Discrimination Based on Health Status. Sec. 2705 prohibits discrimination against individual participants and beneficiaries based on health status in the non-group market.
• Non-Discrimination in Health Care. Sec. 2706 prohibits discrimination with respect to health care providers.
• Comprehensive Health Insurance Coverage. Sec, 2707 requires essential health benefits and places maximum limits on annual out-of-pocket spending.
• Nondiscrimination Rules for Fully Insured Health Plans (Martindale). As of 2010, insurers can no longer deny or restrict coverage for children who have been diagnosed with an illness (that is, a pre-existing condition). From 2014 on, all health plans will be prohibited from restricting coverage of pre-existing conditions or charging higher premiums to individuals with health problems.
• Pre-Existing Condition Insurance Plan.  From 2010 to 2014, a new, temporary  program will offer uninsured adults with pre-existing conditions coverage in special state-based “pools.”
  • Pre-Existing Condition Insurance Plan. Health Affairs Policy Brief, 11.30.2010
• Medical Loss Ratio Requirements. On November 22, 2010, the Department of Health and Human Services released its interim final rule implementing the requirements of the new section 2718 of the Public Health Services Act (added by section 10101 of the Affordable Care Act), entitled, “Bringing Down the Cost of Health Care Coverage.”  This provision is usually referred to as the “medical loss ratio” (or MLR)  requirement, although the term “medical loss ratio” appears nowhere in section 2718. About two thirds of the states have required insurers to report their “anticipated loss ratio.”
  • Rate Review. While rate review oversight remains at the state level, exchange-qualified plans also must be reviewed at the federal level. Some states received federal grants to increase the scope of reviews. See further discussion below.
  • After allowing for quality improvement costs as well as taxes and assessments, an 80 percent minimum loss ratio must be met in the individual and small group markets (separately, unless the state has merged the two markets into one pool, as has Vermont). A result below 80% results in refunds to policyholders. This calculation will be performed on results that will include proceeds to or from the risk adjustment, transitional reinsurance, and risk corridor programs.
  • About 30 states require insurers in their individual markets to achieve MLR targets while about 20 states impose MLR targets on their group or small group markets, but the state MLR targets tend to be lower than the ACA targets.
  • Medical Loss Ratio Requirements (NAHU)

Analysis

• Health Insurance Standards Under the Affordable Care Act. §156.1120 Quality Rating System. (a) Data submission requirement: (1) A QHP issuer must submit data to HHS and Exchanges to support the calculation of quality ratings for each QHP that has been offered in an Exchange for at least one year. (2) In order to ensure the integrity of the data required to calculate the QRS, a QHP issuer must submit data that has been validated in a form and manner specified by HHS. (3) A QHP issuer must include in its data submission information only for those QHP enrollees at the level specified by HHS. (b) Timeline. A QHP issuer must annually submit data necessary to calculate the QHP’s quality ratings to HHS and Exchanges, on a timeline and in a standardized form and manner specified by HHS. (c) Marketing requirement. A QHP issuer may reference the quality ratings for its QHPs in its marketing materials, in a manner specified by HHS. (d) Multi-State plans. Issuers of multi-State plans, as defined in §155.1000(a) of this subchapter, must provide the data described in paragraph (a) of this section to the U.S. Office of Personnel Management, in the time and manner specified by the U.S. Office of Personnel Management.” (Department of Health and Human Services, 5.27.14)
• Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2016. The ACA requires exchange plans to maintain a “quality improvement strategy” designed to prevent hospital readmissions, improve health outcomes, reduce health disparities and meet other quality improvement goals. The Centers for Medicare and Medicaid Services (CMS) implement this requirement with a focus on quality improvement strategies that use value-based purchasing concepts. The rule emphasizes the importance of aligning insurers’ provider payment and quality improvement strategies with those efforts already underway in the Medicare program and other public and private sector payment reform initiatives. “We believe that aligning QHP issuer standards for quality improvement strategies in Exchanges with existing initiatives would reinforce national health care quality priorities while reducing the burden on health plans and stakeholders to implement different and multiple program requirements.” (Center for Medicare and Medicaid Services, 11.26.14)
• The Affordable Care Act’s Requirements for Quality Improvement in the Health Insurance Marketplaces: What Recent Federal Action Tells Us. “The ACA requires plans participating on the marketplaces to maintain a ‘quality improvement strategy’ designed to prevent hospital readmissions, improve health outcomes, reduce health disparities and meet other quality improvement goals…Beginning in the fall of 2016, insurers that participated in one or more marketplaces in 2014 and 2015 will have to submit a quality improvement plan to CMS, followed by annual progress updates. While CMS is not specifying precise elements for insurers’ quality improvement strategies, they indicate that they’ll be looking for strategies that link provider payments to the quality and value of their performance… The ACA and federal rules require insurers to collect and report data that will support the development of quality rating scores for each of their plans offered through the marketplace. In addition, they must contract with an approved vendor to conduct enrollee satisfaction surveys. The FFM will use this data to rate each participating plan through a 1- to 5-star rating scale.” (Center on Health Insurance Reform, 1.7.15)

