By Neil Sandhoefner
Actuaries work with probability and statistics every day, and I’m willing to bet that even though we all know an exponential distribution like the backs of our hands, a good number of us were surprised by the outcome we saw on Nov. 8, 2016. I suppose it’s a reminder that low-likelihood events still do happen. (Somewhere, an enterprise risk management department is nodding vigorously.)
Speaking of unanticipated outcomes, insurance—something else with which actuaries are familiar—is all about protecting against unexpected events. In its simplest form, everyone pays a little so that no one has to pay a lot. Insurance won’t look like a financial gain for any one individual, but the idea is that the community on the whole is better for it.
All of this dovetails nicely into the Affordable Care Act (ACA)—more familiarly known as Obamacare—which has long found itself in the national spotlight.
After years of Republicans rallying against the ACA, they now have control of the White House and both chambers of Congress, and the question everyone’s asking is what they’re going to do. The ACA is a target of reform, to put it lightly. So, it wouldn’t be much of a surprise to see the ACA get repealed at this point, but the important lingering question is, “Then what?” Something will rise up in the place of the ACA (even if it’s an extreme, like a completely unregulated market). There’s still a good deal of uncertainty about what will replace the ACA and the implications for any changes for both insurers and individuals.
At the moment, there don’t seem to be any specific bills to replace the ACA floating around. So, in this article, I’ll review a few of the important provisions of the ACA—I’ll briefly talk about them and explain how each one plays an important role. And I’ll step through why any replacement to the ACA needs to seriously evaluate these provisions and either ensure their function is included in any replacement or propose a new provision to better address the underlying concern each provision was designed to tackle. It’s also important to understand the complicated interdependencies among these provisions—it’s not as simple as simply removing any one of them.
I’ll be focusing on the individual and small group markets because those experienced the most change with the passage of the ACA, and therefore seem poised to be affected the most by any repeal/replacement plans. There are other aspects of the ACA that are still important and worth following (required benefits for large group coverage, dependent coverage up to age 26, among others), but they’re just not the focus of this article.
The idea, then, is that you can use this article to evaluate any proposals that do come up. (This way I don’t have to risk the embarrassment of spending this whole article discussing some specific plan that could fall apart before this article sees the light of day—or the printing press, anyway. I told you—I’m hedging all my bets now!) Hopefully, this will help insurers and individuals understand changes and react appropriately. It’s also a reminder of just why this magazine is called Contingencies.
So, in all seriousness, there have certainly been benefits from the ACA (tens of millions more Americans now have health coverage than before the ACA) as well as challenges (rising premiums, insurers exiting markets). While a repeal may be a good bit of political bluster, it would be prudent for lawmakers to consider what the ACA’s aims were and figure out how to continue to support its successes while making adjustments to overcome some of the challenges that have arisen. Here are some of the key features of the ACA and why they need to be understood before any replacement plan can be drafted.
The ACA aimed to get more Americans health care coverage and to reduce the cost of health care for the nation. Obviously, ensuring that all individuals qualify for coverage goes a long way toward achieving the first part of that goal—hence the guaranteed issue requirement of the ACA. This requirement means that anyone who applies for coverage is issued a policy. That is, no one can be denied for coverage due to pre-existing conditions. One of the main impacts of this feature is that a portion of uninsured people who simply could not find coverage before can now obtain health care coverage. Another impact is that ACA plans now cover previously uninsured people with high-cost conditions and subsequently experience very high claim costs. Any ACA replacement needs to take a hard look at this guaranteed issue requirement. Does the federal government still believe it should support access to coverage for Americans? Is anything short of guaranteeing issuance acceptable? What is the best way to handle people with (high-cost) pre-existing conditions? Removing this guaranteed issue requirement would likely have the impact that people who are currently covered will no longer have health insurance. This is a major ramification that needs to be thought through seriously. If the goal of the federal government in regard to health care is still to expand coverage to more Americans and make health care more affordable, simply removing the guaranteed issue requirement would not achieve that goal.
One idea that gets discussed is setting up high-cost risk pools for individuals with certain costly conditions. This would not entail anyone losing coverage and it would lower the costs for ACA plans, but the problem is that these high-cost individuals would not have any subsidization from healthier insureds. Generally, health care plans charge a premium for all the lives on that plan. Some people pay a little more than they end up using in benefits, some people pay less than the benefits they end up using. In total, though, everyone pays some so no one has to pay a lot (that’s the idea anyway). If high-cost lives were moved to a separate plan, the costs of health care for those on ACA plans would likely decrease, but the costs for these high-risk individuals would then increase. Maybe this is the solution the federal government is looking for, but the question needs to be posed whether this really achieves the ACA goal of reducing health care costs for everyone. There are certainly ways to work through this—possibly a government subsidization of these high-risk pools—but this is a complex law, and any replacement needs to be fully vetted, which includes accounting for the points of view of all parties.
