ACA individual, small group market reforms curb underwriting in hopes of restoring risk spreading function
Since the individual and small group market reforms of the Patient Protection and Affordable Care will become effective in less than two months, many Americans and especially those who buy their own health plans or who work for small enterprises are now becoming much more aware of them.
Many do not however understand what brought them about.
Insurance is based on two essential functions: risk spreading and underwriting. Insurers spread the risk of losses across a large number of people or enterprises. Underwriting is selecting those that will be offered coverage and on what terms.
The ACA reforms came about because in recent years health plans experienced increasing difficulty spreading the risk of claims for medical services. Without adequate spread of risk, insurance simply doesn’t work anymore than, for example, fire insurance if the insurance company insures 100 homes and several are on fire while many others are firetraps.
Since risk spreading was no longer working very well, plans relied more on selective underwriting to ensure they were covering individuals and small employers the least likely to incur high medical costs. But that presented a Catch 22. The more they tightened medical underwriting standards, the fewer individuals and small employers could qualify for or afford coverage. That generated fewer insureds to share medical costs for the plan though their premiums and membership fees. Plans were collapsing in on themselves in a process known as adverse selection.
The ACA hopes to restore these market segments by significantly paring back the role of underwriting in determining who gets coverage and under what price and conditions. Beginning January 1, 2014 health plans must accept all individuals who apply for coverage and cannot base premiums on the health status of a small enterprise’s employees. Underwriting factors are limited to age, residence, and family status and in states that permit it, tobacco use.
The idea is by limiting the use of underwriting, the risk spreading function can be restored to health by getting more individuals and small employers into the risk pool. To enhance the spread of risk, the ACA also puts all individuals and small employers into two separate, single statewide risk pools.
Whether these reforms will achieve adequate spread of risk and restore these market segments to healthy functioning won’t be known for at least several years since they represent a radical rejiggering of how these markets have operated for decades.
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