Tom Snook appeared on the Phoenix-area radio show “Benefits Briefing” earlier this week. He discussed healthcare reform, adverse selection, the individual mandate, Medicaid expansion, employer reform considerations, and other reform issues. Listen to the full interview here:
Next in our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series we discuss the challenges insurers face as they balance the removal of traditional cost-control mechanisms and increased rate review scrutiny.
PPACA has brought about increased scrutiny of rate increases, and it seems likely this will continue. But with a 10% increase now deemed potentially “unreasonable” by federal regulators, and with traditional underwriting/risk selection taken out of the system, there are all the signs of an inevitable collision. An influx of less-healthy people could make it very difficult for many plans to stay below the 10% ceiling without losing money and risking financial instability. If the individual mandate works as hoped, this may be mitigated. Risk adjustment, reinsurance, and risk corridors are also supposed to help with this issue, but will they be enough? This is one to watch.
In our previous post we announced the release of Milliman’s “Ten strategic considerations of the Supreme Court upholding PPACA.” Moving forward we will highlight each strategic consideration. We start by evaluating how “Adverse selection may still be a challenge”:
Guaranteed issue and community rating make the individual insurance market more accessible to the uninsured, but without an effective individual mandate these reforms create adverse selection. The key word there is effective. If enrolling in a healthcare plan is viewed as optional for U.S. citizens because the penalties have limited teeth, those who consider themselves healthy are less likely to enroll because it may not be in their immediate economic best interest. For pricing to be sustainable, these healthier people must enroll in order to balance out the insurance pool costs and health risk.
Milliman analysis on the effectiveness of the individual mandate indicates that much depends on a person’s household income, age, and family type. As the exchanges come online in 2014, many will be focused on the enrollment to determine how this theoretical underpinning bears out in actuality.
One new wild card: The court’s ruling on Medicaid expansion complicates the adverse selection question, because the decision raises access questions for certain low-income individuals. Which brings us to Consideration #2 [Medicaid expansion just became a far more complex and variable proposition].
We’ve been discussing the results of our poll on alternatives to the PPACA individual mandate. The second-most popular idea on the poll was “enforce a penalty that escalates the longer people wait to buy health coverage.” In the Government Accountability Office (GAO) report on mandate alternatives, a range of possible financial penalties are mentioned in conjunction with limiting enrollment windows (which was itself the most popular idea from the poll):
Late enrollees could enroll during subsequent open enrollment periods, or possibly between open enrollment periods, but incur financial penalties. Such penalties could take the form of requiring retroactive payments of missed premiums from the date of the last open enrollment period, or a flat or gradually escalating premium penalty depending upon the length of time without coverage. To encourage individuals to maintain their coverage once enrolled, the premium penalties could decline after a period of continued coverage, until they are eventually eliminated. Other financial penalties could include higher cost sharing for the individual, such as copayments, coinsurance, or deductibles. Another financial penalty could be to reduce or deny subsidies for otherwise eligible late enrollees. Another variation would be to provide a premium discount to all individuals who enroll when first eligible, but withhold the discount from late enrollees.
Of course, as the report goes on to point out, financial penalties might tend to further discourage younger, healthier, but less-wealthy individuals from purchasing coverage, which runs counter to the goals of broadening coverage and reducing costs.
The notion of of using financial incentives and penalties to change behavior is something that has been discussed quite a bit in recent years. For example, we recently looked at how the PPACA raises the level of financial incentives that employers can use to encourage employees to meet wellness targets.
We recently ran a poll on the best course of action to reduce adverse selection if the PPACA individual mandate is struck down by the Supreme Court. The number one answer was “use limited enrollment windows to reduce the occurrence of people joining a plan only when they become sick.”
The PPACA already requires that state health insurance exchanges provide an initial open enrollment period as well as an annual open enrollment period. The idea suggested by the report from the Government Accountability Office (GAO) on potential ways to increase voluntary enrollment is that more restrictive enrollment periods might be useful in the absence of a mandate.
In the absence of a mandate, open enrollment periods could be enhanced beyond the annual periods provided for under the Patient Protection and Affordable Care Act, as amended (PPACA) by incorporating different open enrollment period frequencies and coupling them with various penalties for late enrollees who do not enroll when first eligible. Limiting access to coverage to only such periods is intended to reduce the likelihood that individuals would otherwise wait until they need health care to enroll.
Open enrollment periods could vary in their frequency. Generally, the less frequent they are, the less likely individuals will risk remaining uninsured until the next such period. While PPACA provides for annual periods, these could be extended to every 18 months, every 2 years, or less frequently—some suggesting as infrequent as every 5 years. Or the open enrollment period could be a one-time event in 2014 with subsequent special open enrollment periods only for individuals experiencing qualifying life events that change eligibility for coverage, such as giving birth or attaining adulthood, divorce, or changing jobs.