Another often controversial provision of the ACA is the individual mandate. This is the requirement that everyone needs to have health care coverage that meets certain minimum benefit requirements. If there is a guaranteed issue requirement, plans will certainly attract high-claim-cost lives. Some people have expensive health care conditions, and they will certainly see the value in signing up for coverage, especially if their conditions cannot prevent them from obtaining coverage. However, in order for insurance to work properly, there needs to be some subsidization from lower-claim-cost lives. All else equal, healthier lives will gravitate away from signing up for health care if it’s something they won’t use. They need to be given a good reason to sign up.
The individual mandate (aka, a good reason to sign up) is a key piece of the ACA, and it’s been upheld by the Supreme Court. Removing this requirement would likely have the effect that many healthy individuals who now have coverage would leave their plans. Premiums would increase for those who remain on the plans because only people who have high health care costs would stick around. (It would be similar to the concept of risk pools mentioned above, where there just isn’t subsidization between higher-and lower-cost lives.)
Indeed, when considering the rollout of the ACA, it’s an open question of whether the individual mandate was strong enough—whether the penalty for not securing coverage was sufficient to assure a healthy risk pool.
The guaranteed issue requirement and the individual mandate really go hand in hand, like peanut butter and jelly, Mike and Ike, or insurance articles and drowsiness. So, any changes to the individual mandate need to consider the guaranteed issue requirement of the ACA, and vice versa.
The ACA also has mandated plan design levels. These are essentially broad requirements about what plans need to cover. There are some specific required benefits, and each plan must fit into a “metal tier.” Essentially, these tiers define how rich a plan is, based on the expected value of the services provided by each plan. The metal tiers are bronze, silver, gold, and platinum.
The metal tiers perform a few roles. They give individuals shopping for coverage some basis for comparing coverage options (among carriers and among plans offered by one carrier). They also ensure that there is a minimum standard coverage level. And they play a role in the risk adjustment program that will be discussed in just a bit (you have to be patient!). Any change to plan design requirements, including completely removing the requirements, needs to consider all of these roles.
Comparability of plans is an important step for people obtaining coverage; it also goes a long way in reducing overall costs of health care. It’s important that people understand the coverage they’re buying for the basic reason that someone will feel better about a purchase they understand. Further, understanding coverage can help reduce overall costs. For example, if someone needlessly buys a platinum plan, and later learns they have pristine coverage, they might be incented to just go ahead and use the benefits, figuring they’re paying for them, so why not! Unnecessary utilization would just drive up health care costs.
Also, requiring minimum coverage levels works toward the subsidization between lower-and higher-cost lives that we’ve discussed. The lowest-cost lives are most likely to purchase the lowest metal tier coverage available, and that makes sense. If you don’t need any regular medical care and just want catastrophic coverage, of course you’ll buy whatever the lowest-value plan is. But, if carriers just offered, say, a $10,000 deductible plan, the premiums for that would be incredibly low, a good deal of healthy lives would flock to that plan, and—you guessed it—there just wouldn’t be that subsidization we’ve gotten to know so well. Of course, that’s an extreme example, but it gets the general point across: Any replacement to the metal tier approach needs to be sure to consider the expected premium dollars that would be flowing in. This, of course, rests heavily on the individual mandate. If there’s no requirement for coverage, a good chunk of those low-cost lives will just roll the dice and go without coverage. And, as we’ve covered, the individual mandate is best friends with the guaranteed issue requirement, so if you’re impacting one, you’re also impacting the others.
Premium Stabilization Programs (The 3 R’s)
When the ACA was first passed, it contained three premium stabilization programs, called the 3 Rs. Two were temporary, and now there’s just one left (“one R to rule them all,” I suppose). Even though two of the Rs were temporary and have ended, all three need to be understood and considered in any replacement plans.
The first “R” stands for reinsurance. This temporary program was meant to protect against individuals with abnormally high claim costs. This program ended in 2016, with final payments to occur in 2017. Plans were reimbursed for portions of claims above a defined threshold for any one individual. This program was intended to lessen the costs of individuals who hadn’t had coverage for some time and would subsequently have high claim costs while their chronic health conditions were brought under control.
The program was designed to be temporary because it was aimed at a one-time phenomenon that occurs when uninsured individuals in the population—whose chronic conditions had not been consistently managed—suddenly enter the risk pool. After a few years of coverage, those conditions should be brought to a managed sort of stasis, and the costs for those individuals should decline. Then, there won’t be any more uncovered individuals with untreated chronic conditions because of the individual mandate, so there is no longer a need for a reinsurance program. However, if anything changes with the individual mandate or guaranteed issue requirements, it’s possible that a reinstitution of reinsurance could be necessary. Just because the program, as designed, has ended doesn’t mean it can be ignored in any replacement plans.
