Notes on Health Insurance and Reform

The Individual Mandate: How Sweeping?

Wed, 21 Mar 2012 04:00:00 GMT

The so-called “individual mandate” – the provision under the Affordable Care Act (ACA) that requires most individuals to carry a minimum level of insurance coverage and is now being considered by the Supreme Court – has emerged as the least popular element of the reform law and the prime target for its opponents. Yet in practice, the mandate may not be quite as far-reaching as the controversy over it suggests.

The vast majority of Americans already get insurance from their employers, Medicaid, Medicare, the individual market, or other sources of coverage, and will essentially automatically comply with the mandate once it goes into effect in 2014. The Congressional Budget Office (CBO) projects that about 80% of the 272 million non-elderly people in 2014 would be insured even in the absence of the ACA and would therefore already fulfill the mandate’s requirement.

Also, although the ACA requires people to maintain health insurance or else pay a penalty, the law allows a series of exemptions and special considerations, meaning that millions of individuals could be exempt from the requirement to maintain coverage.

The mandate’s exemptions cover a variety of people, including: members of certain religious groups and Native American tribes; undocumented immigrants (who are not eligible for health insurance subsidies under the law); incarcerated individuals; people whose incomes are so low they don’t have to file taxes (currently $9,500 for individuals and $19,000 for married couples); and people for whom health insurance is considered unaffordable (where insurance premiums after employer contributions and federal subsidies exceed 8% of family income).

In simulations prepared for Kaiser, Jonathan Gruber of the Massachusetts Institute of Technology estimates that about 40% of those who would be uninsured in the absence of the ACA would be exempt from the mandate. That means almost 9 in 10 non-elderly people would either satisfy the mandate automatically or be exempt from it. In Massachusetts – a state where an individual mandate was implemented in 2007 and has largely been effective with less controversy than greeted the ACA – about 1% of taxpayers paid a penalty in 2009, and 70% of people uninsured for any part of the year were exempt from it.

To illustrate who would be exempt from the ACA’s individual mandate, we constructed an example of a hypothetical family of four with two 40-year-old adults and two children, living in a region with average health care costs, and without access to employer coverage. This family would receive an affordability exemption from the requirement to maintain insurance if their income was below the tax filing threshold or if the cost of insurance would be more than 8% of their income. The following chart shows what percentage of income such a family would pay for health insurance at different income levels. It is based on the lower bound of CBO’s estimate that a bronze plan (the minimum coverage people would be required to buy) would cost $12,000 to $12,500 per family in 2016, and our calculator (which illustrates eligibility for subsidies to help with the cost of purchasing coverage through new health insurance exchanges).

As the chart shows, families would be exempt from the mandate at the lowest income levels because they are below the filing threshold for federal income taxes. Just above this level, the mandate would apply, but families would be eligible for substantial government assistance, either through Medicaid (paying essentially nothing for coverage) or through large premium subsidies in exchanges.

Starting at about $61,000 in annual income, however, this illustrative family would be exempt from the mandate. Even though they would be eligible for premium subsidies, they would have to pay more than 8% of income towards health insurance after taking those subsidies into account. If this family’s income rises above about $98,000 (estimated to be four times the poverty level in 2016, at which point they are no longer eligible for premium subsidies) they would also likely have to pay more than 8% of income for a bronze insurance plan and would therefore be exempt from the mandate. Indeed, for our hypothetical family, the exemption would apply up to about $150,000 in income, at which point the family’s resources would be high enough so that the cost of a bronze insurance policy in an average cost region drops below 8% of income.

Specific dollar amounts would vary based on age, family size, and the cost of health insurance in an area, but the basic story is similar.

Of course, even with these exemptions, the individual mandate is not without controversy. Reasonable people can disagree about the mandate as a matter of policy. Opponents argue it’s an inappropriate (and unconstitutional) exercise of federal governmental power. Proponents see it as necessary and proper to make reforms of the insurance market work. Some even suggest that the exemptions are too broad and the penalties too low for it to be effective.

The requirement has perhaps become the most powerful political symbol associated with the ACA. Yet the reality of it may not be as sweeping as the symbolism.

—Cynthia Cox and Larry Levitt

Health Insurance Transparency under the Affordable Care Act

Thu, 08 Mar 2012 05:00:00 GMT

In February, a final rule was issued implementing the Affordable Care Act (ACA) requirement that all health plans provide a uniform summary of coverage for all enrollees and applicants. The idea of providing easy-to-understand summaries of coverage is, in fact, the most popular provision in the ACA, according to a recent Kaiser tracking poll.

That finding suggests powerful consumer frustration over the complexity of health insurance and the difficulty people face evaluating health insurance choices and understanding how coverage works. Indeed, when asked, people say they would prefer to go to the gym or work on their taxes than read through their health insurance policies. Other Kaiser surveys find that too often, consumers don’t fully understand how coverage actually works until they get sick and try to use it, and then are surprised to learn their plan doesn’t pay as much, or at all, for care they thought would be covered. Economists document significant search costs to small businesses – $35 billion annually – arising from the limited ability of employers “to compare the price and quality of the bewildering variety of complex health insurance policies.” Such information barriers hinder market competition and increase the cost of health insurance. Objective measures of a health plan’s cost and value are not routinely available today nor easy for consumers and business owners to find.

With so much attention devoted to the ACA’s controversial requirement that individuals be insured and debates at the state level of whether to set up health insurance exchanges, the variety of provisions that would promote health insurance transparency have perhaps been somewhat lost in the shuffle. Implementation of some of these provisions is underway, while others await action.

Uniform Summary of Coverage (Section 2715, Public Health Service Act) – Starting this fall as they are offered or renewed, health plans and health insurance policies will have to provide enrollees and applicants with a uniform summary of benefits and coverage (SBC). All individual health insurance policies and group health plans must provide this summary. It will give consumers consistent information about what health plans cover and what limits, exclusions, and cost-sharing apply. It must be written in plain language and contain no fine print. At the outset, the final rule requires two illustrations of typical patient out-of-pocket costs for common medical events (routine maternity care and management of diabetes). Other care scenarios illustrating how coverage works for a broader set of benefits (such as expensive outpatient medical therapies, surgery, and mental health care) will be required at some time in the future.

This summary begins to provide consumers with information they can use to understand the coverage they have today and to evaluate health plan choices in new insurance markets that will begin in 2014. The SBC helps consumers understand how their health plan works on paper. Additional transparency provisions in the ACA are intended to show how health plans work in practice, and to make such information easily accessible to the public.

Transparency in Coverage Disclosures (Section 2715A Public Health Service Act, Section 1311(e) of ACA) – Non-grandfathered health plans, whether offered through exchanges or outside, must also disclose other information that would help consumers understand how reliably the plan reimburses claims for covered services, whether the provider network is adequate to assure access to covered services, and other practical information. The law requires plans to disclose information, and for exchanges and the federal Department of Health and Human Services (HHS) to then make publicly-available accurate and timely disclosure of the following information:

• Claims payment policies and practices
• Periodic financial disclosures
• Data on enrollment
• Data on disenrollment
• Data on the number of claims that are denied
• Data on rating practices
• Information on cost-sharing and payments with respect to out-of-network coverage
• Information on enrollee and participant rights under this title
• Other information as determined appropriate by the Secretary

Information required shall be provided in plain language that the intended audience, including individuals with limited English proficiency, can readily understand and use.

This requirement was scheduled to take effect for non-grandfathered health plans outside of exchanges six months after the date of enactment of the ACA, and for exchange plans starting in 2014. No draft rules or guidance on these requirements have been published to date; HHS has suggested a phased-in approach to implementation may be adopted.

Depending on the details of what HHS ultimately proposes, information disclosed pursuant to Section 2715A could give consumers insight into plan features and practices that affect how easily a patient might actually access care covered under a plan. For example, claims payment and denial practices are a key concern for consumers, many of whom report problems claiming covered benefits today. Disclosures might also include information on the nature of external appeals programs that plans use. Under final appeals rules and guidance published last summer, many plans will have the option of contracting directly with review entities to consider cases when consumers appeal a claim denial, while other plans will submit external review cases to an entity that is chosen independently by a regulator. Consumers might consider such information as they evaluate their health plan choices.

Information disclosed under Section 2715A could also help consumers understand aspects of plan coverage that may not be fully described under the SBC. An emerging trend in health plan design involves the use of tiered provider networks. Patients who seek care from network providers could end up paying more or less out-of-pocket depending on how their health plan ranks a particular hospital or doctor. Patients who seek care out of network could owe even more if they are subject to balance billing (which results when providers are not limited to charging the amount the health plan determines reasonable). This can happen inadvertently when patients are hospitalized or undergo surgery in an in-network facility, and are cared for by providers (such as anesthesiologists) who work in that facility but do not participate in the health plan network. Instructions to insurers and health plans for filling out the SBC note that accurately capturing how a tiered network plan operates may be difficult to summarize in the SBC, so plans and insurers are required to use their “best efforts” to describe rules “as reasonably as possible.” If plans were to report to regulators how frequently consumers claim care from the most preferred provider tier, less preferred tiers, and out-of-network tiers (and what out-of-pocket cost liabilities result), consumers would have additional tools to evaluate the accessibility of health plan provider networks and tiers.

