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Implementing Health Reform: The Dam Bursts



November 21st, 2012

For months, states, insurers, and others who will be affected by the Affordable Care Act have been clamoring for more definitive guidance from the Department of Health and Human Services on many issues presented by ACA implementation.  On November 20, 2012, the dam burst and a torrent of proposed rules, notices, data collection notices, and other forms of guidance poured forth.

Proposed rules were published addressing the ACA insurance market reforms and rate review; essential health benefits, actuarial value, and accreditation standards; and wellness programs.  An appendix to the essential health benefits rule was also published describing the essential health benefit benchmark plan for each of the fifty states, listing state benefit mandates (for purposes that will be discussed in my next post), and providing a guide to understanding the proposed state benchmark plans. The proposed wellness program rule was supplemented by a fact sheet and a study on current wellness programs.

HHS issued a letter to state Medicaid directors addressing the Medicaid essential health benefits, as well as a series of frequently asked questions addressing Medicaid issues presented by ACA implementation.  HHS also published a notice recognizing the NCQA and URAC for accreditation of qualified health plans.  HHS issued its actuarial value calculator and continuance tables and a description of its actuarial value calculator methodology.  Finally, HHS published for comment a series of Paperwork Reduction Act listings addressing data collection for rate review, certification of qualified health plans, assessing market reform compliance, and recognizing accrediting entities.

The proposed rules on the market reforms and essential health benefits are subject to a 30-day comment period, while the wellness rule is open for comment for 60 days.  This post examines the market reform and rate review proposed rules.  Additional posts discuss the regulations concerning essential health benefits, actuarial value, and accreditation, and wellness programs and harmonizing Medicaid and the exchanges.

Beginning on January 1, 2014, the ACA will revolutionize the way in which health insurance is sold to individuals and small groups in the United States.  Insurers in the individual and small group markets will be required to sell insurance coverage to any applicant or enrollee and not be allowed to exclude coverage of preexisting conditions or discriminate on the basis of health status, gender, or occupation in setting premiums.  Premiums in non-grandfathered plans will only be allowed to vary based on age (with a maximum 3 to 1 ratio), tobacco use (with a 1.5 to 1 maximum ratio), geographic location, and household composition and size.  The proposed regulations implement these provisions as required by the terms of the ACA, although the introduction suggests disconcertingly that HHS may be open to “a phase in or transition period for certain policies” to avoid disruption.

Standardizing rating methodologies. The proposed rule begins by discussing the permitted rating factors.  It proposes a high level of standardization of rating methodologies, leaving little to the discretion of insurers.  Standardization is important, the preamble asserts, to make risk adjustment among plans more predictable, transparent, and accurate; improve premium transparency and facilitate consumer choice; enable the exchanges to identify the second-lowest cost silver plan to calculate premium tax credits; and discourage adverse selection.  States, however, are permitted flexibility to the extent that they can impose more restrictive rating requirements, for example limiting age variation to a ratio of less that 3 to 1.

Small-group rates are to be generated by summing rates calculated separately for each member of the group and dependents, considering the permissible rating factors, specifically age and tobacco use.  The employer can in turn assess employees a premium contribution based on a percentage of the cost of the individual employee’s coverage (charging older employees and tobacco users more) or an average composite rate, charging all employees the same for the same coverage.  A flat-dollar employer contribution of the same amount for each employee does not seem to be contemplated.

Under the proposed rule, family premiums are determined by adding up the rate for each family member, considering age and tobacco use, unless a state requires otherwise.  For family members under the age of 21, however, only the three oldest are taken into account in setting family premiums.  States can alternatively require pure community rating and use a family-tier structure (individual, couple, parent and children, etc.)

States can identify geographic areas of rating purposes, but states cannot have more than seven geographic areas, and rating areas consisting of less than entire state must be based on counties, three-digit zip codes (i.e. areas that share the same first three digits of their zip codes), or metropolitan statistical areas.  Variation in premiums among geographic areas must be actuarially justified.