The second “R” stands for risk corridors, which were the other temporary premium stabilization program. While reinsurance was aimed at high-cost individuals, risk corridors were meant to protect against overall higher-than-anticipated claims on entire blocks. The initial pricing of ACA plans contained a good deal of estimation and assumptions about the characteristics of the population that would purchase ACA plans. There simply wasn’t good data on who would purchase the plans and what their claims would look like. The risk corridor program was intended to ease the transition for insurers pricing these plans by reimbursing carriers for greater-than-expected losses and also collecting from insurers who had more favorable results than anticipated. The program lasted through 2016 (with final payments to be made in 2017), after which insurers should have a better grasp on the claim costs of this population and should not have so much uncertainty in their pricing. If significant changes are made, there may be new uncertainty introduced into insurers’ pricing, which means a new risk corridor-type program could be needed.
Now, as a note, the reinsurance program worked very well and was able to make greater-than-expected payments to carriers. However, the risk corridor program was not able to make the expected payments to carriers. This seems to suggest that overall claims were simply higher than expected, which is certainly an issue with the ACA as it stands. Thanks to the ACA’s loss ratio requirements (80 percent for individual and small group coverage, 85 percent for large group coverage), we can divine that hefty increases for plans are directly attributable to high claim costs. This seems to be the central problem: For all the bluster a repeal of the ACA would create, if we get down to facts, the cost of health care is probably the one big issue, and there is no ready and simple answer for that. However, that doesn’t mean there isn’t a solution. It just means a serious look needs to be taken and real ideas need to be proposed. Any true and effective replacement program needs to seriously address the issue of cost. It is one of the goals of the ACA, and no real good will be achieved if there is just a reshuﬄing without somehow addressing this underlying issue of high health care costs.
Finally, the third “R” stands for risk adjustment, which is a permanent provision of the ACA. With the guaranteed issue requirement, insurers have no control over the risk profile of their population. (With underwriting, an insurer could make the decision to not cover individuals with a certain condition, and they could price their plans without including claim costs of that condition.) If there are guaranteed issue rules, there is nothing to prevent one insurer from ending up with a much less healthy population than another insurer. Subsequently, the premiums for that one insurer would need to increase solely because of random chance, and then at renewal, large rate increases would cause most insureds to drop that plan and seek coverage elsewhere—and another insurer would then have the same issue. The risk adjustment program handles this by comparing relative health among insurers and transferring funds accordingly. This calculation relies on the actuarial values, or metal tiers, of plans. It’s also inextricably linked to the guaranteed issue nature of the ACA, which, as we’ve covered, goes hand in hand with the individual mandate. (See? It all rests on itself!)
Now, the ACA initially tried to increase health care coverage and tackle rising costs. It also happened to get swept up in a partisan storm. That is unfortunate and distracts from the real issues. Part of the implicit solution proposed by the ACA was the idea that more Americans having coverage—coverage with minimum benefit levels—would organically move the health care industry more toward preventive care so there are fewer chronic conditions that don’t get treated until they are already expensive. (Think about the costs of the daily testing of blood sugar for people with diabetes compared to the cost of amputating a foot. Daily testing—a sort of maintenance—is cheaper, more pleasant, and achieves a higher quality of life for the individual.) Any replacement plan needs to understand the original goals of reducing health care costs, identify how they fell short, and make meaningful changes to the ACA if any good is to come from so much partisan rancor. For example, was it that the ACA assumed the impact of covered lives would come sooner than it actually will? Is the ACA ineffective in getting people to utilize their benefits? These are real questions that impact lives and deserve real, thoughtful answers. An important part of understanding the ACA is to go into the details laid out here, understand their purpose, and analyze how they operate.
It’s not the best approach to treat the ACA as a game of Jenga (pulling out a piece and hoping the rest doesn’t come tumbling down); it’s better to understand it as a sort of tapestry (where just tugging on one string could quickly lead to one ratty blanket). The ACA is certainly not perfect, and it could stand to be improved. It’s important, though, to keep sight of the goals of the ACA—good goals that improve people’s lives—and find better ways of achieving those goals. We all get bogged down in our own ideologies; it’s important to be able to step back, take a breath, and seriously consider our actions. No replacement of the ACA will be worth-while if it doesn’t seek to understand and analyze the key portions of the original law and strive to make them better.
NEIL SANDHOEFNER, MAAA, FSA, CERA, is an actuarial fellow with Mutual of Omaha Insurance, where he works on pricing, development, and regulatory issues of health insurance.
 “20 million people have gained health insurance coverage because of the Affordable Care Act, new estimates show”; Department of Health and Human Services; March 3, 2016.
 “Some Health Plan Costs to Increase by an Average of 25 Percent,
U.S. Says”; The New York Times; Oct. 24, 2016.