Quality reporting for private health insurance (Section 2717, Public Health Service Act) – The ACA also requires the Secretary of HHS to develop reporting requirements for group and individual health plans with respect to covered benefits and provider reimbursement structures that improve health outcomes, prevent hospital readmissions, improve patient safety and reduce medical errors, and implement wellness and health promotion activities. This provision takes effect two years after the date of enactment, though federal guidance indicates that a phased-in approach to implementation of these requirements may be adopted.

As the health reform law restricts competition based on risk selection, insurers may increasingly have an incentive to compete based on the quality of care enrollees receive. Patients will benefit from information that helps them understand and recognize quality of care, and to compare alternative approaches insurers may adopt.

Quality reporting requirements will apply to non-grandfathered individual and group health plans and policies, offered both inside and outside of exchanges.

Healthcare.gov (Section 1103, Affordable Care Act) – Under the ACA, the Secretary of HHS must establish a website to help individuals, families, and small businesses in every state identify affordable health insurance coverage options. This website, www.Healthcare.gov, was first launched in July 2010. It provides information about major medical health insurance policies offered by private insurers in the individual and small group markets. It also provides coverage, cost and eligibility information about the new Pre-Existing Condition Insurance Program (PCIP) and state high-risk pools, Medicaid, and the Children’s Health Insurance Program (CHIP).

Using the so-called Plan Finder, consumers can see a list of all individual health insurance policies sold in their community. (Some insurers do not yet submit data to healthcare.gov.) Consumers can narrow their search and sort plan information based on enrollment, name of carrier, premium, cost sharing levels, and other coverage features.

The site displays standard rate premium information (that is, prices insurers would offer people in perfect health) for each plan option based on an individual’s age, gender, smoking status, family size, and location. In addition, it provides information about how often applicants for medically underwritten policies are turned down or offered surcharged premiums based on health status. The Plan Finder also displays summary information about covered benefits and cost sharing for each policy. Later this year, benefits and cost sharing information is expected to follow the format of the SBC required for all private health plans.

In the future, the Plan Finder will offer consumers other types of performance information about plans and insurers, based on data collected under Section 2715A authority, including the percent of individual policies that are rescinded; the percent of claims that are denied under each policy, and the number and disposition of appeals of denied claims. Elsewhere on the site, consumers can search information about individual and small group market insurers relating to rate review actions and medical loss ratios.

For small employers, the Plan Finder provides similar information about small group policies offered in each community. Small employers can see generally descriptive standard rate information, reflecting an aggregate of all cost sharing options offered under a plan and the demographics of all small businesses that might purchase a plan. The site does not provide Information about how often insurers surcharge premiums based on a group’s health status.

For low-income individuals, the Plan Finder also provides information about Medicaid and CHIP.
Issues involving money and ideology have largely dominated the debate about the ACA during and following its passage, and that’s not necessarily surprising. But as a result, so far at least, less attention has been paid to other ACA changes that would promote greater transparency in health insurance. These provisions may well be less controversial (though surely their implementation has and will engender debate about regulatory burdens) and more popular overall to the extent that they help consumers and small businesses understand how coverage works, reduce their search costs in buying insurance, and foster competition among insurers.

Issues involving money and ideology have largely dominated the debate about the ACA during and following its passage, and that’s not necessarily surprising. But as a result, so far at least, less attention has been paid to other ACA changes that would promote greater transparency in health insurance. These provisions may well be less controversial (though surely their implementation has and will engender debate about regulatory burdens) and more popular overall to the extent that they help consumers and small businesses understand how coverage works, reduce their search costs in buying insurance, and foster competition among insurers.

—Karen Pollitz and Larry Levitt

Private Insurance Benefits and Cost-Sharing Under the ACA

Tue, 28 Feb 2012 05:00:00 GMT

The Department of Health and Human Services (HHS) recently released guidance on the two key components that determine the level of protection that private insurance plans will provide to consumers under health reform. The first involves the services that insurance plans must cover, and the second involves how much patients must pay out-of-pocket for those services.

The Affordable Care Act (ACA) establishes new rules for what insurers must provide for both components starting in 2014. This requires balancing sometimes competing goals of standardizing plan design -- which provides certain guarantees to consumers no matter where they live or what plan they choose and facilitates comparisons across insurers – and permitting more diversity of choices in the marketplace. With recent guidance issued by the federal government on benefits and patient cost-sharing, how insurance options could vary by plan and by state has become quite a bit clearer.

Covered Services: The ACA requires HHS to identify essential health benefits for insurance plans offered in the individual and small group markets. The covered benefits must include at least 10 categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.

While quite comprehensive, these 10 categories also leave some room for variation, including specifically what services within a category are covered and whether there are limits on those services (e.g., caps on the number of visits for physical therapy or home health care, both of which are quite common today). Rather than specify a complete standard benefit package, the federal guidance would let each state determine those specifics by choosing a benchmark plan. This is similar to the approach used for the Child Health Insurance Program. Options available to states for the benchmark include: one of the three largest small group products in the state, one of the three largest plans offered to state employees, one of the three largest national plans offered to federal employees, or the largest Health Maintenance Organization (HMO) in the state. States would need to augment the chosen benchmark if it does not provide coverage for one of the required categories (e.g., habilitative services). Benchmarks will certainly vary from state to state, but the covered benefits will likely look relatively similar.

The guidance also allows insurers within a state to vary what services they cover. The federal guidance uses the concept of “actuarial equivalence,” meaning that plans can trade one benefit for another so long as the coverage overall provides the same value on average for consumers. The guidance offers two options for plans to make these benefit trades. One would allow equivalent substitutions only within each of the 10 overall categories. The other would allow substitutions across categories as well, providing plans with greater flexibility. The HHS bulletin indicates that further guidelines will be issued so that insurer substitutions will not result in discrimination against enrollees or applicants with health conditions.

Insurers will also have flexibility in how they actually cover certain benefits. For example, all plans will have to include prescription drug coverage, but the formularies that specify which drugs are covered will vary. The federal guidance requires only that plans cover at least one drug in each class (e.g., antidepressants, drugs to lower cholesterol, protease inhibitors for HIV, etc.). This is somewhat different from federal standards for Medicare prescription drug plans. Medicare plans must cover at least two drugs in each class, and for six protected categories – antidepressants, antipsychotic drugs, anticonvulsant drugs, cancer drugs, immunosuppressant drugs used by transplant patients, and antiretroviral drugs used by patients with HIV – all or substantially all licensed drugs must be covered. Plans also will have different networks of providers and different ways of managing access to providers and covered services.

Cost-Sharing: How much patients must pay out-of-pocket for covered services is determined by a measure called “actuarial value” (AV), which is the percentage of health care expenses a plan would cover on average for a standard population. For example, a plan with an actuarial value of 70% would be expected to cover on average 70% of health care expenses, with enrollees paying the remaining 30% through some combination of deductibles, copays, and coinsurance.

Some amount of diversity in cost-sharing is built into the statute itself, with plans required to offer coverage in any of four standardized “metal tiers:” bronze (AV of 60%), silver (AV of 70%), gold (AV of 80%), and platinum (AV of 90%). (To put this in perspective, current employer-based plans have an average actuarial value between gold and platinum, and current individually-purchased plans have an actuarial value between bronze and silver.)

Within each tier, insurers could design a wide range of options with varying deductibles, copays, and coinsurance to meet the specific actuarial value. The only cost-sharing element specified for all plans is a cap on total annual out-of-pocket costs, equal to the out-of-pocket limit in Health Savings Account qualified plans (currently $6,050 for an individual and $12,100 for a family).

Lower-income enrollees who buy coverage through a health insurance exchange would have lower out-of-pocket caps and be eligible to enroll in plans with lower cost-sharing levels. For example, enrollees with incomes between 150% and 200% of the poverty level ($34,575 to $46,100 for a family of four) would have an out-of-pocket maximum equal to one-third of the standard level (e.g., a little over $2,000 per person) and receive coverage with an actuarial value of 87%.

The recent federal guidance indicates that actuarial values will be determined using a standard calculator developed by the federal government, rather than allowing insurers to use their own data and assumptions. This means that two plans from different insurers with the same plan design will have the same actuarial value. This approach could mitigate one potentially large source of variation across insurers in the cost-sharing they require of patients within a given tier. Last year, for example, Kaiser commissioned three consulting firms to estimate the cost-sharing that would be required in 2014 to meet the actuarial value thresholds in the ACA using their own data and some common assumptions. The results varied tremendously. For a silver plan with 20% coinsurance, the estimated deductible for a single person ranged from $1,850 to $4,200.

The guidance notes, however, that the calculator may not be able to provide results for some complicated plan configurations, such as tiered networks or donut hole designs. Insurers may be able to adjust the way they use the calculator in these situations, introducing more subjective actuarial judgment into the calculation. States would also be given flexibility to customize the actuarial value calculator using local data, which could result in some variation across states in what cost-sharing is required.

