Health Insurance Market Regulations Under the Affordable Care Act: Protections for Consumers and Small Businesses

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Last month, the Department of Health and Human Services (HHS) issued proposed regulations that flesh out the details of the health insurance market reforms provided under the Affordable Care Act. Set to go into effect in January 2014, these reforms will provide sweeping new protections to small businesses and people who must buy their own insurance. The reforms prohibit insurers from denying coverage, refusing to renew coverage, or charging people more based on preexisting health conditions or gender. The reforms also place limits on the degree to which insurers are able to vary premiums based on someone’s age or tobacco use. Finally, the reforms require that insurers charge premiums that reflect the claims experience of everyone enrolled in all of their health plans in a state market.

Findings from The Commonwealth Fund Biennial Health Insurance Survey show why such reforms are so urgently needed. In 2010, more than one-third of adults ages 19 to 64 who tried to buy a health plan in the individual market over a three-year period, an estimated 9 million people, were either turned down because of a preexisting condition, charged a higher price, or had a condition excluded from their coverage. In just over a year from now, none of these practices will be allowed. The Affordable Care Act also ensures that the health plans purchased by individuals and small businesses will cover a comprehensive set of benefits known as the essential health benefit package. An additional proposed rule that HHS released last month addresses this provision, and will be explored in a future blog post.

The Insurance Market Reforms

These insurance market reforms apply to health plans sold through the new state health insurance exchanges, or marketplaces where small businesses and people without job-based insurance will be able to choose health plans and apply for subsidies to help cover their premium costs. The reforms also will apply to non-grandfathered health plans (or those not in existence when the Affordable Care Act was signed into law in 2010) sold in the individual and small-group insurance markets. In addition, beginning in 2017 states will have the option to open their exchanges to large employers with more than 100 employees. The market reforms will apply to the large-group market in states that exercise this option.

New limits on health insurance rating. The law and the proposed rule effectively ban insurers from charging someone a premium based on their health status, claims experience, gender, or occupation. Insurers may vary premiums only by 1) whether the policy is for an individual or a family; 2) geographic area of the state; 3) age, but only by a factor of 3:1 (an older person may be charged no more than three times what a younger person is charged); and 4) tobacco use, but only by a factor of 1.5: 1. The rule also proposes to standardize the degree to which premiums may increase by age across all state insurance markets. The rule defines a so-called 3:1 “age curve” across the life span, so that children through age 20 are all charged the same premium, and then premiums rise gradually in one-year increments to the top 3:1 ratio at age 64. Those ages 64 and older are all charged the same premium.

Guaranteed availability and renewability. Under the law, insurance carriers that sell coverage in the individual and small-group markets and the exchanges must accept all individuals and small businesses that apply for non-grandfathered coverage within open enrollment periods. The rule proposes that open enrollment periods be the same for the exchanges and the individual market; in the group market, carriers would maintain a year-round open enrollment period for employers. In addition, the law provides for special enrollment periods for people who lose coverage because of job loss, divorce, death of a spouse or parent, aging off of a parent’s policy, and other circumstances. Finally, the law and rule require health plans to renew insurance policies at the request of employers and individuals, with certain exceptions, including failure to pay premiums or fraud.

One risk pool for all enrollees. Today, insurance carriers selling policies in the individual and small-group markets often divide up their enrollees into “blocks of business” according to their health risks and costs. People in higher-risk blocks of business can suffer large premium increases every year, since insurers close the group to healthier new enrollees. The law and the new rules ban this practice, requiring insurance carriers to base premiums on all enrollees in all non-grandfathered health plans sold in the exchanges and the individual market in the state, or in the small-business exchanges and the small-group market. States can also decide to merge their individual and small-group markets, in which case the risk pool would encompass both markets inside and outside the exchange.

HHS proposes that the claims experience of the enrollees in all non-grandfathered health plans of an insurance carrier in a state be combined to determine the premium rate for all plans. This protects consumers in plans that might have above-average risks from paying above-average premiums. A carrier’s state-wide premium rate will then be adjusted for the overall risk profile of its customer base under the law’s risk-adjustment program; that is, some plans will receive payments for higher risks or make payments for lower risks. This means that the plan’s premium may vary only by a plan’s actuarial value (the average medical costs covered by a health plan) and cost-sharing (such as higher or lower deductibles), as well as plans' provider networks and delivery system characteristics. This new way of setting premiums in the individual and small-group markets will encourage insurers to compete for customers on the basis of health delivery innovations and quality, rather than on the basis of risk selection.

Conclusion

Open enrollment in the Affordable Care Act’s new state insurance exchanges begins in October 2013, with coverage beginning in January 2014. For the first time in most states, small businesses and consumers who do not have affordable health insurance through an employer will be able to select coverage with the confidence that they will be offered a plan, and that their premiums will predominantly reflect its value, rather than their health, gender, or occupation. Also for the first time, individuals with incomes under $92,000 for a family of four will be eligible for subsidies to help pay their premiums for plans sold through the exchanges. It is essential that federal and state governments continue to work hard to ensure that all Americans who lack health insurance can begin shopping and signing up for coverage nine months from now.

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