Rate Review

• Review of All Premium Rate Increases of 10% or More. HHS works in partnership with states to ensure that all proposed rate increases of 10 percent or more in the individual and small group market are thoroughly reviewed. The Affordable Care Act sets minimum standards for the review of these proposed increases, called effective rate review standards.   If a state lacks the resources or authority to meet these standards and conduct the needed reviews, HHS conducts the rate review while continuing to make resources available to states to strengthen their rate review process (further details here).
• Actuarial Justification. As part of this process, all plans sold in the individual and small group market  are required to submit actuarially-certified justifications of their premium increases, including the portion of the premium increase attributable to each unique benefit category (e.g., inpatient hospital, outpatient hospital, prescription drugs, etc.).
• Rate Review Grants. To help states strengthen and improve their rate review processes, the ACA provides states with $250 million in Health Insurance Rate Review Grants.  These grants give states much needed resources to build on their historical primary role of reviewing proposed health insurance premium increases and to hold insurance companies accountable for unjustified premium increases.
• CMS. Fact Sheet on State Effective Rate Review Programs.

Risk Amelioration Provisions (3 Rs)

The 3Rs were designed to alleviate concerns about the risks associated with the new ACA Exchanges in the context of substantial reforms made to the individual and small group markets. The first two are time-limited (3 years: 2014, 2015 and 2016) while the risk adjustment program is permanent. In a nutshell, the difference between these programs is as follows: “Risk adjustment moves money from plans whose customers are healthier than average to plans whose customers are sicker than average. Risk corridors move money from plans that see unusually high gains and distribute it to plans that see unusually low gains. And reinsurance uses fees on all the participating insurers to create a fund, that then gives money to plans whose customers exceed a certain cost.”

Reinsurance

According to Louise Norris at healthinsurance.org (1.4.14), “The three-year reinsurance program can be run by states or by HHS to collect tax-deductible funds from group and individual health insurance plans on a per-insured basis and remit funds to non-grandfathered individual health plans – both on and off exchange – that incur high claims costs. Initially reinsurance was to kick in when a claim exceeded $60,000. But in late November, HHS proposed new guidelines that would lower the threshold to $45,000. Reinsurance pays 80 percent of the claim above that point, until total claims for that insured reach $250,000 for the plan year. So for example, if an insurer pays a $200,000 claim for an insured, the insurer would receive $124,000 in reinsurance funds [($200,000-$45,000) x 0.8]. The lowered attachment point for the reinsurance program is an answer to the dilemma posed if the new pool of insureds is sicker than originally anticipated.”