There are still a number of outstanding questions about how the rules governing benefits and cost-sharing will work. For example, will plans be prevented from discriminating against very high-cost patients by imposing substantial cost-sharing or limiting coverage for specialty drugs and other services affecting a small number of people? Will consumers be able to readily recognize and understand variations in plan benefit and cost-sharing designs, and evaluate the differences in protection they offer?

But, the basic approach for how this will all work is now coming into view. Individual consumers and small businesses will be able to choose from a very wide range of options, from bronze plans offering essentially catastrophic coverage to platinum plans with much lower cost-sharing (and higher premiums). Deductibles and other cost-sharing features will vary somewhat from plan to plan and state to state, but a bronze, silver, gold, or platinum plan should provide approximately the same degree of protection everywhere. Benefits may vary somewhat across the country, depending on the benchmarks that states choose, and across insurers as well. That variation is likely to be more around limits on the number of days or visits that are covered rather than outright exclusions for entire categories of services, and coverage will certainly vary less than it does today.

Different people, of course, will come to different judgments about how this approach balances the goals of ensuring minimum protection for consumers, comparability, and diversity of choice.

—Larry Levitt, Gary Claxton, Karen Pollitz

Insurance Coverage of Contraceptives

Tue, 21 Feb 2012 05:00:00 GMT

The last several weeks have been a roller coaster ride for those interested in insurance coverage of contraceptives. In this post, we answer some of the key questions about the new contraceptive coverage policy generally, and more specifically, how it will be applied to religious organizations.

Why is contraceptive coverage part of health reform?

When the Affordable Care Act was passed, it included considerable attention to preventive care, for the first time stipulating that new private plans cover a wide range of recommended clinical preventive services to plan holders without cost-sharing. Specifically, this section of the law (2713) requires that private plans cover services that receive a strong recommendation from the U.S. Preventive Services Task Force (USPSTF); vaccines recommended by the Advisory Committee on Immunization Practices (ACIP); preventive services for children recommended by Bright Futures guidelines for pediatric preventive care; and “with respect to women,” new services that will be identified by the Health Resources and Services Administration (HRSA). In 2010, the Department of Health and Human Services (HHS) requested that the Institute of Medicine (IOM) convene a committee of experts in women’s health and prevention to identify gaps for women in the current preventive recommendations.

The IOM committee identified eight new preventive services for women, including screening for intimate partner violence, well woman visits, breastfeeding supports as well as the inclusion of contraceptive services and supplies, including all methods approved by the Food and Drug Administration. These recommendations were adopted by HHS in August 2011. Contraception is also recommended as a part of health care for women by the nation’s leading health care professional associations, including the American Medical Association, the American Congress of Obstetricians and Gynecologists, the American Academy of Pediatrics, and the American Public Health Association.

This new provision has significant implications for access to contraception and affordability for millions of women. It is estimated that half of pregnancies in the U.S. are unintended, among the highest rate among developed nations. The vast majority of women in the U.S. have used a contraceptive at some point in their lives to prevent unintended pregnancy, plan future pregnancies, or space childbearing. Cost-sharing requirements, such as co-payments and co-insurance, have been shown to curtail utilization of preventive services.

How much do contraceptives cost and aren’t they already covered by insurance?

The costs of contraceptives can vary widely, depending on the type of contraceptive a woman uses. Condoms are generally inexpensive, but other forms that are more effective (such as implants and IUDs) can be quite costly and also require a visit to a health care provider for insertion or prescriptions.

Coverage for prescription contraceptives is generally widespread, but not universal, in the private and public sectors. Most women in the U.S. receive coverage through private plans, and the 2010 Kaiser/HRET survey of employers reports that 85% of large firms cover prescription contraceptives in their largest health plans, although they may charge cost-sharing which can vary greatly by employer and type of plan. Currently, 28 states require insurance plans sold in the state to cover contraceptives, with a wide range of specific requirements and exemptions among these mandates. These laws, however, do not affect self-insured employer plans, which are regulated by the federal Employee Retirement Income Security Act (ERISA) and are exempt from state rules. These are plans that are funded directly by the employers and 60% of covered workers are in these plans. In 2000, a ruling by the Employment Equal Opportunity Commission found that employers that cover preventive prescription drugs and services, but do not cover prescription contraceptives are in violation of the Civil Rights Act. Contraceptive coverage is also typically included in most major government programs, including the Federal Employees Health Benefits Plan (FEHBP), Medicaid, the Indian Health Service, and TRICARE (which covers military families).

How will the final federal rule on contraceptive coverage affect insurance coverage of contraceptives?

The new federal rule will be effective August 1, 2012 and states that the full cost of all prescribed FDA-approved contraceptives and related services must be covered in new private plans, including individual, small group, large group, and self-insured employer plans. This new rule applies to all new plans, except for plans sponsored by certain non-profit religious employers who object to the use of birth control. Existing plans that have “grandfathered” status are not required to provide this coverage regardless of the employers’ religious affiliation. Originally, the exemption was limited to religious employers that included only houses of worship. Some religious leaders called for a broader definition of religious employers to include religiously-affiliated institutions, such as faith-based hospitals and universities, even if they employ and serve people with a wide range of religious tenets. Others disagreed, saying that the type of insurance coverage that women have should not be defined by their employers’ religious beliefs. This exemption has been the focus of much of the current debate.

Who will be required to cover contraceptives and who is exempt?

The Administration issued a Final Rule on February 10, 2012 addressing the religious exemption. In essence, the exemption has two levels: One that exempts churches, synagogues, and other houses of worship from the coverage requirement completely. It also grants other nonprofit employers who hold religious objections to contraceptives a one-year grace period (until August 2013), during which they do not have to comply with the regulation. By the end of this one-year period, HHS will issue rules requiring the insurance companies that sell plans to these religiously-affiliated employers to offer contraceptive coverage without cost-sharing directly to any employees and their dependents who desire it. Therefore, religiously-affiliated employers that oppose birth control will not have to spend their funds on contraceptive coverage, but their employees and their dependents will still be able to obtain full coverage for contraceptives directly from the insurer. During the transition year, the Administration plans to put forth more details on this portion of the regulation and to specify requirements for self-insured plans, where the employer and the insurer are the same entity. It is currently unknown how many religiously-affiliated insurers are self-insured.

The Administration put forth this rule with the intention of relieving employers with religiously-based objections with the obligations of using their funds toward contraceptive coverage, which may violate their religious tenets, while still assuring that women have access to contraceptive coverage without cost-sharing.

This final policy is based on the contraceptive coverage mandate and exemption in Hawaii. In Hawaii, an employer that invokes a religious exemption to the mandate is required to provide enrollees, in writing, a list of the contraceptive services that the employer refuses to cover as well as information on how to access the services. It is the insurer who must then to provide this coverage to the workers. The Hawaii statute also recognizes that women may use contraceptives for many health conditions, and states that coverage must include “prescription contraception that is necessary to preserve the life or health of the enrollee.” Under the federal rules it is not yet clear how employees will be notified of the policy, whether there will be a similar protection for the other medical uses of contraceptives, and how the new rule will affect self-funded employer plans that have been exempted from state laws. This could be clarified over the next year.

What is the cost impact of this provision?

The specific short- and long-term costs and savings for plans of this new policy are not known. The National Business Group on Health recommends that employers include coverage of contraceptives in their plans, finding that the short-term costs may be modest and will likely be offset rapidly by long-term saving in preventing costs associated with pregnancy. An HHS brief on cost implications of prior expansions of contraceptive coverage concluded: “Evidence from well-documented prior expansions of contraceptive coverage indicates that the cost to issuers of including coverage for all FDA-approved contraceptive methods in insurance offered to an employed population is zero.” When coverage of contraceptives was added to FEHBP in 1999, it did not increase premium costs. Finally, a key difference between prior research and the current policy is that the ACA provision eliminates cost-sharing, and it is not clear how much this would affect plan costs as this expense is currently borne by workers and their families.

What’s next?

While the rule issued by HHS is final, this issue is likely to remain in play. Over the coming year, HHS has indicated that it will further clarify how this exemption will be structured. In the meanwhile, some legislators in Congress who are not satisfied with the present religious exemption have introduced legislation to change this rule and other organizations have filed legal challenges. These bills and lawsuits aim to either broaden the exemptions from the mandate to a wider group of employers with objections to contraceptives and other elements of the health reform law, or repeal the contraceptive coverage provision from the law.

—Alina Salganicoff and Usha Ranji

Betting on Private Insurers

Thu, 19 Jan 2012 05:00:00 GMT

Just-released estimates of national health spending in 2010 by the Centers for Medicare and Medicaid Services (CMS) show that 45% of our health care spending is financed by the federal and state governments, primarily through the Medicare and Medicaid programs. This share has grown temporarily in recent years because of the economic downturn, as private insurance has declined and Medicaid has grown. It has also increased due to our demographic destiny: the growing cohort of baby boomers who are retiring and shifting from employer-sponsored health insurance to Medicare.

