As the launch of health insurance marketplaces under the Affordable Care Act nears, some predict that the enterprise will collapse of its own weight, unable to sustain the moving parts required for states, the federal government, insurance companies, and consumers to interact. We recommend four actions that policy makers should take to promote the success of the marketplaces, the structured exchanges where consumers will shop for health coverage under the ACA. Some of these actions can be implemented before the October 1 launch date, while others will need to be initiated now to bring about changes needed by 2015 and 2016.
- The marketplaces must disallow unreasonable prices from insurers.
- A unified national campaign should be launched to attract a broad pool of marketplace enrollees.
- Consumers receiving advanced premium tax credits to purchase insurance should be protected from unanticipated tax liability for the first two years of operation, so that the marketplaces attract as many people as possible.
- New non-profit consumer-run insurance plans (CO-OPs) sponsored by the ACA should have funding restored. This would enable more CO-OPs to enter the market in 2015 and 2016 to help hold down prices in the 26 states where they do not yet exist. In addition, the Office of Personnel Management (OPM), responsible for contracting with at least two “national plans” to enter each state to spur competition, should focus on developing networks of smaller plans to serve as national plans in 2015; this would avoid giving greater market share to dominant insurers.
Smart Purchasing To Ensure Reasonable Prices
The success of health insurance marketplaces depends on their ability to achieve broad consumer participation, especially by healthy people, in order to help keep prices affordable. The fact that approximately 80 percent of people enrolling in coverage through marketplaces will receive tax credits will help ensure that insurance is affordable. A study by the Urban Institute projects that almost 90 percent of young people will be eligible for such credits, ensuring a large and relatively healthy population in the marketplace.
If, however, insurance premiums are set far above the actual cost of covering people, the marketplaces could go into a “death spiral.” Rather than pay high premiums, many healthy people would not buy insurance. If these healthy people stay out, the cost of insuring the remaining sicker people would rise, creating a vicious cycle of escalating premiums and an exodus of healthy people.
Some factors could raise insurance costs inside marketplaces above levels in today’s individually purchased insurance market. For example, by improving the comprehensiveness of coverage, new coverage standards might increase total claims costs in states that currently have lower mandated benefits, according to the National Association of Insurance Commissioners. A second factor is that individuals now covered through high-risk pools will be moved into marketplaces. The effect of this shift, however, should be modest since the costs of the 300,000 people enrolled in these pools will be spread across the 25 million people expected to be insured through marketplaces by 2016.
A third factor is that some people who were previously uninsured could have pent-up demand for medical services as a result of poor access to care while uninsured, although a recent study found no evidence of pent-up demand among Medicaid enrollees. Even assuming pent-up demand, its cost-raising effects should even out over time. In addition, an ACA-mandated reinsurance program should absorb short-term variations in demand. Moreover, about 48 percent of nonelderly uninsured adults are “healthy and young,” and 62 percent of them say they would be interested in shopping for insurance in the new marketplace. The fact that many will be eligible for tax credits makes their enrollment much more likely.
Meanwhile, actual spending on medical services is growing at the slowest rate in 50 years — at just 3.9 percent in 2012 — refuting any justification for significantly higher prices based on medical costs for the population as a whole. Taken together, cost-producing factors may increase coverage costs somewhat, but they would not appear to justify the large premium increases of 30 percent or higher for 2014 — before taking into account the effects of the premium tax credits — that have been reported by the Wall Street Journal.
Established insurers must balance whether to price to increase market share or price to cover all risk-pool contingencies. Based on their announced anticipated rate increases, it appears that the scales may be tipping towards higher prices. If premium increases are seven or eight times the annual increase in actual medical spending, insurers’ concerns about adverse risk pools could become a self-fulfilling prophecy. Similarly, a strategy by some existing insurers to offer “early renewals” in 2013 to healthier individuals and small businesses would keep them out of the marketplaces in 2014; this would have the effect of concentrating higher-risk consumers in the marketplace, exactly what insurers need to avoid. Younger, low-risk people, who anticipate less need for insurance protection, would likely disproportionately drop out, leading to still higher premiums.
The exercise of buying power in the marketplaces, through rate review and active negotiating, would encourage insurers to offer plans at lower cost and seek efficiency and more competitive prices from providers. The health insurance industry has proven its ability to prosper under regulated pricing. According to Bloomberg Government, Medicare revenue among the largest insurers has grown by almost one-third (as a result of participation in Medicare Advantage); Medicaid revenue has almost doubled as a result of participation in Medicaid managed care programs. More than half of these companies’ combined revenues now come from government programs.
