Greater than expected staying power of employer-sponsored health coverage could jeopardize viability of post-ACA individual market
There are three basic explanations being offered up by individual health plan issuers on the eve of plan year 2017 open enrollment to justify sharply increased premiums in many states:
- Most of the Patient Protection and Affordable Care Act premium stabilization programs are expiring in 2017 and money is still owned plans under one of the expiring mechanisms designed to even out a given health plan issuer’s loss experience with that of other issuers;
- Plan issuers have more extensive loss experience data than in the initial years of the individual market segment as the Affordable Care Act reforms kicked in and it was harder to estimate what to charge;
- Closely related is the previous point, loss data indicates statewide individual risk pools are posting higher than expected medical utilization, with even higher utilization among plans sold on state health benefit exchanges. Premiums are thus being aligned to reflect the true quality and loss experience of the statewide risk pools.
The third point describes a dynamic situation that could change over time. For example, if medical utilization decreases and the health risk profiles of those in the individual market improve, premiums could readjust downward to reflect that more favorable environment.
However, a more long term concern that should be troubling for health policymakers voiced within some quarters of the health insurance industry is the state risk pools are unbalanced. Or to use an insurance industry term, adversely selected and skewed toward those more prone to using a lot of medical care with too few folks in the pool who use less. Those are actuarially assumed to be the so-called “young invincibles” in their twenties and thirties.
This is a larger concern because it could reflect a more long term, structural problem in the individual market as a whole. If the pool remains unbalanced, premium rates are likely to remain elevated since there are fewer premium dollars flowing into the pool from those who use less medical care to offset the expenses of higher utilizers. The longer premiums remain elevated, the greater the risk to the viability of the individual market as a whole since adverse selection tends to perpetuate an unvirtuous cycle of more people abandoning the market as premiums increase, reinforcing the need for additional premium hikes. This was the situation that existed prior to the Affordable Care Act’s 2010 enactment. Even in populous states like California, where accounts of premium increases of nearly 40 percent and an individual market poised to enter the terminal “death spiral” phase of adverse selection tipped the political scales to assure the needed votes in Congress for the law’s approval.
One of the assumptions of the Affordable Care Act’s individual market reforms is that by making individual coverage more like employer-sponsored coverage with minimum benefit requirements, annual enrollment periods and no medical underwriting, employer-sponsored coverage among smaller organizations would decline. It hasn’t turned out that way. The greater than expected staying power of employer-sponsored health coverage could reinforce an ongoing structural imbalance in the individual market, particularly in smaller states where by definition the risk pool is naturally limited.
The reason is the twenty and thirty somethings health plan issuers say they need to help achieve a good spread of risk for a balanced pool are more likely to be covered in employer sponsored plans than people age 50 and older — and therefore not participating in the individual market. They are beginning their careers and more likely to be employed full time and whereas the latter age cohort is more likely to be retired, semi-retired, self-employed, and otherwise not employed full time by an employer offering health benefits.
Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email