As Kaiser Family Foundation President and CEO Drew Altman has written, this is hardly evidence of an “imminent danger of a government takeover” of the health system. In fact, if one slices the pie in a slightly different way – looking at how health benefits are managed, rather than how they are financed – it becomes clear that in some ways quite the opposite is true: we are increasingly relying on the private insurance industry to provide health coverage. And, even when coverage is publicly-managed, health care services are primarily purchased from private providers.

Take the 255.3 million Americans who were insured in 2010:

• 149.9 million were covered through employer-sponsored coverage, either through a privately-insured plan or a self-funded plan managed by a private third-party administrator (almost always an insurance company).

• 14.9 million bought coverage on their own from an insurer.

• 38.1 million were covered through Medicare, a government social insurance program. But, as of the end of 2010, 11.4 million of those beneficiaries were enrolled in private Medicare Advantage plans. (Many Medicare beneficiaries also receive their prescription drug coverage through private insurers in Medicare Part D, or get supplemental insurance through Medigap or employer retiree plans, but let’s leave those aside since part of their coverage is still arranged by a government program.)

• 48.4 million were covered through Medicaid, but about 11.2 million received coverage through a private managed care organization. (An additional 15.5 million beneficiaries received coverage through Medicaid-only managed care plans, which are a mix of private insurers and publicly-sponsored plans. As a result we don’t categorize them as being managed by private insurers, but a meaningful number are private insurers, so our figures underestimate the influence of private plans.)

So, out of the 255.3 million people with health coverage in 2010, at least 73% were in private insurance arrangements. This share is likely to grow starting in 2014, when major elements of the Affordable Care Act (ACA) kick in. Many of those currently uninsured will buy private insurance through new state-based exchanges, and others will be covered through expanded eligibility in Medicaid, likely more often than not in a managed care plan. (The Congressional Budget Office projects that Medicare Advantage enrollment will decline as a result of the ACA, but that effect is small relative to the newly-insured.)

There's no doubt that the expansion of private insurance for managed care in public programs in recent years has been important for the insurance industry. A recent Bloomberg Government study examined the financial performance of the nation’s private insurers, concluding that the “biggest contributor” to recent revenue and enrollment growth “has been a substantial expansion in the companies’ Medicare Advantage and Medicaid managed-care businesses.” Across the health system, we pay a price for this reliance on private insurance in terms of higher administrative costs. The McKinsey Global Institute estimates that the U.S. spends nearly five times as much as the average for all OECD countries on administrative costs on a per capita basis.

The question is, will our bet on private insurance help to control costs over time? Recently, private insurance premiums – like the rest of the health care system – have been growing quite slowly. In 2010 premiums increased by 2.4%, according to the CMS estimates. This is largely the result of slow growth in the use of services, likely driven by the recession and increases in patient cost-sharing. Whether, and by how much, utilization will pick back up when the economy recovers is an open question. If premiums once again start to accelerate, insurers may come under growing pressure to demonstrate their value to the system.

—Larry Levitt and Gary Claxton

Insurance Brokers and the Medical Loss Ratio

Thu, 08 Dec 2011 05:00:00 GMT

In a close vote, the National Association of Insurance Commissioners (NAIC) recently adopted a resolution urging Congress and the Department of Health and Human Services (HHS) to exempt insurance broker and agent compensation from medical loss ratio (MLR) requirements or otherwise adjust the requirements to ease their effect. HHS last week released its final MLR rule, maintaining its original decision to count broker compensation as an administrative cost for insurers. H.R. 1206, a bill that would exempt broker commissions from the MLR calculation, is currently pending in the House.

The MLR provision of health reform requires insurers to use at least 80% of premium dollars (85% for large employer plans) on health care expenses and quality improvement (rather than overhead and profits). If an insurer doesn’t meet the requirements, it will have to pay rebates to consumers. Rebates based on 2011 experience will have to be paid by August 2012.

Brokers and agents – often referred to as insurance "producers" – not surprisingly are concerned that the MLR requirement will put pressure on insurers to cut back on administrative expenses, including sales commissions. Exempting broker commissions from the MLR calculation would mean that insurers could more easily meet the MLR thresholds without making changes to broker compensation. But that would also likely lead to higher premiums and smaller rebates for consumers.

To put all this into perspective, we analyzed 2010 insurer filings to NAIC (compiled by Mark Farrah Associates). On average, broker compensation accounted for 6% of insurance premiums in the individual market and 5% of premiums in the small group market. On a per person basis, this works out to an average of about $12 per month going to commissions in the individual market and $15 in the small group market. (Note that these amounts are averages. Not all insurance is sold through brokers, and commissions are generally higher for an initial sale than for a renewal.)

Interestingly, the amount insurers spend on brokers compensation varies quite a bit from state to state. In the individual market, commissions range from less than 1% of premiums on average in Hawaii and Vermont to nearly 10% of premiums in South Carolina and Delaware. In the small group market, broker compensation accounts for less than 1% of premiums in Alabama and North Dakota, compared to about 7% of premiums in Utah and California.

The state-by-state variation may be due to a variety of factors, including: How competitive the insurance market is, how insurance is sold in different states, how often individuals and consumers change insurance carriers, and the level of commissions paid by insurers. In some states, insurers rely more heavily on direct sales than commissions. Direct sales are also counted as administrative expenses under the MLR rule, but on average account for a much lower share of premium revenue than commissions (about 1% on average in both the small group and individual markets).

How much pressure the MLR requirement will put on broker commissions – or, how much exempting them would affect rebates to consumers – will vary from state to state, but also from insurer to insurer. Some plans appear to already be meeting the MLR thresholds, so exempting commissions in those cases would have little effect. But for the market overall, removing sales commissions from the equation would lead to smaller rebates for consumers and higher premiums over time.

—Cynthia Cox and Larry Levitt

The Economy and Medical Care

Tue, 15 Nov 2011 05:00:00 GMT

Various market watchers have reported that the use of health care services has not been growing recently as it had in the past, resulting in lower than expected health care claims for people with private insurance and higher than expected earnings for insurers. A look at physician office visits by nonelderly patients with private insurance over the past decade illustrates the change in the use of services (See the chart below). (This analysis was prepared for the Kaiser Family Foundation by researchers at Stanford University using physician utilization data collected by IMS Health.)

Although the total number of visits jumps around somewhat from quarter to quarter, the analysis shows generally that the quarterly number of office visits by privately insured patients increased from about 140 million visits per quarter at the beginning of the decade to 160 million visits early in 2005. The number of non-elderly people with private insurance changed hardly at all over that period, increasing by about 1% according to our analysis of the National Health Interview survey. So, the increase was driven by people with private insurance going to the doctor more often.

From 2005 through 2008, the trend in physician visits was largely flat as the number of people with private insurance dropped slightly (about 1.7%).

Then, as the economic downturn deepened, the number of physician visits among the privately insured started a downward trend, which has continued even as the recession technically ended in June of 2009. The number of visits fell to a low of 129 million in the 2nd quarter of 2011, a decline of 17% from 156 million visits in the 2nd quarter of 2009. The number of people with private insurance declined over this period as well as many people lost their jobs and their insurance along with them. But, the decline in the number of people with private insurance is much smaller than the decline in visits – about 2% between 2009 and 2010. And it looks like private insurance enrollment may be increasing into 2011.

Even people who are insured are going to the doctor less. Likely, consumers are reacting to the severe economic downturn and significant job-loss which has defined the economy over the last several years by cutting back on health spending. Higher deductibles, copays and coinsurance increase the cost of care, and their impact may be magnified in these tough economic times. The Kaiser/HRET Annual Survey of Employer Health Benefits finds that the share of workers covered on the job by plans with a deductible of at least $1,000 grew from 18% in 2008 to 31% this year. In some cases people may be foregoing unnecessary care, meaning that health costs are reduced with little or no effect on health. In other cases people are likely cutting back on necessary care, potentially endangering patients' longer term health and leading to higher costs over time.

The drop in medical service use poses somewhat of a dilemma for insurers, their customers, and regulators. As the economy recovers, service use will probably begin to increase, but when that will happen and by how much it will increase will be difficult to predict. The data show a slight uptick in physician use by the privately insured in the 3rd quarter of 2011, but the change was not statistically significant and there’s no way of knowing whether it’s the beginning of a trend. It could also simply be that more people are now insured. Insurers will want to protect themselves against an upswing in service use by building higher trends into their rate projections, but purchasers and regulators may push back, claiming that insurer projections are not in sync with recent experience. In fact, reports suggest that insurers have profited this year after raising premiums with the expectation of higher utilization that never materialized.

Two provisions of the Affordable Care Act may come into play here. States and the federal government are now reviewing premium increases of more than 10% to determine if they are justified. This process provides some insights into what insurers are assuming for the future, and an opportunity for regulators to challenge those assumptions. And, insurers are now required to give small businesses and individuals rebates if their medical loss ratios (the share of premium dollars going to medical claims) are below certain thresholds. If insurers project bigger increases in health care use than actually occur, they may find themselves giving money back to consumers.

—Gary Claxton and Larry Levitt. Analysis of the physician utilization data was prepared for Kaiser by Randall Stafford and Laurence Baker of Stanford University.