Operating margins have grown as well. The ongoing efforts of these companies to expand their role in public programs — along with their rising stock prices — are a testament to the profitability of private insurance operating in government sponsored programs. It is worth noting that the revenue and margin growth have occurred in lines of business with not only the sickest populations but also the most regulated reimbursement.
Accordingly, marketplaces should exercise their authority to evaluate premium increases, disallowing increases that exceed reasonable actuarial projections. The feasibility of using “aggressive purchaser” strategies appears preliminarily to be validated in the California marketplace. Premiums have increased there by a smaller-than-expected 13 percent — before the operation of the premium tax credits. These premiums reflect both the richer benefits required by the ACA and decisions by plans to offer narrower provider networks as a mechanism to control costs.
This is not a call for excessive government regulation. Rather, we call for the new purchasers in these marketplaces to use negotiations and selective contracting, with full transparency, based on both cost and quality. Many large self-insured employers and public purchasers such as CalPERS have been doing this successfully for years.
All marketplaces have the authority to exclude plans if their presence in the marketplace would operate contrary to the public interest. The Federally Facilitated Marketplace (FFM), whether in partnership with a state or by itself, will operate in 33 states. Even if some state-based marketplaces are unable now to exclude plans on the basis of price, the ability of the FFM and those states with aggressive purchaser approaches to affect pricing nationwide is substantial. To those who fear that insurers would refuse to participate in the marketplaces under these circumstances, consider what Aetna’s President, Mark Bertolini, said on NPR’s All Things Considered on June 15, 2012:”Our organization has taken the view that when someone takes a $2.5 trillion industry and throws another trillion dollars into the bag, shakes it up, throws it on the table, and says ‘Who wants it?’ that’s the time to get creative.”
The Communications Strategy
The perception by almost a quarter of the population that the ACA has been repealed or overturned cannot be consistent with a successful enrollment strategy. In addition to attractive pricing, what is needed to spur adequate enrollment in the marketplaces is a coordinated, unified, national outreach campaign across the country now that overcomes the continuing confusion about the ACA.
To inspire action, the message must be coherent and consistent, so that friends and family across the country can reinforce enrollment with each other. In short, the communications strategy needs to generate some excitement. While targeted outreach and enrollment are essential, such efforts must rest on a predicate of national awareness.
Temporary Tax Safe Harbor
The annual tax credit “reconciliation” process poses another threat to marketplaces. If a family receives an advanced tax credit based on the previous year’s tax return to purchase coverage, and their overall average year-end income is greater than anticipated, the family must pay the back the “over payment” used to purchase health insurance, up to certain limits (e.g., $2,500 for married persons with income between 300 percent and 400 percent of the federal poverty level).
There is substantial income volatility among US families. According to the Kaiser Family Foundation, 20 percent of people receiving tax credits could end up with a tax bill at the end of the year. The uncertainty of tax liability could drive people, especially healthy people, away from the marketplaces and generate hostility to health reform. It is noteworthy that the Massachusetts Connector does not engage in an annual reconciliation process.
A straightforward regulatory policy change could avoid this early threat to marketplace risk pools and prices and give them time to stabilize. The reconciliation process could be delayed until 2016, giving the Internal Revenue Service (IRS) and tax-credit eligibility systems time to resolve operational issues and develop better ways to reconcile the differences between last year’s tax return and current wage data to account for fluctuating family circumstances. This additional time would lead to more accurate determinations of the amount of premium tax credit to which families are entitled and lower rates of tax liability at the end of the year.
Such a change would also remove a level of complexity and thus ensure smoother operations in the early phases of marketplace implementation. The experience with the initial rollout of Medicare Part D low-income subsidies suggests that additional time to improve the reconciliation process would be prudent. It would also give the public time to embrace the marketplaces and their subsidies. This change would actually encourage people to enroll.
This can be accomplished without Congressional action. The ACA explicitly provides discretion in how reconciliation is administered, and operational concerns have been relied on before, in the implementation delay of the employer mandate and key aspects of the Small Business Health Insurance Options Program (SHOP), and in the abandonment of the Community Living Assistance Services and Supports (CLASS) program long before its de-funding. The delay obviously would not affect cases where there is evidence of fraud. It would unquestionably be controversial. The gains in enrollment and public trust, however, could be significant.
Imposing a two-year delay in the tax reconciliation might not add substantial costs. Recouping the overpayments could prove difficult and expensive. It is noteworthy that the premium tax credit never passes through the hands of the insured but is paid directly to the insurance plan by the IRS. The insured, therefore, never retains any cash from which to pay back the government. Second, if the delay draws healthier people into the system so that premiums are lower over time, the savings to government from lower tax-credit costs could be large. The delay also would give the government time to develop additional safe harbors for people who participate in marketplaces in good faith to encourage the continued the enrollment of healthier populations.
