In 2010 the Obama administration signed legislation to create a more equal health insurance market. Most of the provisions were not implemented until 2014. These provisions consisted of three major items that require insurers to:
While these changes are positive and hoped to bring more equality to the marketplace there were problems in the methods and regulations to be implemented. In the past, people had to go through a medical underwriting in order to get individual health insurance. Then, they were placed into risk categories and based on their risk they would then be given plan options and pricing. This system allowed the insurer to manage their risk based on the overall health associated with the individuals AND allowed individuals to be rewarded for wellness and good health.
When the ACA provisions became final in 2014 the individual health insurance market was changed in many substantive ways. Insurance companies lost control of their risk management system and had to adapt to new regulations. The above regulations essentially took away the “risk buckets” and made one singular risk bucket for the whole population. This gave millions of people the ability to get insured, however, it also increased premium costs for millions who were already insured. Below we can see the average cost of health insurance for the past 10 years, according to eHealth:
|Year||Individual Health Insurance Premium||Falimly Health Insurance Premium|
The cost of insurance is a simple equation in a regulated marketplace. Insurers are only allowed to charge a small excess over the expected claims costs. The excess amounts are determined by state insurance regulators with insurance carriers submitting proposals for planned product availability and cost. Regulators, in turn, then have the ability to accept, reject or modify the proposals. Thus, the cost of insurance premiums are essentially determined by the cost of the claims paid by the insurance carriers. As claims rise, so do the premiums.
When the Affordable Care Act was implemented in 2014, everyone, regardless of employment, gender, age, or pre-existing medical conditions could purchase medical insurance at a guaranteed premium cost. Many individuals who had been denied coverage or had expensive medical conditions excluded from their medical insurance previously could now gain coverage and financial assistance. This was certainly an admirable goal to provide coverage for those who need it most. The reality however, there is no free lunch and the increase in claims would have to be paid for by those who had no claims.
The logical, although unfortunatethe , prediction would be for healthy individuals to seek other alternatives for health insurance or simply decline coverage due to expense and lack of perceived benefit. Originally, the ACA had a built in penalty to “force” all individuals to purchase health insurance coverage. Unfortunately the tax penalties were too little and the premium costs too large to force participation in the individual health insurance market. Eventually, tax penalties would be removed by the Trump administration altogether.
Today, when we look at consumer behavior within the individual insurance market we do see a trend of young and healthy people leaving. Alternative programs and minimalist non-ACA insurance plans have invaded the marketplace and compete for healthy individuals with far lower costs for participation. Again, as healthy individuals leave the insurance marketplace, the simple equation must correct itself in one of 2 ways: reduce claims expenses or increase premium revenues.
The lone “risk bucket” created by the ACA needs healthy people to pay into the market. This has caused a political debate surrounding the question of: Is it fair for a healthy individual who doesn't use their insurance often, to pay the same as someone who is sick and always in the hospital? Is there a way to provide a lower baseline (aka premiums) for coverage with higher costs associated with utilization to provide more balance and fairness? Is there a way to incentivize healthy lifestyles without “punishing” others who choose unhealthy habits?
Every year during Open Enrollment millions of healthy Americans ponder the questions above. No matter the political viewpoint or worldview, some individuals are essentially priced out of the individual insurance marketplace. Their income is too high to receive any tax credits or financial assistance, yet when faced with paying $15,000 to $20,000 in annual premiums, with after tax dollars, they simply can’t afford coverage. As premium costs continue to rise, the choice to continue health insurance coverage becomes more and more difficult each year.
As more and more individuals leave the market costs for those who remain in the market will inevitably increase. In a very real sense a death spiral is created. Those who have no choice, those with chronic medical conditions such as diabetes or kidney failure, will remain in the market. Those who have a choice, young and healthy individuals and families, will reach a point of unaffordability or lack of perceived value and leave the market. Which in turn will increase the costs for those who remain...which in turn creates greater unaffordability...which causes more individuals with a choice to leave the market...which in turn increases the cost for those who remain in the market...and so goes the DEATH SPIRAL.
The question is: are we in a death spiral now for individual health insurance?
There are many admirable things that the ACA tried to accomplish: equity, price control, and consistency of coverage for everyone. Unfortunately, as most things involving our politics and government, implementation of the ACA and it’s very construction have taken us down a path where the stated goals are likely unobtainable. The problem is not with the goals of the ACA but rather with way the ACA executes the provisions.
So where does this leave us? As insurance brokers, we work hard to understand the products, the costs, their utility, and how our clients can get the most from policies they purchase. We don’t pretend to have the answers; we explain the good and the bad. We look for options and alternatives. Some of our favorite options:
Until the rules are changed the outlook for the individual health insurance market is poor. Insurance carriers need the ability to further define product offerings to restore equality while maintaining fairness. The individual marketplace needs value and affordability restored. The sooner we remove the ACA barriers that prohibit product innovation and consumer choice, the sooner our individual marketplace will accomplish what was started in 2014 but so poorly executed: acceptance and affordability for all, regardless of pre-existing conditions or gender.