Questions About Essential Health Benefits

Tue, 18 Oct 2011 04:00:00 GMT

The Institute of Medicine (IOM) recently issued its long-awaited report on defining the essential health benefits under the Affordable Care Act (ACA). As expected, the committee preparing the IOM report did not recommend which specific services should be covered, but rather discussed what the process should be for defining the essential benefits, which all insurers selling coverage to individuals and small businesses will have to provide beginning in 2014. Somewhat unexpected was their recommendation to set a dollar target – reflecting the current average cost of a small business health insurance plan – as the benchmark for decisions about what to include and not include in the essential health benefits package.

The ACA gives the task of identifying the essential health benefits to the Secretary of Health and Human Services (HHS). The law specifies that the essential health benefits package must include at least 10 categories of items and services: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. It also requires that the scope of benefits be equal to that of a “typical employer plan.” A few other criteria in the law (e.g., that the benefits reflect an appropriate balance among the categories and take into account the health needs of diverse segments of the population) guide the Secretary’s decision making.

HHS commissioned the IOM report, but it is under no obligation to follow any or all of it. The report makes a number of recommendations about the processes and criteria the Secretary should use to identify the essential health benefits, but some big and important questions are left largely unaddressed. Here are a few:

• What kind of limits on covered services will be permitted?

The services categories listed in the health reform law are quite broad and inclusive, and while there may be some ambiguity around a few specific services that are not explicitly listed (such as imaging or transplants), most health care will fit pretty easily into the enumerated list. The bigger question may be about the scope of benefits within the specified categories and what limits might be allowed on otherwise covered services. For example, could a plan cover only up to 10 physical therapy visits a year, or 15 prescriptions, or 30 days in a hospital? These kinds of service-specific limits won’t matter to the vast majority of people in any given year and will reduce premiums, but they could matter a lot to a small number of individuals who in any given year come down with serious illnesses or who have chronic conditions. The IOM report gives little guidance about how limits on coverage should be handled, suggesting that they should be based on medical evidence and applied to individual circumstances (see page 5-21). However, for most types of services, it is difficult to see how explicit caps that limit coverage in all circumstances for all covered individuals can be evidence-based. Also, unlike situations where a plan denies a claim because it’s not medically necessary, caps on covered services cannot be appealed to an independent reviewer.

This is one of the more difficult issues facing the Secretary. Will the regulation from HHS specify when limits will be permitted, or will these decisions be left up to the state health insurance exchanges or even to insurers? Note that the IOM report did recommend that the regulations “should list standard benefit inclusions and exclusions at a level of specificity at least comparable to current best practice in the private and public insurance market.”

• How will the essential benefits interact with the calculation of actuarial value?

The ACA defines the coverage insurers are required to provide in two different ways, separating the services covered (the essential health benefits) from the amount of cost-sharing enrollees pay (the “actuarial value”). For individual and small group plans, the ACA defines four tiers of coverage: bronze, silver, gold, and platinum. Patient cost-sharing will vary across the tiers, but all plans selling to individuals and small businesses will have to cover the essential health benefits. The different tiers of coverage in the law are not defined using specific deductibles, copays, and coinsurance. Rather, they are specified using the concept of an "actuarial value" (AV). For example, a silver plan has an actuarial value of 70%, which means that for a standard population, the plan will pay 70% of their health care expenses on average, while the enrollees themselves will pay 30% through some combination of deductibles, copays, and coinsurance. The higher the actuarial value, the less patient cost-sharing the plan will have on average. The percentage a plan pays for any given enrollee will generally be different from the actuarial value, depending upon the health care services used and the total cost of those services. And, the details of the patient cost-sharing will likely vary from plan to plan.

How the actuarial value is calculated – which has not been addressed in regulations issued so far by the federal government and was not part of the IOM’s charge – could have significant implications for what the scope of services covered might be. For example, a recent brief from the American Academy of Actuaries recently suggested that any benefit limits “that are not defined specifically in the essential benefits package presumably would be reflected in the numerator of an actuarial value calculation, but the allowed cost of the entire episode(s) would be included in the denominator.” This means that a plan imposing benefit limits – covering, say, no more than 30 days in a hospital – would lower its actuarial value and have to make up the difference somewhere else in the coverage it provides. However, different rules for calculating actuarial value might not penalize plans for limiting benefits, making such limitations more likely.

• What does it mean to peg the essential benefits to a typical small employer plan?

The IOM report recommends that the ACA’s requirement that the essential benefits reflect what’s provided under a typical employer plan be interpreted to mean a small employer plan. Leaving aside whether this is a good idea or a bad idea – which reasonable people could disagree about – it’s somewhat unclear what it really means in practice. There’s little doubt that small employers offer less comprehensive coverage than large employers. For example, our recently-released annual employer survey found that half of workers with health coverage through small businesses have a deductible for single coverage of $1,000 or more, compared to 22% among those working for large employers. But, as the IOM report acknowledges (see page S-4), the differences in the overall scope of coverage between small and large firms stem more from differences in benefit design (i.e., patient cost-sharing, which is governed by the actuarial value thresholds defined in the ACA and the purchasing decisions made by employers) than in the services covered (which is governed by the definition of the essential benefits). So, attempting to distinguish between large and small employer plans is largely immaterial to the task facing HHS in specifying the essential health benefits, and may become a distraction if debate focuses on cost-sharing differences between large and small employer plans rather than the services that they offer.

Defining the essential health benefits was always going to be one of the toughest issues policymakers would face in implementing the health reform law. It determines what insurance protection people will have when they get sick or injured (with the aim of improving that protection relative to the status quo). It affects the federal budget, since a more comprehensive package means higher federal costs for subsidizing the premiums of low- and moderate-income people buying insurance on their own. And nearly every segment of the health care industry has a stake in it. The IOM report offers some guidance for resolving the inevitable tradeoffs, though it’s only one of many possible roadmaps and still leaves some big questions unaddressed.

–Larry Levitt, Gary Claxton, Karen Pollitz

Grandfathering Explained

Thu, 08 Sep 2011 04:00:00 GMT

The Republican leadership in the House of Representatives recently indicated that it will be seeking to repeal regulations under the Affordable Care Act (ACA) that govern the “grandfathered” status of health plans. As this aspect of the health reform law gets more scrutiny, it may be useful to review some of the specifics of how grandfathering works.

The purpose of grandfathering: As provisions of the ACA go into effect, grandfathering provides for a smoother transition by allowing health plans to remain as is and not be required to implement certain aspects of the law’s new rules and protections.

How plans maintain grandfathered status: To remain grandfathered, a plan had to be in existence as of March 23, 2010 (when the health reform law passed) and not make any major changes in coverage since then. Some examples of changes in coverage that would cause a plan to lose grandfathering include:

• Eliminating benefits to diagnose or treat a particular condition.
• Increasing the up-front deductible patients must pay before coverage kicks in by more than the cumulative growth in medical inflation since March 23, 2010 plus 15 percentage points.
• Reducing the share of the premium the employer pays by more than five percentage points since March 23, 2010.

Keep in mind that for employer-sponsored insurance, any change in grandfathered status is up to the employer, who can choose whether or not to make changes to the plan.

Why it matters: Many of the ACA’s provisions apply regardless of grandfathered status. For example, all plans have to allow dependents up to age 26 to enroll (though only non-grandfathered plans are required to enroll dependents who have access to their own employer coverage). And lifetime limits on coverage are now prohibited. But here are some of the key provisions that do not apply to grandfathered plans:

• A requirement that plans provide preventive services with no patient cost-sharing.
• State or federal review of insurance premium increases of 10 percent or more for non-group and small business plans.
• A rule allowing consumers to appeal denials of claims to a third-party reviewer.
• Starting in 2014, the requirement to provide the minimum “essential health benefits.” (Note that this requirement does not apply to large employers, whether or not they have grandfathered status.)

For the provisions now in effect, the only one that grandfathered plans are exempt from that is likely to have a material effect on costs is the preventive services requirement. According to the economic impact analysis that accompanied the regulation implementing this requirement, it’s projected to increase premiums in non-grandfathered employer plans by about 1 percent.

Grandfathering may have significant symbolic value. Advocates of the health reform law point to it as helping people keep coverage they had pre-reform, while opponents argue that the loss of grandfathered status could lead to higher costs. As a practical matter, the effects throughout the insurance market are likely to be quite modest in either case. And, where employers make changes that result in a plan no longer being grandfathered – for example, raising deductibles or employee premium contributions – those changes are probably going to be more consequential for workers and their families than whether or not the plan is grandfathered.

—Larry Levitt

Measuring the Affordability of Employer Health Coverage

Wed, 24 Aug 2011 14:23:00 GMT

A recent draft regulation issued by the Treasury Department describes who is eligible for premium tax credits to help them afford coverage offered through health insurance exchanges beginning in 2014. Tax credits will be available to people with incomes between 100 and 400 percent of the poverty level who are not eligible for public coverage such as Medicaid or Medicare and who are not offered affordable health coverage by an employer. The approach that the regulation proposes for measuring the affordability of employer coverage could have significant financial consequences for a modest number of lower- and middle-income families.