The report suggests that changing open enrollment frequency could be combined with financial penalties or restrictions on coverage for those who miss the window. Key concerns raised by the GAO include the following:
- Financial penalties might make coverage even more unaffordable for the low-income individuals the exchanges are designed to help
- Overly restrictive enrollment periods may run counter to the goal of increased coverage
- The additional inconvenience might influence the younger, healthier segments of the population to avoid enrolling
Interestingly, enrollment windows have been used to manage adverse selection related to the PPACA already. In 2010, Oregon implemented an enrollment window for child-only policies after two major insurers stopped carrying such policies in response to the PPACA’s elimination of preexisting conditions underwriting. Insurers were afraid that parents might wait to enroll until their children became ill.
Thanks to everyone who participated in our poll asking how best to manage adverse selection if the PPACA individual mandate is struck down. The top three answers were:
- “Use limited enrollment windows to reduce the occurrence of people joining a plan only when they become sick”: 28%
- “Enforce a penalty that escalates the longer people wait to buy coverage”: 23%
- “Sever the high-risk population into a separate pool to keep costs for the general population down”: 18%
In upcoming posts we’ll take a look at each of these options in a bit more detail.
In addition to the Supreme Court challenge to the Patient Protection and Affordable Care Act (PPACA), the upcoming presidential and state elections are likely to have an effect on the implementation of the law. Milliman consultants John Meerschaert and Michael Sturm projected some of the possible outcomes in a recent feature story. As they point out,
The November 6 general election may prove to be a bigger factor than the Supreme Court decision, because the potential result could be a complete repeal of the PPACA.
Assuming the law is not struck down in its entirety by the Supreme Court, the authors predict that the elections are likely to result in one of the following outcomes for the PPACA:
- President Obama is reelected. Repeal legislation will be vetoed, the PPACA will move forward in whatever form is left by the Supreme Court, and exchanges will go forward.
- A Republican president is elected, but the Democrats control at least one house of Congress. No attempt at repealing the 2010 legislation is likely to pass, and the PPACA will remain the law of the land. Major provisions of the law may be delayed, especially exchanges.
- The Republicans capture the presidency and both houses of Congress. The PPACA will be significantly modified, if not repealed. Without federal subsidies, states would have less incentive to create exchanges, although some states might keep moving forward.
One of the most interesting questions is this: if they win, what would Republicans replace the PPACA with, if anything? The National Journal offered some perspective in a recent discussion, and Uwe Reinhardt today offered his take on the Economix New York Times blog.
The Patient Protection and Affordable Care Act attempts to balance the adverse selection inherent in its guaranteed issue approach by enforcing an individual mandate to purchase insurance. This individual mandate will be at the heart of the Supreme Court proceedings later this month.
Media coverage of insurance industry practices such as recission have made many Americans sympathetic to the idea of guaranteed issue without regard to preexisting conditions. But guaranteed issue without a mandate of some kind may have some serious consequences.
So, how does the individual mandate in PPACA actually work, and how would it work in practice? Although the effects of any complex policy are difficult to predict, Milliman consultant Paul Houchens recently wrote a detailed treatment of the subject, Measuring the Strength of the Individual Mandate.
If the Supreme Court strikes down the individual mandate, there are other policy options that could potentially achieve similar results. These were collected in a report by the Government Accountability Office based on interviews with industry experts:
- Modify open enrollment periods and impose late enrollment penalties.
- Expand employers’ roles in autoenrolling and facilitating employees’ health insurance enrollment.
- Conduct a public education and outreach campaign.
- Provide broad access to personalized assistance for health coverage enrollment.
- Impose a tax to pay for uncompensated care.
- Allow greater variation in premium rates based on enrollee age.
- Condition the receipt of certain government services upon proof of health insurance coverage.
- Use health insurance agents and brokers differently.
- Require or encourage credit rating agencies to use health insurance status as a factor in determining credit ratings.
Kaiser zeroes in on key dynamics of the new Milliman report about the strength and weakness of the individual mandate, which we blogged about Tuesday. Of particular interest, the Kaiser coverage seizes on the key role that income level will pay in the efficacy of the mandate:
The report finds that “For households with income below 200% [Federal Poverty Level, or FPL], the individual mandate will provide high financial incentive for insurance participation, as remaining or becoming uninsured would be more costly than purchasing insurance…. For households with income between 200% and 300% FPL, the penalty amount becomes significantly smaller relative to out-of-pocket premium amounts because of the premium tax credit subsidy’s decreasing value. The influence of the individual mandate will be very strong for a portion of this income cohort, but less certain for households with income approaching 300% FPL, individuals, and the young.”
Beginning in 2014, the individual health insurance market, with the exclusion of grandfathered plans, will require all policies to be guaranteed issue and community rated. The individual mandate is intended to reduce the degree of adverse selection that would otherwise occur in such an environment.
This paper focuses on the individual mandate’s penalties in relation to the expected out-of-pocket premium for bronze-level coverage in the individual market, which for individuals age 30 and older will be the least expensive qualified coverage available for purchase.
The relationship between the individual mandate penalty amounts and the bronze plan premium will vary significantly across different population segments and interacts with the following demographic and premium rating variables:
- Household income
- Family type
By modeling estimated penalty amounts relative to estimated out-of-pocket premium amounts, several conclusions can be made about the mandate’s impact. Insurance carriers, regulators, and state policymakers should take these considerations into account when trying to estimate the individual mandate’s impact on adverse selection, insurance participation, and insurance plan selection in the new individual insurance market.
Read the full paper here.