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Rand: Renewal of Cancelled Policies Slightly Raises Marketplace Premiums

By Rebecca Adams, CQ HealthBeat Associate Editor

January 22, 2014 -- None of the three plans that were debated last fall to extend expiring insurance policies would make the health law's new insurance exchanges unworkable, said a study released last week by the Rand Corporation.

The plan that President Barack Obama announced in November to allow the extension of expiring insurance policies for an additional year has the mildest effect on the health of the marketplace when compared to two competing plans that lawmakers had proposed, the study added.

Obama announced the plan after intense public criticism that cancellation of policies for non-compliance with the health law violated his pledge that Americans could keep their existing coverage under the overhaul if they liked it. Obama announced that policies that would otherwise be cancelled because they do not meet the benefit requirements of the health care law could continue for another year if insurers and insurance commissioners agreed.

The House of Representatives at the time was preparing to pass a different, farther-reaching proposal, placing Obama under pressure. The day after Obama announced his plan the House passed a bill (HR 350) introduced by Energy and Commerce Committee Chairman Fred Upton, R-Mich. Upton's bill died in the Senate.

The Rand study compared the impact of those two plans with another (S 1642) put forward in the Senate by Mary L. Landrieu, D-La.

"None of the three proposals would lead to a death spiral," said the 20-page study.

Under the plan that was adopted, Obama's administrative fix, enrollment in the marketplaces will fall by about 4 percent, or 500,000 people. Premiums will rise about 1 percent more than they would have otherwise.

Landrieu's bill would have a slightly more negative impact - enrollment would have gone down by about 8.5 percent and premiums would have gone up about 2.5 percent.

Upton's bill would have been the most disruptive to the marketplace. Enrollment would have dropped 26 percent and premiums would have gone up by about 10 percent.

All three of the proposals would perpetuate the two different insurance markets for people who buy insurance on their own. People who do not qualify for subsidies in the marketplaces and are likely to find cheaper prices among individual policies sold outside of the marketplaces because the individuals are young and healthy may choose to get coverage outside of the marketplaces created by the federal law.

All three of the proposals would increase federal spending. The president's plan will drive up federal spending by about $600 million. If Landrieu's plan had been enacted, it would have increased federal costs by $1.1 billion and Upton's plan would have pushed up costs by $5.2 billion.

The higher spending comes about because of higher premiums and federal subsidies that increase as rates rise.

Also, young and healthy people cost less to insure. If fewer of them are in the marketplace, then the costs for everyone would rise. "In effect, this departing group acts as a second subsidizer, and the federal government must fill the void," said the report.

But the study concluded that under all three approaches the marketplaces would continue to operate without major problems.

The researchers pointed to several factors that would mitigate the impact of the proposals. First, subsidies are offered only in the marketplaces - that federal money will attract customers.

Temporary measures also will help lessen losses for insurers. The federal programs that provide reinsurance for high-cost cases and risk corridors that limit insurers' losses for three years will help. And "risk adjustment" mechanisms that transfer money from insurance plans with many healthy customers to those with many sick enrollees can encourage insurance companies hit by bad risks to keep offering coverage in the marketplaces.

The impact will vary in different states. But the researchers used an economic model to figure out that overall, the marketplaces would not be abandoned by so many customers they would cease to function.

"Although we observed premium increases and enrollment declines, the ACA-compliant market did not spiral out of control," said the report. "Instead, it converged to an equilibrium with higher premiums and lower Marketplace enrollment. Thus, our results indicate that a death spiral will not result from any of the proposed reforms."

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