Here's the issue:

Starting in 2014, the health reform law generally requires people to have health insurance and provides tax credits to help them afford it. Those who are offered health insurance through a job, however, are expected to take that coverage and generally are not eligible for premium tax credits. This includes both the worker and any family members who are eligible to enroll in the job-based coverage. There is an exception to this rule, though: if people are offered coverage by an employer that has patient cost-sharing above a certain level or is unaffordable, they are permitted to forgo the employer plan and apply for a tax credit that can be used for coverage in an exchange. Job-based coverage is considered unaffordable if the amount of the out-of-pocket premium for the employer coverage exceeds 9.5% of that person's income.

While it's clear how this applies to a single worker without any dependents, determining a family's eligibility for premium tax credits is far less clear in the law. One way would be to look at what the family would have to pay for coverage based on its size and compare that to its income. A second way, which the Treasury Department has proposed, would judge affordability for the entire family based solely on whether the employee's contribution for single coverage would exceed 9.5% of family income, regardless how much it would cost the entire family to enroll in job-based coverage. A third hybrid approach is also possible: affordability for the worker could be determined based on the required contribution for single coverage while affordability for the remaining family members would be based on the required contribution for family coverage.

What would this mean for families? We estimated the effect based on coverage in 2008 using demographic and insurance data from the Medical Expenditure Panel Survey and employee premium contribution information from the Kaiser/HRET Employer Health Benefits Survey. The analysis – which assumes no behavior changes by employers in response to the health reform law – suggests that there are about 3.9 million non-working dependents in families (technically, "health insurance units") in which the worker has access to affordable employer-sponsored coverage but the family does not. Under the draft regulation, these family members would be excluded from getting federal tax credits to help them buy coverage in health insurance exchanges. On average they'd have to pay 14% of their income to opt into the employer coverage, substantially more than what they would pay in an exchange. (Kaiser's subsidy calculator illustrates what families would pay in exchanges, after taking tax credits into account.) The lowest income workers would generally be eligible for Medicaid, and the higher income workers are unlikely to have to pay more than 9.5% of income for insurance, so people affected the most have incomes under three times the poverty level ($67,050 for a family of four in 2011).

In the draft regulation, the Treasury Department indicated that it expects to exempt these family members from the requirement to buy insurance, so they won't be penalized if they choose to forego coverage. Some of these families would probably still decide to enroll in their employer coverage even though they would have to pay a large percentage of income for it; that would likely be the case even if they were permitted to buy subsidized insurance in an exchange. People value insurance, and they particularly value employer-provided benefits. But, some of these family members would undoubtedly remain uninsured.

As implementation of the health reform law proceeds and regulations and guidance are issued, this is one of many seemingly technical issues that may have significant implications. It is the nature of insurance that in many cases – this one included – there may be large consequences for a relatively small number of people. Navigating these tradeoffs is what Kaiser President and CEO Drew Altman described in a recent column as the "art of implementation."

—Larry Levitt and Gary Claxton (with analysis by Anthony Damico)

The Budget Trigger and Health Reform

Thu, 04 Aug 2011 04:00:00 GMT

No doubt it will take some time to sort out how elements of the debt deal (formally “The Budget Control Act of 2011”) will all work. Delving into the details of how it affects subsidies in the Affordable Care Act (ACA) to make insurance more affordable helps to illustrate how complex this business can be.

Let’s start with a short primer on the ACA subsidies. Starting in 2014 people buying insurance on their own in health insurance exchanges will be helped in two ways:

1. Premium subsidies: Those with incomes between poverty and four times the poverty level ($44,000 for a single person and $89,000 for a family of four in 2011) are eligible for tax credits that reduce the premiums they have to pay. Our subsidy calculator illustrates what those tax credits and premium payments would be for people in different circumstances. The Congressional Budget Office projects that these tax credits would cost about $75 billion in 2016.

2. Cost-sharing subsidies: Those with incomes between poverty and 2.5 times the poverty level ($27,000 for a single person and $56,000 for a family of four) also are eligible for coverage that provides lower patient cost-sharing than the norm. CBO projects a cost of about $13 billion in 2016.

The cost-sharing subsidies are based on the idea of actuarial value. For example, a plan with an actuarial value of 70% – referred to as a "silver" plan in the ACA – means that for a standard population, the plan will pay 70% of their health care expenses, while the enrollees themselves will pay 30% through some combination of deductibles, copays, and coinsurance. The higher the actuarial value, the less patient cost-sharing the plan will have on average. Exchange enrollees with incomes up to 1.5 times the poverty level receive coverage with an actuarial value of 94%, those with incomes 1.5 to 2 times the poverty level receive coverage with a value of 87%, and those with incomes 2 to 2.5 times the poverty level can enroll in a plan with a 73% value. To make this tangible, we commissioned three actuarial and benefits consulting firms to estimate the deductibles and coinsurance that would meet these various actuarial value thresholds. The full details are here.

Now, how might the debt deal affect all of this? The so-called “Super Committee” required to report back by November could recommend any number of changes to these subsidies or other elements of the ACA. But if the committee deadlocks, then a series of automatic cuts are triggered. The premium subsidies are provided as refundable tax credits, and as a result are exempt from the automatic cuts (exemptions are based in part on budget legislation that predates the ACA). However, the cost-sharing subsidies are direct spending by the federal government and are thus subject to the budget reductions. (Other types of spending in the ACA could also be affected.)

How these cost-sharing subsidy reductions would actually filter through the system is complex and somewhat unclear. The ACA entitles low-income exchange enrollees to coverage with a higher actuarial value, and it requires participating health insurers to provide that coverage. The federal government then pays insurers directly for the extra costs associated with lower patient cost-sharing.

So, the direct effect of a triggered budget cut would be that low-income enrollees would still get improved coverage, but insurers would be paid less for providing that coverage. Insurers probably would try to recoup these losses by charging higher premiums (which would, in turn, also lead to higher federal tax credits). This might also make private plans reluctant to serve lower-income enrollees, and they could take steps to try to avoid that part of the market.

No budget reductions of the scale included in the debt deal are painless, and that will undoubtedly factor into the tradeoffs considered by the committee charged with developing an alternative deficit reduction plan. But, the ACA presents a particularly complicated case since federal and state policymakers are working out the delicate details of health reform implementation in the midst of this broader budget debate.

—Larry Levitt and Gary Claxton

Remember the People Outside of the Exchanges

Fri, 22 Jul 2011 04:00:00 GMT

There has been a substantial amount of focus on the recently released draft regulations governing state-based health insurance exchanges under the Affordable Care Act (ACA). And that’s appropriate, since the exchanges have the important roles under reform of providing consumers with easier access to insurance and facilitating tax credits and cost-sharing subsidies that make coverage more affordable.

But, as central as exchanges will likely be, it’s important to remember that there are other key provisions that help shape the reformed marketplace. Insurers will still be able to sell insurance to individuals and small businesses outside of the exchanges, and the health reform law applies new consumer protections to plans sold in that outside market, too. Beginning in 2014, insurers will be required to sell coverage to everyone even if they have pre-existing health conditions, insurance will have to cover the “essential health benefits,” and coverage will be standardized into tiers that vary by the amount of patient cost-sharing. Also, a risk adjustment system – which redistributes funds from plans enrolling healthier-than-average people to those covering a sicker-than-average population – will operate throughout the individual and small business insurance markets, inside and outside of exchanges.

Exchanges play the role of organizing information and facilitating the decisions about purchasing and qualifying for financial assistance. The more general market reforms have a different function, regulating rating, underwriting and marketing practices to protect consumers and create a fair basis for insurer competition, whether they offer plans inside or outside of exchanges. Indeed, exchanges won’t function effectively if the broader market rules are not well implemented and enforced.

To be sure, most individual purchasers will probably buy coverage through the exchanges. This is because premium tax credits and cost-sharing subsidies will only be available to those purchasing coverage through exchanges, likely providing a substantial enrollment boost. The Congressional Budget Office (CBO) estimates that 22 million individuals will be buying coverage through the exchanges by 2016, and that 18 million of them will be receiving federal tax credits to help them pay for their premiums.

This leaves a substantial market for non-group and small-group coverage outside of the exchanges. CBO projected during the congressional health reform debate that about 9 million people would continue to buy coverage on their own, not through the exchanges. Also, CBO expects that few small businesses will buy insurance through the exchanges, covering about 2.9 million workers out of a total small group market of about 25 million people. This makes sense because the premium tax credits for small businesses available through exchanges are temporary and targeted towards the smallest businesses with low wages. Looking at the non-group and small-group markets combined and extrapolating the CBO projections, more people will likely be getting coverage outside of the exchanges (about 31 million) than inside (about 25 million).

Recognizing that there will be a sizable insurance market outside of the exchanges has important implications for reform implementation. While the same basic ground rules apply inside and outside of the exchanges, federal law applies certain additional provisions (such as those relating to performance standards and choice of some health care providers) only to plans in the exchanges. States also have flexibility in how they review and oversee insurer rates, policies, and practices. If plans offered outside of the exchange are subject to fewer standards or less scrutiny, they may have a price advantage or, perhaps more worrisome, attract healthier enrollees, which would increase exchange premiums and potentially federal subsidy costs as well. Risk adjustment could compensate for this “adverse selection,” but it’s not likely to do so perfectly.