Risk Corridors

The ACA “risk corridors” provision requires profitable insurers to pay the federal government up to 80% of profits they make on policies sold on the exchanges but that also requires the federal government to pay insurers up to 80% of the losses they suffer from policies sold on the exchanges. According to Louise Norris at healthinsurance.org (1.4.14), “Each qualified health plan (including QHPs sold off-exchange that are substantially similar to QHPs sold in the exchange) will have a target amount set for claims costs, roughly equal to total premium revenue minus allowable administrative expenses. If claims costs are less than 97 percent of the target amount, the insurer will remit a portion of the savings to HHS. The money will then be sent to insurers with claims costs that exceed 103 percent of the target amount. The risk corridor program helps to mitigate the uncertainty in insurers’ premium calculations for the new plans being sold in 2014, and will continue to provide market stabilization through 2016.”

• CBO Score. In its February 2014 budget outlook, the CBO announced “CBO and JCT also incorporated into the updated baseline projections some new estimates of payments and collections for the risk corridor program, which had previously been projected to have no net budgetary effect; collections are now projected to exceed payments by $8 billion for the 2015–2017 period.”
• Critique of CBO Score. Seth Chandler at The Federalist argues “I’ve done the math and I don’t see how CBO is getting this $8 billion number unless it is assuming either very high enrollment in policies covered by risk corridors or very high rates of return made by insurers. Or it made a mistake. I don’t think CBO’s own numbers support very high enrollment in policies covered by risk corridors and I don’t believe either an emerging reality or CBO’s own rhetoric justify assuming very high rates of return. So I think CBO ought to take a second look at its prediction. People should not yet make policy decisions based on the CBO estimate.”

Risk Adjustment

According to actuary Greg Fann at Wakely Consulting Group (5.9.14), “A critical permanent balancing item in the new framework is risk adjustment. Risk adjustment is “a zero-sum game” across each market in each state, and is intended to have issuers compete on their ability to provide quality affordable care and an efficient administrative system, rather than their ability to attract a less risky membership. Risk adjustment fosters market stability and overall competition. While new to the commercial market, risk adjustment programs are prevalent in Medicare Advantage and various state Medicaid programs.”

Analysis

• Milliman. (2013) When Adverse Selection Isn’t: Which Members are Likely to be Profitable (or not) in Markets Regulated by the ACA. The actuarial firm contends that these three mechanisms, risk adjustment in particular, will provide greater profits for insurers enrolling higher-risk enrollees. “The results of our analysis are, in most cases, the precise opposite of what one would expect without these programs. In several important ways, the nuances and interactions inherent in the 3Rs can generate impacts that actually turn traditional risk management practices upside down… How can members with higher risk scores be more profitable than members with low risk scores? Newborns, adult females, the elderly, and members with HCC conditions will likely produce higher expected profits for at least the following three reasons:
  • The HCC (Hierarchical Condition Categories) coefficients for most conditions handled by the risk adjustment program are higher than the average relative costs of those conditions (this factor drives the vast majority of our results).
  • The payment mechanisms for the transitional reinsurance and risk adjustment programs do not interact, so issuers in the individual market can effectively be reimbursed twice for many high-cost claimants (once through risk adjustment and again, partially, through reinsurance). Based on language included in the preamble to the governing regulations, this may be by design.
  • The basis for the risk adjustment transfer payments is statewide average premium (instead of average claims, which in many cases would be more theoretically correct). This creates a leveraging effect whereby those paying into the pool tend to pay too much and those receiving funds tend to receive too much.”
• Chandler, Seth. Obamacare Risk Adjustment: State Challenges Expose Constitutional Problems. (2.29.16) “What potentially threatens the entire Risk Adjustment operation, however, is a modest attack by a few states that may not realize how seriously their complaint about implementation of the program exposes the constitutional fragility of the entire system. This potentially unwitting erosion of the constitutional foundation exists because, as I set forth further below, it has not been the states that have actually implemented Risk Adjustment. The federal government has been doing the job for the states, quite possibly without any statutory authorization.”
• Blase, Brian.  (4.25.16) New Obamacare Study Considers What Happens When Generous Government Subsidies End. “First, insurers incurred substantial losses overall despite receiving much larger back-end subsidies per enrollee through the ACA’s reinsurance program than they expected when they set their premiums for 2014. Second, we estimate that in the absence of the reinsurance program insurers would have had to set premiums 26% higher, on average, in order to avoid losses—assuming implausibly that the overall health of the risk pool would not have worsened as a result of the higher premiums. Our findings raise serious questions about the ACA’s future, particularly when the reinsurance program ends and premium revenue must be sufficient to cover expenses… The reinsurance and risk corridor programs expire at the end of this year, which means that in 2017, for the first time, premiums must cover expenses. In order to reverse their losses, insurers will undoubtedly have to raise premiums and redesign plans to make them less generous. Of course, these changes, particularly the premium increases, will make the coverage look less attractive for those who insurers most need to sign up.”
• Chandler, Seth. (9.1.16) A New Obamacare Proposal Might Not Be Legal. “The Obama administration proposed this week new rules for its Risk Adjustment program, a critical component of the Affordable Care Act. There are actually some better-late-than-never parts of the proposal. Most notably the new rules will try to compensate for the extra expense insurers incur when people exploit ACA regulatory and enforcement weaknesses to time their insurance purchases to cover only expensive medical emergencies. Unfortunately, the better parts of the new Risk Adjustment proposal are contaminated by an illegal component: one that would transfer money among insurers in different states. Under this part of the proposed rules, which will take effect in 2018, insurers who sell policies in states where medical costs have gotten under a modicum of control such as Utah or Georgia will end up subsidizing insurers who sell policies in states where medical costs continue to be sky-high.”