One-year age bands. Age rating would vary based on a uniform age curve with single-year increments from age 21 to 64.  All individuals under age 21 would be in a single age rating category, as would individuals above age 64.  The use of one-year age bands lessens the rate shock that would occur if wider (e.g. 5-year) bands were used.  An age-band table is provided in the proposed rule, which begins with small incremental year-to-year increases (ages 21 to 24 remain at 1) that become much larger as they approach age 64.  States may use their own alternative uniform age-rating methodology, but must submit information regarding their methodology no later than 30 days after the adoption of the final rule.

Tobacco use. Premiums may vary based on tobacco use by a ratio of up to 1.5 to 1.  The wellness proposed rule allows rewards of up to 50 percent of the premium for participation in a program to prevent or reduce tobacco use; thus, a smoker who is trying to quit could be freed from the tobacco-use surcharge in a group plan with a wellness program.  Insurers in the small group market would be required to allow tobacco users to escape the surcharge by participating in a smoking cessation wellness program.

The proposed rule requests comments on how to define tobacco use:  Does it have to be regular?  Must the user be addicted to nicotine?  Tobacco use will apparently be self-reported, putting a high cost on checking a box on the insurance enrollment form.

Guaranteed availability and exceptions. The general requirement of guaranteed availability is subject to some exceptions.  Individual coverage would only be available during annual open-enrollment periods, except where an applicant qualified for a special enrollment period, as is the case in the exchange.  Small-group coverage, on the other hand, would be available continuously, again as in the exchange.  Employer-contribution and group-participation requirements could be enforced to avoid adverse selection.  Network plans could limit eligibility to areas where they had network coverage.

The proposed rule acknowledges that the Health Insurance Portability and Accountability Act exception to guaranteed availability for bona fide associations no longer exists under the ACA, but requests comments on whether a transition or exception process for these plans could be possible.  Finally, the rule would prohibit marketing practices that would result in favorable selection by health plans.

The proposed rule requires plans to guarantee renewability of coverage subject to certain exceptions, such as nonpayment of premiums; fraud; violation of contribution or participation rules; termination of a plan or discontinuation of a product in accordance with state law; or enrollee movement out of the service area.  Issuers of bona fide association plans may terminate coverage for individuals or groups who cease to be association members.  (The rule generally clarifies that association plans that cover individuals are regulated as individual coverage; associations that cover small groups are regulated as small-group coverage).  Student health plans may limit eligibility to students and their dependents.

Insurers must consider all of their individual enrollees in all non-grandfathered plans to be members of a single risk pool and all of their small-group enrollees in non-grandfathered plans to be members of another single risk pool. Insurers may not, that is, treat different blocks of business as different risk pools.  All enrollees must be charged the same premium rate based on market-wide experience, subject to variation based only on the permitted rating factors plus the actuarial value of particular plans; network or delivery system characteristics; benefits additional to the essential health benefits; and the unique characteristics of catastrophic plan members.  States may combine the individual and small-group risk pools; states that intend to merge the risk pools for 2014 must notify HHS within 30 days of the promulgation of the final rule.

HHS will enforce the market reform rules under its Public Health Service Act enforcement authority.  States bear primary responsibility for enforcing the law, but HHS may enforce the rules in states that are not substantially enforcing them.

Catastrophic plans. The proposed rules clarify that catastrophic plans must cover the essential health benefits, but do not do so until the deductible has been satisfied.  They must also cover preventive services without cost sharing as well as three primary care visits.  They are only available to individuals who are under age 30 or who cannot afford minimum essential coverage.

Rate review. Finally, the proposed rule makes three changes in the existing rate-review program requirements.  First, states seeking state-specific rate review thresholds must submit proposals to HHS by August 1 of each year, to allow HHS to publish a notice as to state-specific thresholds by September 1.

Second, insurers will be required to submit data and documentation to HHS regarding all rate increases, and not just those exceeding the reasonability threshold, to permit monitoring of potential disruptions in the insurance market and to ensure that insurers in fact use a single risk pool.  Insurers would submit the same information to HHS that they submit to the states using a standardized template, which is independently published as a Paperwork Reduction Act notice.  Reported information would be available to the public except for trade secrets.

Third, to be considered effective, state rate review programs would have to consider the reasonableness of insurer assumptions regarding the rate impact of the reinsurance and risk adjustment programs and the implementation by the insurer of the single risk pool, essential health benefits, actuarial value, and other 2014 market reforms.

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