Exchanges serve an important role under the health reform law in providing a mechanism for people to obtain subsidies to make insurance more affordable, and they may help to bolster competition in the insurance market and improve value for consumers. But their success will depend on a market test – the choices that individuals and small businesses make – and on the regulatory decisions made at the federal level and in the states as implementation proceeds.

—Larry Levitt and Gary Claxton

What is a Mini-Med Plan?

Tue, 05 Jul 2011 04:00:00 GMT

One of the early insurance market changes in the Affordable Care Act (ACA) phases out caps that some insurance plans impose on the annual dollar amount of benefits they will cover. Plans issued or renewed after September 23, 2010 cannot have annual limits of less than $750,000, and the threshold goes up to $1.25 million in 2011. Annual dollar limits of any kind are prohibited starting in 2014.

The federal government has issued waivers from these rules for a number of plans – so-called “mini-med” plans – that would face big premium increases if they had to raise their annual limits to comply with the rules, potentially leading some employers to drop coverage altogether. The Office of Consumer Information and Insurance Oversight recently announced that no new waivers will be granted after this year, and that the waivers will only apply until 2014 when the major elements of the ACA take effect.

The federal government has identified the employers, unions, and insurers that have been granted waivers, but has not publicly released the details of the coverage people have under these plans. A little Googling, though, reveals what the coverage looks like for some of these mini-med plans that have been granted waivers.

For example, McDonald’s “McCrew Care” benefits (here’s an example in Montana) requires employees to pay $56 per month for basic coverage that provides up to $2,000 in benefits in a year and $97 per months for a “Mid 5” plan that provides up to $5,000 in benefits. Ruby Tuesday charges workers $18.43 per week (going down to $7 after six months of service) for coverage that provides up to $1,250 in outpatient care per year and $3,000 in inpatient hospital care. Denny’s basic plan for hourly employees in 2010 provided no coverage for inpatient hospital care and capped coverage for doctor office visits at $300 per year. (The restaurant offered more comprehensive coverage to salaried employees.)

Annual dollar limits on benefits will not be allowed at all beginning in 2014, so mini-med plans as we know them will probably cease to exist. What this means for low-wage workers in the larger firms that offer these plans now, however, is more of a question. The health reform law calls for an essential health benefits package (with details expected to be provided later this year by the Department of Health and Human Services) to be required in plans for people purchasing on their own or through small employers, but what larger employers must offer their workers is not as clearly laid out. It may be that the tight dollar limits in the mini-med plans with waivers today could be replaced by equally-limited coverage with tight limits on the number of physician visits, prescriptions or hospital days that they will pay for. How these low-wage workers will fare under health reform is one of the many open questions that will be informed by the final regulatory scheme and the decisions of employers and their workers.

–Larry Levitt and Gary Claxton

An Employer Health Benefits Balance Sheet

Fri, 17 Jun 2011 04:00:00 GMT

There seems to be growing interest in the question of how many employers will keep offering coverage to their full-time employees once the Affordable Care Act (ACA) is fully implemented in 2014, or instead will choose to stop offering coverage and pay a penalty.

While there is some good analysis and plenty of conjecture, it is impossible to predict with any certainty how employers will react at this moment because some of the key rules that will inform their decisions have yet to be issued, including:

• What benefits larger employers would need to offer to meet the employer requirement;
• How “nondiscrimination” rules will work, which dictate whether and how employers can structure different benefit plans and different contribution levels for different types of workers within the firm; and
• What the structure and scope of benefits will be for coverage offered through new insurance exchanges, which is where employees and their families would seek coverage if their employer stopped offering it.

It’s useful to remember that employers offer health benefits to attract and retain workers, so how employers will react will depend at least in part on what their workers want them to do, which in turn will depend on how workers will weigh the cost and quality of the different options. And these options are not entirely clear at this point. In addition, there are lots of other changes employers may make short of not offering insurance, such as increasing or decreasing benefits or cost sharing, changing how much they contribute, changing who is eligible for coverage, changing some jobs to part-time status, etc.

Given all of these uncertainties, precisely estimating how many employers will respond one way or another is difficult. But it’s helpful to look at some of the key factors that an offering employer might consider in deciding whether to continue to offer health benefits, almost as a sort of balance sheet from the perspective of employers and their workers:

Factor	Continue Offering Benefits	Drop Benefits
Employer and Employee Costs	Today, employers that offer coverage generally contribute most of the cost for employees but less for their families. Employees pay the rest.	Employees would still have to buy insurance, but without the employer contribution. Employers would save money as a result of no longer contributing towards the cost of insurance. What would happen to those savings is an open question. Economic theory suggests that the savings would largely get returned over time to employees as higher salaries (though maybe not equally to higher and lower wage workers). This could vary from employer to employer depending on how competitive the market is for skilled workers.
Tax Subsidies and Credits	The employer contribution to health benefits is tax-free to workers. Employees can also pay their shares on a pre-tax basis through a so-called “section 125” account. The tax-preferred status of employer-provided health coverage is a particular benefit for higher-income employees in high tax brackets, with the government in effect paying for a substantial portion of the cost.	There would be no way for workers to buy health insurance on a tax-free basis, but low- and moderate-income workers would be eligible for tax credits if they bought insurance in an exchange. Workers and family member would face a financial penalty if they did not buy coverage (if it’s affordable to them).
Penalties	Larger companies with at least 50 employees offering coverage face a penalty of $3,000 per work in cases where coverage is unaffordable and the worker buys insurance in an exchange with the benefit of a tax credit. Employers can avoid the penalty by offering coverage meeting certain requirements.	Larger companies not offering coverage would face a penalty equal to $2,000 per year times the number of full-time employees minus 30. This flowchart illustrates how it works.
Medicaid	Employees and their families eligible for Medicaid – which is expanded under the health reform law – can choose to enroll in Medicaid whether the employer offers health benefits or not.
Predictability of Costs	Employer costs for health insurance are highly unpredictable.	Costs for non-offering employers would be more predictable. But companies in markets where they are competing for skilled workers may be cautious about dropping benefits until they see how the exchanges are working.
Benefits Package	Smaller employers providing coverage must offer the essential benefit package (regulations not yet issued); minimum benefit requirements for larger employers and all employers that self-fund are not clear in the law and may be addressed by regulation.	Workers receive the essential benefit package (regulations not yet issued) if they buy coverage themselves; may be eligible for cost-sharing subsidies if family income is below 250% of the poverty level and they buy coverage in an exchange.

The dollars and cents part of a decision like this is fairly easy to quantify, particularly after some of the regulatory issues described above are resolved. For larger employers with reasonably-paid employees, it’s likely that it will still make financial sense for them to offer coverage. The existing tax subsidy their workers get for employer-provided health insurance will likely outweigh the combination of the tax credits that would be available for workers in the exchanges and the penalty the employer would have to pay for not offering coverage. These types of companies tend to offer good benefits already, so the outstanding regulatory decisions will probably not have a big impact on their choices. On the other hand, for employers with many lower-wage employees -- including such places as restaurants and retail stores -- the picture is cloudier. Some of these companies provide pretty limited coverage to their lower-skilled employees, while in some cases providing better benefits to managers and other office employees. It’s unclear whether they will be able to continue this in the future. Even if firms are permitted to maintain limited coverage for their employees, some will find that the balance sheet tilts towards not offering coverage because the new sliding scale tax credits available to their predominantly lower-wage employees in exchanges will far exceed the current tax subsidy for employer-based insurance.

The idea of an employer dropping health benefits sounds like a bad outcome. And under the status quo, it is – workers lose the ability to get health insurance on a tax-free basis and they can be denied coverage in the individual market if they have pre-existing health conditions. After 2014, though, things change quite a bit. The coverage in the individual market will offer the same protections as in the group market, and tax credits will be available in exchanges for people with incomes up to four times the poverty level (now about $89,000 a year for a family of four). Really what happens is that the employees move from being covered by a private employer-based plan subsidized through a federal (and often state) tax subsidy to a private plan subsidized through a federal tax credit. The company and its workers are making a decision about which form of tax subsidy provides the best value, something that employers and others do every day. The penalty for non-offering large employers tilts the playing field somewhat towards employer-based coverage.

Beyond the dollars and cents, the intangibles around employer decisions to keep offering health benefits are tougher to assess. We don’t yet know exactly what exchange coverage will look like and whether employees with employer-based insurance will view it as a reasonable or even desirable alternative. Will employees be willing to give up something they know for something new? Or, will a good job mean one that still comes with health benefits? For the answers to these questions, we’ll likely have to wait until 2014 and beyond, as employers consider their options – probably very cautiously – while looking behind their backs at competitors doing the same thing.

–Gary Claxton and Larry Levitt

Health Reform and the Art of Federalism

Wed, 08 Jun 2011 04:00:00 GMT

The U.S. Department of Health and Human Services (HHS) recently announced significant changes to the premiums charged in the Pre-existing Condition Insurance Plan (PCIP), aka the “high risk pool” created by the Affordable Care Act. Premiums will now be up to 40% lower depending on the state (in some states the cost to enrollees is unchanged), and application procedures will be eased.

