Supplemental health industry for small companies: Challenges and opportunities
Small companies in the supplemental health products market need to understand the unique challenges these products present in order to compete effectively.
(Yes, but not as much as you might think)
The individual mandate has been called one leg of the Patient Protection and Affordable Care Act (ACA) “three-legged stool” (with guaranteed issue and subsidies being the other two legs).1 During the crafting of healthcare reform, culminating in the passage of the ACA in 2010, insurers and other market experts contended that the mandate was absolutely necessary for a functional individual guaranteed issue market. With the passage of the Tax Cuts and Jobs Act of 2017, which included a repeal of the individual mandate, there are renewed concerns related to the stability of the individual market. (Technically, the mandate was not repealed, but rather the penalty was set to $0 for 2019 and future years. Throughout this paper, we will refer to this action as repeal.)
While we believe the individual mandate’s financial penalties at face value are high enough to induce high insurance participation rates, the enforcement of these penalties has not been strict enough to fully achieve the mandate’s policy aims. However, available premium assistance in the insurance marketplaces may provide sufficient financial incentives to prevent a collapse of marketplace enrollment rates resulting from the mandate’s repeal. In this paper, we examine available empirical data to arrive at this conclusion.
The Congressional Budget Office (CBO) believes the mandate repeal will have a material impact on enrollment and premium rates in the non-group market.2,3 Specifically, the CBO estimates that, as a result of the mandate’s repeal:
On the other hand, while the CBO’s report has provided point estimates for the impact on non-group enrollment and premium rates from repealing the individual mandate, the CBO also devotes several paragraphs to discussing why the actual effects may differ from the above values. In other words, there is considerable uncertainty when it comes to the actual impacts of the mandate repeal. This uncertainty is driven by several factors. First, and maybe the most significant, is the fact that the impact of a mandate (and by extension, its repeal) fundamentally deals with human behavior, which is notoriously hard to predict. Second, even if human behavior were well-understood, the impact would vary considerably state by state based on various factors, including overall premium rates and affordability, state median income, and a state’s Medicaid eligibility levels (particularly its decision on Medicaid expansion). And finally, as we shall see in the following sections, the evidence for mandate effectiveness is mixed.
Prior to the ACA, non-group insurance rating rules varied significantly across the country.7 The vast majority of states permitted medical underwriting, while a small number required a form of community rating (which prevents insurers from varying premiums by health status). In the 1990s, several states attempted to reform their non-group markets by adopting guaranteed issue (GI) and community rating (CR) rules without a coverage mandate. Research done by Milliman actuaries found that the states implementing GI and CR without a mandate experienced market deterioration as measured by enrollment, premium rates, and available insurance options.8
However, these historical examples admittedly are not the ideal comparisons for how the ACA individual market might function without a mandate. While the states implementing these reforms in the 1990s did not have individual mandates, they also did not have various other measures intended to decrease unfavorable selection and increase enrollment, which the ACA does have. These measures include open enrollment periods and financial assistance to consumers to purchase coverage in the form of premium subsidies.9 The ACA premium subsidies in particular are thought to be a critical part of market stability, even though they do not apply to everyone buying coverage in the individual market.10
The most recent data available11 related to the mandate indicates health insurance coverage rates might respond to an effective mandate. For example, from 2014 to 2015, the mandate was strengthened from the greater of 1% of income or $95 to the greater of 2% of income or $325 (and strengthened further to 2.5% of income or $695 in 2016).12 Examining the Internal Revenue Service (IRS) data for these two periods provides the following observations regarding shared responsibility payments and mandate exemptions:
Available statistics on shared responsibility payments and insurance coverage from 2014 to 2015 might suggest a positive correlation between enhanced penalties and insurance coverage gains. However, in complex environments such as health insurance markets, many other factors could be influencing overall insurance coverage rates in addition to the strength of the mandate (e.g., greater awareness of the mandate, consumer education, changes in access to employer-sponsored insurance and public coverage, and premium rates). To that end, the mandate penalty went up again in 2016, but reported enrollment for the national comprehensive individual market in 2016 was flat to slightly down relative to 2015.17 Similarly, based on the National Health Interview Survey (NHIS), the uninsured rate for persons under age 65 was nearly identical from 2015 (10.5%) to 2016 (10.4%).18
A mandate to buy health insurance coverage is only effective if the penalty is actually applied in practice to nearly all individuals who do not purchase health insurance. While the ACA’s individual mandate was in place in 2014 and 2015 and carried an increasing penalty, there were a number of limitations related to the penalty being collected by the IRS.
First, the only way the IRS could enforce and collect the penalty was to reduce the amount of a taxpayer’s refund.19,20 Thus if a taxpayer owed an individual responsibility payment but was not in a refund situation, the penalty could be avoided, at least until the next year in which a tax refund was owed.21 This is the case for all tax years from 2014 to 2018.
