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Expert: Exchanges Could Survive Without Mandate, but Rates Would Rise

By John Reichard, CQ HealthBeat Editor

March 29, 2012 -- If the U.S. Supreme Court rules that the individual mandate is unconstitutional but otherwise upholds the health care law, will state insurance exchanges survive?

Yes, says one of the nation's leading experts on exchanges. But he thinks premiums charged on the exchanges will be higher than if the mandate were in effect.

"State exchanges could be viable on an ongoing basis even without the individual mandate," says Richard Curtis, president of the Washington, D.C.-based Institute for Health Policy Solutions.

But "without the individual mandate or other incentives for participation in the health insurance market, fewer individuals would obtain coverage when they are healthy, causing substantially higher premiums due to adverse selection," Curtis added. In other words, there would be an imbalance tilting toward older and sicker people in the makeup of enrollees in plans offered on exchanges.

Such marketplaces didn't survive in the 1990s when state health overhaul laws spawned a number of state-based exchanges. In those days they were known as "alliances" or "health insurance purchasing cooperatives."

The alliances were voluntary; no one had to get coverage there. The problem was that they lacked a way to assure a steady flow of good insurance risks enrolling in the health plans they offered.

It was no secret that mandatory alliances would have been more effective in bringing in healthy people to the alliances and in keeping rates down. But states didn't want to go that route. After a few years, the alliances weren't able to offer attractive rates and they faded away.

On the other hand, the mandate in the health law (PL 111-148, PL 111-152) that requires individuals to carry coverage would help prevent adverse selection in exchanges. Young and healthy people have to get coverage or pay a penalty. And the only place they can get federal tax credits to help pay for the coverage is in the exchanges.

Curtis says with the mandate gone, for those who are eligible for subsidies in the form of tax credits to help them pay for health coverage (those with annual incomes between 133 percent and 400 percent of the federal poverty level) those federal tax credits would compensate for the cost of those higher premiums.

"Since tax credit recipients can only obtain health insurance through the exchange, they would continue to constitute a reliable and substantial core population" for these new marketplaces, he said. "Earlier state exchanges which failed had no such core population," he said.

But unless a state adopted other ways to ensure broad participation in its exchange, that exchange wouldn't be able to offer affordable coverage for individuals with incomes above 400 percent of the poverty level who aren't eligible for federal tax credits.

The Obama administration has said that if the individual mandate is struck, so too should be provisions of the law requiring community rating in which everyone is charged the same rate regardless of age or health status and "guaranteed issue," which prevents an insurer from turning down any one.

Under that scenario, exchanges would probably be able to serve the tax credit-eligible population without turning anyone away, Curtis said. But it would be a mixed bag for people with incomes above 400 percent of poverty.

Insurers could then charge based on health status or deny policies to the sick. Exchanges would have to do that too because otherwise they'd be flooded with sick people. The growing percentage of sick people would cause premiums to escalate so much that the exchange could fail, Curtis said.

"If the court were to also strike the guaranteed issue requirement and the prohibitions on pre-existing condition limitations and /or health rating, issuers could offer more affordable coverage to healthy individuals. But those in need of care and coverage would be left without affordable coverage," Curtis says.

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