President Obama’s November 14 announcement that health insurance issuers would be permitted—pending approval by state regulators—to renew certain canceled health insurance policies has raised new questions for the individual and small group marketplaces in 2014, just when many issuers were starting to turn their attention to strategies for 2015.1
At the time of this writing, much remains unclear about how states will react to the president’s proposed administrative fix. So far, Rhode Island, Vermont, Minnesota, and Washington have said they will not allow noncompliant policies to be renewed, while Florida, North Carolina, Ohio, Kentucky, Texas, and Oregon have said they will.2,3,4 Other states have said they need more time to decide, and it is still possible that legislative action will be taken on this issue.
For states that allow this transitional policy, a new category of exempted policies will be created,5 distinct from both the policies previously grandfathered in March 2010, and also the new reformed policies on and off the exchanges that comply with the full gamut of reforms taking effect in 2014.
Even for states that make quick decisions to allow issuers to renew canceled policies, it is unclear how many issuers will be willing or able to do so. Significant challenges include:
- Determining with state regulators what premium rates could be charged for these resurrected plans. Because medical inflation (among other forces) tends to increase claim costs each year, the 2013 premium rates for these plans are likely inadequate for 2014. However, there is not enough time for the usual actuarial analysis and rate review processes to occur.
- Issuers may not be able to set up computer systems to administer the previously canceled benefit plans in time, or may struggle to get required notices out to former policyholders in time for them to sign up again. As described below, those mailings are one of the preconditions required to qualify for the transitional policy.
- Even if issuers manage to determine rates and configure their systems, it’s unclear how many policyholders will decide to sign back up again.
- On the other hand, if competitors choose to renew canceled plans but an issuer does not, that issuer may lose market share (and could also lose goodwill among regulators, brokers, and members).
- Finally, it is unclear what this rule change may do to the risk profile of the reformed risk pools (on and off the exchanges). It is likely that, in many states, the canceled plans in the individual market were made up of lower-cost individuals6 compared to the expected new entrants into the individual market in 2014 (which is due to current underwriting practices in the absence of guaranteed issue). Accordingly, because prices for 2014 were already set assuming that the canceled plan populations would be part of the reformed risk pool, the rates for reformed plans may be insufficient if the canceled plan members’ entries into the market are delayed.7
Related to the last point, the post-2014 individual and small group markets have complex risk mitigation programs (the three R’s—risk adjustment, transitional reinsurance, and risk corridors8) that can materially impact financial outcomes for issuers. Setting 2014 premium rates involved careful analysis of these programs. Now issuers will need to quickly analyze the potential interactions of these programs with the change in rules (more on this below).
A few answers
Among all of the uncertainties, there are a few answers. A close reading of the letter sent by the federal government to state regulators implementing the president’s fix provides some important insights:9
- Which policies are eligible to be restored?
Non-grandfathered policies in the individual and small group markets that were (1) in effect as of October 1, 2013, and (2) have received or would otherwise receive a cancelation or termination notice from the issuer. No new sales of these exempted policies are allowed.
- How long will the exempted policies be available?
The letter allows policies to be renewed for an additional policy year (starting between January 1, 2014, and October 1, 2014, and in theory extending into 2015).10 However, it also suggests that the government will consider extending the transitional policy beyond this time frame. If exemptions are continued into the future, it may result in ongoing anti-selection against the reformed market. In other words, enrollees in exempted policies who develop health conditions in the future might leave those plans and enroll in more generous benefits under reformed plans, while healthier enrollees might choose to retain the lower cost, exempted coverage.
- Can issuers pick and choose which policies or plans to restore?
It appears not; the letter requires issuers who choose to renew policies to send a notice to “all individuals and small businesses” that were canceled. It is unclear whether the decision can be made separately for individual and small group markets. The notice must include information about which reforms aren’t reflected in any continued coverage, and it must inform policyholders that compliant coverage is available on and off the exchange, possibly with a subsidy.
- Will these exempted policies be exempt from the entirety of the Patient Protection and Affordable Care Act (ACA)?
No, the letter only exempts the renewed policies from ACA Sections 2701 through 2707 and Section 2709. These sections contain the majority of the major changes made under the ACA to these plans, such as adjusted community rating, mandated coverage of essential health benefits, and guaranteed availability and renewability, among others.11 The omitted Section 2708 has to do with limiting waiting periods for coverage, which wouldn’t apply here anyway.
- Are these exempted policies grandfathered?
It appears these policies will not be “grandfathered” in the technical sense of the ACA, because no modifications have been proposed to the definition of this term in the regulations. This makes sense, because if they were grandfathered they would no longer have to comply with ACA requirements that went into effect earlier, such as providing certain preventive services without cost sharing.
- Assuming they are non-grandfathered, are the newly exempted policies subject to risk adjustment, transitional reinsurance, or risk corridors like other non-grandfathered plans?
If the three R’s applied to the exempted policies, it could create unintended financial consequences unless premium rates were able to somehow be adjusted to take that into account. However, it appears that the three R’s will not apply to these new non-grandfathered, but exempted, policies.
For risk corridors, this is obvious, because that program only applies to qualified health plans (QHPs) on an exchange (or plans that are nearly identical to an exchange plan offered by the same issuer). Because the exempted policies will not be offered on exchanges, they will not be QHPs and will not be eligible for risk corridors.12
For the risk adjustment and reinsurance programs, the regulations state that non-grandfathered plans will not be subject to these programs until they are subject to the guaranteed availability and community rating requirements of the ACA.13 Because the exempted policies are not subject to those two requirements (they are contained within Sections 2701 to 2707), they will not be subject to risk adjustment or receive reinsurance payments. (However, they will still be subject to reinsurance contributions like other major medical plans, which likely are not fully factored into their 2013 premium rates.)