Tax Provisions

Overview

• Health Insurance Tax. The ACA imposes a sales tax on insurance plans sold in the fully-insured market starting in 2014. The estimated tax will collect $8 billion in 2014, increasing to $14.3 billion in 2018, and thereafter increased based on premium trends. According to the CBO, the tax will be “largely passed through to consumers in the form of higher premiums.” Oliver Wyman’s analysis suggests premium increases “in the insured market of 1.9% to 2.3% in 2014, and further increases such that by 2023, we estimate that the fees will increase premiums by 2.8% to 3.7%.”
• Exchange Usage and Administration Fees. Plans on federally-facilitated exchanges must pay 3.5% of premiums in 2014. State operated exchanges are similarly allowed to charge user fees to consumers.
• Reinsurance Assessment Fee.  This 3-year tax (2014-2016) is to fund a reinsurance program to reimburse insurers who have a disproportionate share of high-risk cases; it will be $63/member of fully-insured and self-insured health plans.
• Patient-Centered Outcomes Research Institute Fee. This also will be assessed on fully-insured and self-insured plans for the years 2013-2019; the fee amounts to $1 per person per year for plan years ending between 10.1.12 and 9.30.13, $2 per person for plan years ending between 10.1.13 and 9.30.14, with the fee adjusted in subsequent years by the increase in per capita national health spending.
• Modification of Section 833 Treatment of Certain Health Organizations. The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance. Interim guidance can be found in Notice 2010-79, which also solicits comments on the application of the amended provision.
• “Cadillac” Tax on High-Cost Health Plans. Although CBO estimates a portion of this tax will be paid by third party administrators and insurance carriers, the lion’s share of revenues will come from employers. See Excise Tax on Comprehensive Health Insurance Plans (Cadillac Tax).

Research and Analysis

• Heritage Foundation, Insurance Market Reform
• See Components of Premium Increases for a detailed summary of the estimated impact on private health insurance premiums of the various health insurance reform and insurance tax provisions of ACA.
• Who Should Pay to Cover Pre-Existing Conditions? Blahous, Charles, 4.30.17.

ACA Impact on Health Insurance Industry Financial Health