Risky Business: Health Actuaries Assess the Individual Market and Rates

Health reform is often a series of what-ifs. As we wade into the uncertainty of congressional action, Executive Orders, and “the greatest replacement plan ever,” consumers and insurers alike have to hedge their bets and carefully calculate the impact of a number of unknown outcomes. Unfortunately sometimes it seems like there are two competing realities. Affordable Care Act (ACA) opponents claim that the individual health insurance market is collapsing and repeal is necessary to save it. ACA supporters say there’s nothing wrong with the market that a few small tweaks won’t fix. Luckily, we have an independent, unbiased source of wisdom to help us cut through the rhetoric:  the American Academy of Actuaries (AAA), the trade association for the green eyeshades that analyze health insurance data. They recently released an issue paper on the future of the individual health insurance market.

Actuaries play a critical role in the insurance world. Insurance functions as a way to protect consumers from financial risk (and in the case of health insurance, health risk). In order to sustain that protection, insurance companies also need to protect themselves from financial risk by setting accurate rates, which they do by having actuaries project what they will pay out in claims. Covered individuals represent a certain amount of risk to insurers, based on the cost and frequency of their use of health care services. Actuaries help insurers predict how much risk they’ll be facing and how to price their plans to cover their costs.

The AAA’s paper, written by its health insurance committee, lists the necessary ingredients for a stable individual market: ample enrollment, a balanced risk pool, healthy competition amongst insurers, and a reliable regulatory environment. After evaluating the first three years of the ACA’s market reforms, the AAA assesses a number of proposals to correct market shortcomings.

Here are a few highlights from their comprehensive analysis:

Enrollment

In the individual market, it’s important to cast a wide net; high enrollment allows the market to withstand the ebb and flow of claims from year to year, and provide insurers sufficient padding for administrative costs. While results vary from state to state, in the first three years, overall enrollment in the individual market was lower than anticipated. And though the uninsured rate has reached historic lows, the individual market continues to struggle. The AAA points to the continued reliance on employer-sponsored insurance, a weak individual mandate, the high cost of coverage, particularly for those ineligible for subsidies, and insufficient outreach efforts as reasons for low enrollment in the individual market.

Reaching sufficient enrollment is a game of carrots and sticks; you can either incentivize enrollment or penalize non-enrollment. Premium subsidies are the current carrot, providing financial support that make premiums more affordable for consumers. The AAA notes that, as affordability continues to be a problem, increasing the amount could lead to higher enrollment. In addition, a permanent reinsurance program that reimburses plans for high-cost enrollees could lower premiums and encourage individuals to purchase coverage. The primary stick is the individual mandate, which the AAA argues is too weak. They are also not enthusiastic about a continuous coverage requirement, a trademark of many replacement plans, which would allow insurers to medically underwrite those who experience a lapse in coverage. The AAA asserts this practice will likely lead to higher premiums for sicker people and lower premiums for healthy people, returning us to many of the inequities that led to passage of ACA in the first place. Instead, they suggest a heftier individual mandate penalty for not enrolling, in addition to increased outreach and enforcement.

Balanced Risk Pool

In addition to quantity, the “quality” of enrollees can make or break a risk pool. From an actuarial standpoint, the ACA’s prohibition on medical underwriting makes enrollees with high health costs more prevalent, and this adverse selection, if not balanced by incentives for healthy people to enroll and stay enrolled, creates an unbalanced risk pool. In addition to advocating for a stronger individual mandate penalty, the AAA calls out weak enforcement of Special Enrollment Period (SEP) verification and the 90-day premium payment grace period as factors that led to this imbalance.

The AAA thus proposes reducing the 90-day grace period and tightening SEP verification to ensure that enrollees are “all in,” arguing these would decrease the risk of people picking up and dropping coverage mid-year. Shorter open enrollment periods and limits on the ability of providers to steer people eligible for Medicare or Medicaid to private plans could further improve risk pools. The Obama Administration took action on several of these issues, and there is some evidence the markets are improving.

Examining Proposals to Replace or Re-Shape the ACA

The AAA paper examines new regulatory approaches from both sides of the political spectrum. They find that the sale of insurance across state lines, a traditionally conservative idea, might create an uneven playing field and a regulatory race to the bottom. This would hurt people with pre-existing conditions the most. The paper also disputes the notion that high-risk pools answer the challenge of stabilizing the market while covering people with pre-existing conditions, noting that historically, “enrollment has generally been low, coverage has been limited and expensive, they required external funding, and they have typically operated at a loss.”

Examining a proposal on the more progressive end of the spectrum, AAA concludes that a public option could hurt market competition and provider participation if the public plan sets rates too low. In between these extremes, the AAA advocates improving the risk adjustment program and rate review practices.

Regulatory Environment

The individual market is currently regulated at the federal and state level. Market rules protect consumers, but can also lead to market instability if regulators don’t build an even playing field for insurers. The AAA notes that current market instability can in part be traced to the ACA’s transitional policies that favor off-marketplace plans by allowing individuals to retain their pre-ACA coverage after 2014 premiums were set. Further, the federal government changed the rules in the middle of the game for risk corridor payments, after insurers had set their rates, leading many to absorb millions in unanticipated losses (and some smaller plans to go out of business). These mid-course changes by policymakers have fed the perception among some in the insurance industry that the federal government is not a reliable regulatory partner.

We are at a crossroads in the health reform debate; the ACA has brought about an unprecedented expansion of coverage, but the individual market continues to face challenges. Policymakers have a range of options to ensure that insurers have appropriate incentives to remain in a vibrant, stable market that provides consumers with reasonable choices at an affordable price. The AAA paper could help them focus on those that are most likely to be effective. 

You can read the full AAA paper here.

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