Why the House Repeal Bill Is Unlikely to Stabilize Insurance Markets
Every parent who has taught a child to ride a bicycle knows the importance of training wheels for keeping the bicycle upright until the child masters balancing. “Training wheels” are also vitally important when launching a new health insurance market, as are longer-term stabilizers.
Congress established the Medicare Part D program in 2003, creating for the first time a freestanding outpatient prescription drug insurance product, something the private sector had never offered before. To ensure this product’s viability, Congress enacted stabilizing measures—a generous reinsurance program to cover high-cost cases, a risk corridor program to share risks with insurers, a risk adjustment program to compensate insurers for the riskiness of the population they covered, and a fallback program for the federal government to assume the risk of providing coverage for service areas where no private carriers stepped forward.
The Part D program is generally regarded as a success, with dynamic insurer participation and competition, reasonable premiums, and strong enrollment. Nevertheless, the training wheels—reinsurance, risk corridors, risk adjustment, and the possibility of fallback coverage—remain in place 11 years after the program launched, with the reinsurance program in particular supporting its continued viability.
The Affordable Care Act (ACA) called forth a new private insurance product just as Part D did. The ACA asked insurers to offer an individual insurance product to all comers, forgoing health status underwriting and covering a set of essential health benefits with defined actuarial value limits and without preexisting condition exclusions. Recognizing the risk that insurers took in creating such a product, legislators offered a number of stabilizers.
For the first three years of the new program, insurers would be offered reinsurance for high-cost cases. A temporary risk corridor program committed the federal government to share large losses (and large profits) with insurers for the first three years. A permanent risk adjustment program would spread the risk of covering high-cost populations among insurers, while an individual responsibility penalty would drive—and a premium tax credit program would lure—healthy consumers into the market, helping to ensure long-term stability. Although a “public option” was vigorously debated during the lead-up to the enactment of the ACA, no federal fallback was created as a backstop.
The ACA’s stabilizers have not proven entirely satisfactory. The risk corridor program was essentially defunded when Congress limited the amount to be paid out to the amount collected from insurers, the reinsurance program phased out too quickly, and the individual responsibility penalty has arguably proven insufficient. While insurer participation was relatively strong and premium increases modest for the first three years of the marketplaces, a number of insurers failed or left the marketplaces for 2017, while other insurers raised their premiums sharply.
The American Health Care Act (AHCA), introduced into the House on March 6, depends on, and assumes the existence of, a vigorous individual market for health care. And yet it removes the prime stabilizer of the ACA, the individual mandate. It offers instead a continuous coverage requirement that imposes a 30 percent premium surcharge for 12 months on individuals who have a gap in coverage of 63 or more days during the previous year. This should encourage healthy people to maintain continuous coverage, but the 30 percent penalty is unlikely to discourage individuals who really need high-cost care and will not offset the cost of that care. It may primarily prove a barrier to participation by low-income individuals who occasionally must decide between insurance premiums and car repairs or rental payments. Moreover, the individual mandate penalty is repealed retroactively to 2016, but the continuous coverage requirement goes into effect in 2019, leaving a gap in market stabilizers at a critical time.
AHCA’s primary market stabilization initiative offers the states $100 billion over nine years to support high-risk pools, reinsurance programs, or other market stabilization efforts, beginning in 2018. States that do not propose their own projects will receive the funds for individual market reinsurance. But states can also use the funds to provide cost-sharing assistance for low-income enrollees or to pay for provision of care, and states are only eligible if they provide matching funds. The funds are likely far too little to stabilize individual insurance markets, even if states spend the money wisely.
Republican proposals to increase the age-rating ratio from 1-to-3 to 1-to-5—allowing insurers to charge older people as much as five times what they charge younger people—should make the market more attractive for younger people, as will age-adjusted tax credits that are much more generous for younger people. But the tax credit structure will discourage enrollment by some healthy as well as unhealthy older people. Since tax credits are not geographically adjusted, they will discourage enrollment in high-cost areas, including many areas with few insurers.
In the coming days insurers will decide whether individual insurance markets appear sufficiently balanced to risk returning for 2018. The ACA’s training wheels are largely gone, and wobbles are apparent. It is not obvious that Congress is offering the stability insurers will demand to return or to stay in the market for the long term.