In markets with little insurance competition, the leading insurer(s) face less pressure to contain premium growth. In response, the ACA created a loan program to sponsor the formation of Consumer-Operated and Oriented Plans (CO-OPs) to bring new non-profit consumer-governed insurance to state markets. It also authorized the Office of Personnel Management (OPM) to contract with “national plans” to compete in every state to further boost competition.
CO-OP plans are modeled on existing health consumer-governed nonprofit companies that are award-winning for the quality and efficiency of their care: HealthPartners of Minnesota; Group Health Cooperative of Puget Sound, Washington; Group Health Cooperative of Eau Claire, Wisconsin; and Group Health Cooperative of South Central Wisconsin. CO-OPs offer the potential for lower premiums not present in established plans with legacy administrative systems and legacy relationships with providers that make health care delivery innovations more difficult. CO-OPs now operate in 24 states. The “fiscal cliff” deal, however, wiped out most of the funding to enable CO-OPs to form in the remaining 26 states. The primary beneficiaries of that action are the dominant insurers.
In those states where preliminary marketplace premium pricing is available, notably Colorado and Oregon, CO-OP premiums have come in at the lower end of the spectrum. In Maine, in the absence of the CO-OP, there would be only one carrier in the marketplace. If markets with CO-OPs have prices that range from just 2 to 5 percent lower than markets without CO-OPs, calculations based on premium tax credit estimates from the Congressional Budget Office and Urban Institute indicate that the savings to the taxpayer in premium tax credits over the next 10 years would range from $6.9 billion to $17.4 billion. (Calculations are based on CBO estimates of premium tax credits at the national level by year, Urban Institute estimates of federal premium tax credit spending by state, and the authors’ analysis.)
The CO-OP program should be re-funded sufficiently to allow CO-OPs to form in the remaining 26 states to increase competition in 2015 and 2016. Based on current patterns of funding, adding CO-OPs in all of the 26 remaining states will require about $1.6 billion, leaving net savings from premium tax credits of $5.4 billion to $15.8 billion.
The OPM national plans also have the potential to stimulate competition that results in lower premiums. If, however, the OPM plans turn out to be the existing dominant players that already command substantial market power, the entrance of OPM plans could have the perverse effect of actually reducing competition by enhancing already large market shares. This in turn would diminish OPM’s bargaining power with these plans on price, leading to higher government costs.
OPM’s challenge is to successfully encourage the organization of networks of smaller plans across states to serve as national plans. Under OPM’s regulations, unrelated insurers can join together under a common trademark to enter separate state markets as a single national plan. Because these consortiums of smaller plans pose less risk of “cornering the market” than existing dominant insurers, these networks could provide an additional safety valve against the pricing power of existing insurers.
The application period to become an OPM plan closed on March 29, 2013, so we do not yet know who those plans will be. It would be surprising, however, if smaller plans could have mobilized for this effort for 2014. Therefore, enlarging the stable of national plans with networks of smaller plans should be a priority for OPM, both to give consumers more choices and sustain OPM’s bargaining power with the insurers with whom they contract.
Patience will be needed. Enrollment in the Massachusetts Connector, the model for the marketplaces, has grown gradually over time. As a recent study in Health Affairs shows, Switzerland and the Netherlands have had similar experiences with their private insurance marketplaces. The Children’s Health Insurance Program (CHIP) stumbled out of the starting gate, and many states needed more time to get their programs fully operational. Yet CHIP remains a popular program, providing health insurance to over 7 million children. Just as the first year of a new car rollout usually requires some design adjustments, the first year of marketplaces could be bumpy.
Marketplace failure would not usher in a return to the pre-ACA world — status quo ante is not even an option. Budget battles will likely continue for the foreseeable future, resulting in iterative Medicare and Medicaid cuts. If the marketplaces and the coverage expansions that come with them collapse, the result would be significant increases in the number of middle and working class uninsured as employer coverage continues its long secular decline. Providers would have to deal with less revenue at the same time that their uncompensated care costs are rising. Many hospitals might have to close emergency rooms, and problems with access to care would not be confined to the poor. Providers might shift uncompensated costs to private insurers.
No one has come up with a private-market alternative to marketplaces that would provide secure health insurance to millions of Americans. Some of the benefits will take years to harvest, and there will be many challenges along the way. During that process, however, Americans will have the opportunity to have stable and affordable coverage — if policymakers have the will and courage to enact some basic safeguards to ensure a successful mission.