As discussed previously, the number of individuals receiving an individual mandate exemption was nearly twice the number of persons making a shared responsibility payment in 2015 (6.5 million vs. 12.7 million). Taxpayers could apply for an individual mandate exemption due to a hardship, unaffordable coverage, or several other exemption categories.22 For this paper, we will focus on hardship and affordability exemptions, as well as “silent returns.”
Figure 1: 2017 APTC Eligibility and Affordability Exemptions: Single Household, Based on National Average Bronze Premium
Based on public data for the 2017 open enrollment period plan selections,28 nearly 65% of insurance marketplace enrollees nationwide are above the age of 35, the age range at which at least some portion of adults could get an affordability exemption. While the numbers in Figure 1 are based on a national average premium, it is likely in many geographic areas that a significant portion of adults over age 50 qualified for an affordability exemption in 2017, and, with large rate increases once again, even more in 2018. For example, an adult age 55 with income between approximately $48,000 and $89,000 would qualify for an affordability exemption in 2017 based on the monthly national average bronze premium. As stated previously, the actual affordability exemption is based on the lowest-cost bronze plan offered in the taxpayer’s geographic area.
For perspective, the sum of individual mandate exemptions (12.7 million) and silent returns (4.3 million) for the 2015 tax filing year (17.0 million) was nearly equal to the average monthly enrollment in the non-group market in 2015 (17.5 million).31,32 While it is possible that a portion of the population receiving exemptions or filing silent returns is eligible for other forms of insurance (such as employer-sponsored coverage), the absence of these individuals from the individual market risk pool is likely a contributing factor to significant premium rate increases that have been observed in many parts of the country in the last few years.33
While measuring the effect of the individual mandate has focused on the non-group insurance market, isolating its impact is difficult because the institution of the individual mandate coincided with the implementation of the insurance marketplaces and available federal premium assistance. Comparatively, the employer-sponsored insurance market has been stable relative to the non-group market in terms of enrollment, types of coverage offered, and premium subsidy provided (through an employer’s contribution to the sponsored plan). Therefore, by examining insurance participation in employer coverage (the percentage of employees eligible for an employer’s sponsored health plan who elect to purchase coverage) in the current decade, we can assess whether the individual mandate may have had a material effect on insurance participation rates.
Based on the Medical Expenditure Panel Survey (MEPS) administered by the Agency for Healthcare Research and Quality (AHRQ), the chart in Figure 2 illustrates the percentage of eligible private sector employees enrolling in employer-sponsored insurance from 2010 through 2016.34 Nonparticipation in an employer’s plan may be due to a number of factors, including: availability of coverage through a spouse’s employer, eligibility for public health insurance (Medicaid), unaffordability of coverage, or perceived lack of need for health insurance. Therefore, the participation rate in an employer’s plan should not be used to estimate the percentage of employees that are uninsured.
Figure 2: Percentage of Eligible Employees Enrolling in Employer-Sponsored Insurance (private sector employees)
In 2010, 76.5% of eligible employees enrolled in their employers’ health plan coverage. Ignoring random volatility in the survey results, these data points do not suggest any material change in employer-sponsored insurance participation since the implementation of the individual mandate in 2014. This suggests two primary observations:
1. Incentives explicitly offered through employer-sponsored insurance (employer subsidy, tax-exempt treatment of the value of coverage, employee contributions made on a pretax basis) are sufficient to induce high insurance participation.
2. The implementation of the individual mandate in 2014 did not result in incremental gains in employer-sponsored insurance participation above those achieved by explicit incentives such as favorable tax treatment and employer subsidies for health insurance coverage.35
In summary, assessing the impact of the mandate’s repeal on the individual market must be considered within the context of an individual’s current health insurance coverage situation.
As the mandate penalty has gone up and net premiums (after premium subsidies) in many cases have gone down, it makes increasing financial sense to enroll in coverage if eligible.36 However, enforcement of the mandate, due to both legislative and regulatory decisions, has not been sufficiently strong to induce high insurance participation rates in the non-group market, lessening the potential for the mandate’s repeal to have a dramatic effect.
If federal premium assistance offered through the insurance marketplaces is viewed as a sufficient incentive to purchase insurance by itself, enrollment rates for the premium subsidy-eligible population may not materially change in the absence of the individual mandate.
The effect of the mandate’s repeal must also be considered for the population purchasing individual market coverage without a subsidy. For this market segment, premium affordability will likely continue to be a significant concern. Because of the individual mandate’s affordability provision, the mandate’s ability to slow enrollment attrition for nonsubsidized consumers may have been limited in many states. Therefore, future premium rate changes may have a larger impact on health insurance participation than the mandate’s repeal.
How to achieve market stability?
In conclusion, while we believe an insurance mandate can be an effective tool in inducing high insurance participation rates, it must be sufficiently enforced to fully achieve its policy aims. Thoughtfully structured and consistently enforced state-based insurance mandates, in combination with existing ACA federal premium assistance and other stability programs (such as state-based reinsurance programs),42 may provide policymakers the best opportunities to improve the individual market risk pool.