More changes coming
Of course, as we have just seen, rules can always change. The very end of the administration’s letter suggests that more changes are coming with respect to the risk corridor program, stating:14
Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance.
Under the risk corridor program, issuers will share profits and losses with the federal government on exchange plans (and near-identical off-exchange plans). Most off-exchange only plans (and all grandfathered plans) don’t get this protection, however, and even for plans that are protected, losses are not entirely eliminated, just mitigated. Moreover, if the renewal of canceled policies results in an on-exchange population that is higher-cost than issuers priced for, the risk corridor program could easily become unbalanced, resulting in the federal government having insufficient shared gains to offset shared losses—in other words, there would be a net transfer of funds from the government to issuers. This result is possible because the risk corridor program is not required to be revenue-neutral to the government, unlike risk adjustment.
Under risk adjustment, funds are transferred between issuers in a given state and market to try to account for differences in enrollees’ health statuses. Therefore, risk adjustment can’t help if the market as a whole is underpriced.
Transitional reinsurance makes payments to individual market plans for certain high-cost claimants. These payments are supposed to exhaust a fixed budget ($10 billion in 2014). If fewer enrollees become eligible for reinsurance because of the change in rules, it could be that not all of the money will be paid out in 2014 (absent changes to the parameters of the program). However, if reinsurance funds are left over for 2014, they can still be used in 2015 to help mitigate rate increases in that year for individual market plans.
The ACA and its implementing regulations set many new requirements for health insurance plans issued in 2014 and later. Plans issued before March 23, 2010, are in many cases grandfathered, and so are not subject to these requirements. However, plans issued since then but before January 2014 are not grandfathered, and so issuers were required to either cancel or modify them to make them compliant. Common examples of noncompliance include plans that did not cover one of the ACA’s essential health benefits (such as maternity or prescription drugs) or plans that did not have a low enough maximum on out-of-pocket spending by the member.
Individuals or small groups with a canceled policy are able to purchase compliant replacement policies on a guaranteed issue basis, although that has proven difficult for many consumers, which is due to the technical difficulties with some exchange websites.
Issuers likely had a variety of reasons for canceling policies rather than attempting to modify them (and in some cases, state law or regulation required one approach or the other). One simple reason had to do with the revised rate filing process that they went through in early 2013 in order to obtain regulatory approval for their 2014 premium rates. This process was set forth in federal regulations and sub-regulatory guidance that came out in late 2012 and early 2013.
If policies were modified but not formally canceled, issuers had to characterize the rate change as a rate increase, and increases could be substantial given the additional benefits included in the modified plans. Under the ACA, rate increases over a 10% threshold are subject to an additional federal review process, which requires filing additional forms and information, and additional potential for delay. Given these hurdles and the extremely challenging filing deadlines set by state and federal regulators, many issuers may have seen the “cancel/rewrite” option as a simpler way to achieve the goal of getting existing policyholders into compliant plans.
1. For a summary of 2015 pricing considerations, see What now? 2015 individual market pricing: Morbidity and other considerations.
2. Sun, L.H., Kliff, S. & Somashekhar, S. (November 15, 2013). Obama’s health-law fix sends insurers, officials scrambling. Washington Post. Retrieved November 18, 2013, from http://www.washingtonpost.com/national/health-science/obamas-health-law-fix-sends-insurers-officials-scrambling/2013/11/15/33440766-4e24-11e3-ac54-aa84301ced81_story.html.
3. Budnick, N. (November 15, 2013). Oregon announcement could mean good news for people with expiring health coverage. Oregonian. Retrieved November 18, 2013, from http://www.oregonlive.com/health/index.ssf/2013/11/oregon_health_insurers_can_now.html.
4. Crosby, J. (November 19, 2013). Dayton won’t grant extension of existing health insurance plans. Minneapolis Star Tribune. Retrieved November 19, 2013 from http://www.startribune.com/business/232411991.html.
5. Not to be confused with certain other exempted
plans, such as student health insurance plans.
6. Age also plays a role here. Insurers are required to limit premium rate variation by age starting in 2014, which results in implicit subsidies from younger members to older members. Pricing for 2014 depended on a balance of younger and older members, which may be disrupted if younger members are allowed to stay on less expensive exempted policies.
7. This is the general dynamic expected in most states and markets; however, depending on each state’s regulations before the Patient Protection and Affordable Care Act (ACA), the outcome could vary significantly from state to state.
8. For links to articles with more about each program, see http://www.healthcaretownhall.com/?p=7269.
9. Centers for Medicare and Medicaid Services (November 14, 2013). Letter to state insurance commissioners. Retrieved November 18, 2013, from http://www.cms.gov/CCIIO/Resources/Letters/Downloads/commissioner-letter-11-14-2013.PDF.
10. Although this seems to be the intent of the transitional guidance, a recently finalized regulation (45 C.F.R. § 144.103, as amended by 78 Fed. Reg. 65091 (Oct. 30, 2013)) appears to require policy years in the individual market to be calendar years starting in 2014. This may require clarification by the government.
11. See the section-by-section summary here for reference: http://www.dpc.senate.gov/healthreformbill/healthbill05.pdf.
12. However, it is possible that their experience will still be pooled with other non-grandfathered plans as part of the risk corridor calculation (see e.g. 45 C.F.R. § 153.500), even though the risk corridor payment or assessment will only be based on the pro-rata share of that experience attributable to QHPs.
13. See 78 Fed. Reg. 15410, 15418 (Mar. 11, 2013) for risk adjustment and 45 C.F.R. § 153.234 for reinsurance.
14. For more on how risk corridors work, at least under current rules, see Risk corridors under the ACA.