How Do Noncompliant Health Plans Affect the Market?
The Affordable Care Act helped to standardize health insurance coverage by requiring that new health plans cover a package of essential benefits, such as maternity benefits and prescription drugs, and prohibiting insurers from charging people more based on gender or health status. Yet, the Republican House and Senate bills to repeal and replace the Affordable Care Act (ACA) released over the past nine months would have allowed insurers to sell health plans that are not compliant with ACA standards. More recently, President Trump has called on federal agencies to authorize greater sale of short-term policies and “association health plans” with skimpier benefits as a way to avoid the ACA’s regulated markets.
Actuaries and other analysts have expressed concern that allowing compliant and noncompliant health plans to be sold side by side in the same market could destabilize the market for the compliant plans. If people who benefit the least from the standard requirements are allowed to opt for cheaper noncompliant plans, then the risk pool for the compliant plans will worsen, driving their prices higher, and possibly to an unsustainable level.
The ACA itself provides some insight into whether this kind of market segmentation could emerge. The ACA allows two types of noncompliant plans: grandfathered and grandmothered. Grandfathered plans, explicitly exempted by the law, existed when the ACA was first enacted (March 2010), whereas grandmothered plans (also known as “transitional”) are those exempted by executive order that existed only as of January 2014, when the ACA first took full effect.
We know little about the older, grandfathered plans because they are not subject to any ACA reporting requirements. However, insurers must report data about transitional (grandmothered) plans, such as enrollment, premiums, and claims. Drawing from these data, we analyze the basic financial characteristics of ACA-compliant and noncompliant-transitional plans, among the insurers that sold a substantial amount of both types (at least 1,000 members each), in either the individual or the small-group market in 2015.1
For insurers selling individual-market health plans, monthly premiums on average were 54 percent higher for their ACA-compliant plans in 2015 than for their noncompliant plans, in large part because of higher medical claims for compliant plans.
This average experience masks a wide variation among particular insurers. For the quarter of insurers with the greatest difference in prices, ACA-compliant premiums were 82 percent to 123 percent higher than for noncompliant plans, and claims were 157 percent to 193 percent higher.
For the small-group market, financial performance was much closer in 2015 between compliant and noncompliant plans. One reason that financial experience was so similar in the small-group market is that the covered benefits are much closer to each other for existing and new ACA plans in this market than in the individual market. Those benefits are significantly more comprehensive than the benefits that were being sold in most individual markets, prior to the ACA. Thus, the individual market has more difficulty sustaining noncompliant plans than does the small-group market.
This experience under the ACA indicates that, if noncompliant plans are allowed to be sold alongside compliant plans, this will result in splitting the individual market into a more expensive segment for sicker people and a cheaper one for healthier people. ACA-compliant premiums and claims in 2015 were notably higher than for noncompliant transitional plans. Covering a more comprehensive range of health care services is one reason for higher costs. Another is a different mix of enrollees. Because transitional plans had higher premiums for people with preexisting conditions, they most likely had a healthier pool of enrollees than ACA plans, which do not vary rates by health status.
For example, Blue Cross and Blue Shield of North Carolina, which had the largest pool of transitional members in the country (more than 90,000), reported that its 2015 rates were based in part on the fact that half of its transitional members were under the age of 35, compared with only a third of its ACA members. Accordingly, its ACA rates for a 45-year-old, nonsmoking male were 51 percent higher than its transitional rates (and 68 percent higher than its rates for grandfathered plans). By keeping these two populations separate, the prices for ACA plans were substantially higher than if all policies were ACA-compliant.
By no means does this limited experience under the ACA perfectly predict what might happen under various reform/replace scenarios, since the ACA’s market rules are distinctive. For instance, the ACA requires that insurers use the same factors to price both their grandmothered and their ACA compliant plans, which tends to suppress even greater differences from emerging. Nevertheless, the ACA experience helps to anticipate whether various alternative approaches, such as short-term policies or “association health plans,” have the potential to further destabilize the insurance market by siphoning off healthier enrollees.
1 We identified a sample of 29 insurers covering 963,000 members in the small-group market and 16 insurers covering 835,000 members in the individual market, spread across 21 states. Some states opted to disallow transitional (grandmothered) plans. In other states, some insurers that entered the ACA market had no substantial existing enrollment.