Contributor: Roy Goldman, PhD, FSA, MAAA, CERA
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If one didn’t know better, one would think the U.S. healthcare system were in dire straits. The country should have been celebrating that the uninsured rate dropped from 16.3% in 2010 to 8.8% in 2016. We should have been pleased that during this period the medical cost trends for the largest segments of the market (employer group plans, Medicare, and Medicaid) were among the lowest in thirty years, although still higher than we would like. Instead, the country spent two years (or, really, seven years) listening to rhetoric about the Affordable Care Act (ACA) and witnessing endless attempts to repeal it or weaken it, with the likely result of making robust coverage unaffordable or unattainable for millions of Americans.
Criticism of the ACA
Most of the criticism of the ACA has centered on the individual market, which at 8% is the smallest market segment. However, Medicaid, with 20% of the market (49% of births and 64% of nursing home patients), also came under attack. The questions were legitimate: why are premiums rising so fast, and why are insurers dropping out of the individual marketplaces? The good news is the individual market could be stabilized, IF there were a bipartisan DESIRE to do so!
In a stable market, insurers could project costs accurately and avoid wide swings in premium rates. Actuaries who have studied the challenges and risks of the health insurance market conclude the key to stability is a better balance of enrollees by age and risk conditions.
A better balance can be attained while preserving the beneficial effects of the ACA. Lost in the lament over high deductibles are the advantages of being insured (even with a large deductible): financial security against bankruptcy by large medical expenses, preventive care benefits at no cost to the insured, and access to the insurer’s provider discounts when accessing care. It is well known the ACA extended insurance coverage to over 21 million uninsured Americans. Less publicized are other beneficial effects, such as expanded prescription drug coverage to 44 million Medicare beneficiaries and the imposition of quality and medical loss ratio (the percentage of insurance premium dollars spent on healthcare claims) requirements on insurers.
Stabilizing the Individual Market
The fundamental goal of the ACA was to provide access to affordable, robust insurance coverage regardless of health conditions and regardless of income. Here are five recommendations that would make the individual marketplaces actuarially sound while preserving the above goal:
- Create stronger financial incentives for coverage. Actuaries have sufficient historical experience to know that a market cannot succeed unless there is a strong incentive for all eligible individuals to purchase coverage. If only unhealthy individuals join, premiums need to be set higher. But when faced with higher rates, healthier members skip coverage, thereby leaving only those with the more expensive healthcare needs in the marketplace, and, thus, pushing rates even higher.
- Reinstitute a national reinsurance program. The existence of reinsurance during 2014-16 reduced rates at least 15-20% cumulatively.
- Fund the cost subsidy programs for low-income families. The ACA requires insurers to cover these subsidies. Without government funding, premium rates need to be raised. These lead to higher government premium subsidies that are, in the aggregate, greater than the original cost subsidies because more families are eligible for the former than the latter.
Make insurance more attractive for younger adults. Age rating should reflect the true actuarial costs by age. The ACA artificially lowered premiums for older insureds causing younger enrollees to make up the cost difference. Premium subsidies and cost subsidies are currently more valuable to older insureds who have higher expected costs. They should be restructured to reflect both age and income instead of just income.
5. Establish a unique individual insurance market. There are currently two grandfathered non-ACA-compliant markets and two ACA-compliant markets, one on-exchange and one off-exchange. Having only one market would allow insurers to better predict who will enroll, leading to appropriate pricing and reduced anti-selection.
There is already a prototype for items #1-3. Policymakers simply need to emulate the successful and popular Medicare prescription drug program, Part D, which was passed with only Republican votes in 2003. It features:
- a strong disincentive for late enrollment
- risk adjustment, reinsurance, and risk corridor protection for insurers
- premium and cost subsidies for low-income enrollees
Despite the fact that prescription drug premiums are roughly 1/10 of medical premiums, in 2015 the government paid out $31 billion in reinsurance in Part D vs. $7.9 billion for the ACA. The government paid $45 billion in low-income and retiree subsidies vs. $32 billion under the ACA in 2014. No lawmaker has denounced these Part D payments as bailouts for insurers!
Unfortunately, as 2017 came to a close, none of the above actuarial recommendations were enacted. Instead, the Trump administration and the tax bill made the insurance markets worse:
- Cost subsidies are no longer being paid to insurers, thus, leading to unintuitive pricing (higher rates for silver plans than for a gold), unaffordable rates for those not eligible for subsidies, and greater government premium subsidies as discussed above.
- Elimination of the individual mandate beginning in 2019 will lead to healthier individuals leaving the market, thus causing the average premium rates to increase, which, in turn, will require larger government premium subsidies.
- No permanent funding for the Children’s Health Insurance Plan (CHIP), which would put more low income families into the ACA markets. (With the passage of the Bipartisan Budget Act on February 9, 2018, CHIP is, apparently, funded for another ten years.)
- Possible future decreases in funding for Medicare and other government subsidized health programs may be required to offset the increased deficit created by tax cuts. (The Budget Act helped save some of these programs, but some states are now passing legislation that will restrict eligibility for Medicaid.)
Of course, insurers’ rates for 2018 were set before the tax and budget acts were passed. Rates were increased to cover the loss of reimbursement for cost subsidies (CSRs) and the likely deterioration in the average health of those remaining in the market. The enrollment results are better than expected, with an overall 3.7% decrease: a 0.2% increase in the 15 states with state-based marketplaces and a 5.3% decrease in the 34 states using the federal marketplace. 2018 may yet see a national reinsurance program and funding of the CSRs. But there is still little attention focused on the growth of the unit costs of healthcare services. In the next issue, we will discuss how a single-payer system, or, more generally, a universal healthcare system could lead to lower costs if set up with appropriate utilization controls.
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