The PCIP plans provide coverage for people who cannot buy coverage in the non-group market because they have pre-existing health conditions. Most states allow insurers to deny coverage or charge higher premiums based on health status, a practice that will change in 2014 when the main elements of the ACA take effect. Under the PCIP, people who are uninsured and have pre-existing health conditions are able to buy coverage at premiums that match the standard rates for non-group coverage where they live. The federal government pays any costs that exceed the amount collected through premiums.

There’s a small catch, though. The premium reductions in the PCIP only apply in 23 states and the District of Columbia, where states chose not to operate the high risk pool and left it up to the federal government. For the other 27 states (see the map below from the federal government’s healthcare.gov web site), the news release announcing the changes said that HHS sent letters to the states “running their own programs to inform them of the opportunity to modify their current PCIP premiums.”

This is an early sign of the tension inherent in the basic structure of the health reform law: in many cases, there’s an expectation and hope that states will take the lead on implementation, but the fallback is that the federal government will do so if not. One key factor in how this will all play out is whether the federal government judges state plans strictly or give them lots of wiggle room.

In the case of this latest announcement on the PCIP, the federal government seems not to be requiring states that operate their own programs to reduce (or at least review) the premiums that are charged, instead giving them the “opportunity” to do so. As a result, it is possible that consumers in states where the federal government operates the high risk pool will be better off than consumers where states have assumed that task, even though the federal government is paying all of the subsidies in both cases.

This federal-state tension permeates the health reform structure, where states are given the opportunity to implement (and sometimes exceed) federal standards and where the federal government will have to make judgments about how strict or flexible to be with the states. Next up may be the prior review of unreasonable premium increases in the non-group and small business insurance markets. Also on the horizon are programs that allow enrollees in insured health plans to appeal a denied claim to an external reviewer. And, of course, what states decide to do in creating health insurance exchanges.

In all these cases, the federal government will have to judge whether state programs meet the applicable federal laws and regulations, and to step in with a federal program if not.

States all have their own policy preferences and politics. There are likely to be cases where states decide to implement the federal rules almost to a tee and others where they decide just to take a pass and let the federal government implement certain provisions. But there may also be cases in between where states mostly follow the federal framework, but then diverge somewhat, maybe in minor ways or maybe in major ways that have significant consequences for consumer protection or federal costs (the federal government pays all of the premium and cost sharing subsidies authorized by the ACA). What will the federal government do? Let the state slide? Or, declare the state out of compliance and put in place a federally-operated program?

– Larry Levitt

Peering Into the Black Box of Insurance Rating

Tue, 07 Jun 2011 04:00:00 GMT

Recently, the New York Times reported that private health insurers continue to seek large premium increases despite seeing lower than expected use of medical care and booking record profits. The story highlights a significant problem for health policy: the lack of good, public information about how health insurers manage health care use and what they pay for medical services. As a nation, we rely on competition among largely private health plans to ensure that health care dollars are used efficiently and wisely, but truth be told, we do not know very much about how well they are doing.

Finding ways to meaningfully reduce the growth of public and private health care costs continues to be a vitally important issue for public policy. The growth of public health spending has dominated the recent debate about ways to reduce federal and state budget deficits, and critics of the newly adopted health reform act complain that it does not sufficiently address growth rates for private health care costs.

But it is difficult to develop public policies that might affect private health care costs without a good understanding of where the money goes and what the cost drivers really are. Unlike public programs, where cost and service use can be analyzed in some detail to inform policy decisions, public information about private health spending is mostly based on aggregate measures such as premiums or gross provider receipts. Details of private health transactions are largely held inside private insurers and away from public view. Public confusion and consternation over recent large rate increases in the nongroup market are a good example of this problem: despite intense public and political interest, there still is no answer to the question of why some nongroup carriers have repeatedly requested double-digit rate increases while other measures of health care costs, such as average premium changes for employer-based coverage or overall trends from the national health accounts, show much lower rates of growth.

This lack of information is not just a problem for policy, but it also limits the ability of policyholders to understand their insurance arrangements. This can be a particular problem today for people with nongroup insurance, who have the right to renew their policies but who may not be able to switch insurers if they have developed health problems. While insurers often point to underlying medical costs as the reason rates are going up, there are many decisions that insurers make that affect the premium increases that these individual consumers see. For example, insurers decide which policies are grouped together for rating purposes and when to stop selling a policy and begin selling new ones (which affects the quality of risk pools). Some insurers vary premium increases for nongroup policies based on how long a person has held the policy (called durational rating) or even on the policyholder’s claims in the prior year. Details about these practices often are not clearly explained to policyholders, leaving them confused about their premiums and how they may change in the future.

While not a complete answer, the rate review provision in the Patient Protection and Affordable Care Act (ACA) could provide a way for consumers and the public to see beyond premiums and to learn something about underlying health care cost trends for different services and about insurer practices and performance. The ACA requires that proposed premium rate increases that are unreasonable be reviewed and justified before they become effective. A thorough rate review involves assessing the level of use and per service cost for the major types of health care services and analyzing the impacts of insurer practices and other important factors that affect the premiums charged under a policy or group or policies. Having this type of detailed information from different insurers across different markets would assist analysts and policymakers trying to better understand what is driving the use and cost of medical care services, while the detailed explanation of rating factors and rating practices would help consumers understand whether the increases they are seeing reflect cost trends affecting all policies or particular decisions made by their insurer.

Final rules just released by the Centers for Medicare and Medicaid Services (CMS) require that a proposed rate increase in a state that exceeds a threshold amount (initially 10%) be reviewed before it takes effect to determine if the proposed rate is unreasonable. The review will be conducted by the state if it has an effective rate review process (as defined in the rule) or otherwise by CMS. Insurers are required to submit a preliminary justification providing summary information and a basic explanation of the reasons for the increase. This information will be made available to the public. In cases where CMS, rather than a state, is reviewing the increase, the insurer will also need to provide more detailed information and data to support the proposed increase. This additional information will also be provided to the public, subject to provisions in the Freedom of Information Act limiting the release of trade secrets. States conducting reviews could, but are not required to, make available to the public the more-detailed information that they receive in the course of their reviews.

The ACA and the final rule start down the road of making insurer experience and operations more transparent, but they stop short in many instances of providing the type of detailed information needed to support informed analyses of cost trends and market practices. One issue is the ACA itself, which limits review to unreasonable rate increases (CMS estimates that only about 14% of rate filings in the nongroup and small group market would be be subject to review and require submission of a justification). A second issue is that the information that must be disclosed under the rule is fairly simplistic in cases where states perform the review instead of CMS. For example, the consumer disclosure form developed by CMS requires insurers to disclose the expected cost trend for specific types of medical services (e.g., hospital inpatient, professional), but for rate increases that are reviewed by states, the list is not broken down by expected change in use and expected change in price for each type of service. This is pretty basic information for trying to understand how costs are changing and how insurers are reacting: changes in price raise issues about how much providers are charging for their services and how much insurers are willing to pay, while changes in use raise questions about the number and kinds of services that providers are ordering and insurers' abilities to manage them. And while the disclosure form does require a “brief, non-technical” description of the proposed increase in these cases, including how changes in cost and use are contributing to the increase, the description appears to be intended for a consumer audience and is unlikely to be sufficiently detailed to support more detailed analyses by service type. Other important elements of the rate increase, such as the financial history of the product, are also addressed in this “brief, non-technical” way. CMS does require much more detailed information and explanation to be filed and potentially disclosed in cases where they will be performing the review, but they estimate that they will perform reviews for only 28% to 36% of rate filings requiring review.

The final CMS rule directs the policy focus back on the states. In the past, getting information on rate actions has been difficult in many states, but this has been changing. A few states have increased public access rate filings since passage of the ACA, and grant funds from CMS may assist more states in doing so. The release of the final rate review rule may encourage more states to open up their rate review processes to shed more light into the black box of how health insurers set premium increases.

– Gary Claxton

Who Will be the H&R Block and TurboTax for Health Insurance?

Fri, 03 Jun 2011 04:00:00 GMT

There’s been quite a bit of focus lately – insofar as these issues go, anyway – on health insurance agents and brokers (sometimes known in the industry as “producers”). They are pushing legislation that has been introduced in Congress – and is now being studied by the National Association of Insurance Commissioners – that would exempt agent and broker commissions for health insurance from minimum medical loss ratio (MLR) thresholds established in the health reform law. (The MLR is the percentage of an insurer’s premium revenues that goes to pay medical claims as opposed to administrative costs and profits.)

The brokers don’t want their commissions to count as administrative costs, fearing that insurers will then have an incentive to cut them. In fact, this seems to have already started to happen. Opponents of the legislation argue that exempting agent and broker commissions from the MLR calculation will make the thresholds easier for insurers to meet, and therefore reduce pressure to cut costs and the premiums that individuals and small businesses pay.

Interestingly, what’s been largely absent from this discussion so far is what kind of help consumers may need with the financial aspects of buying coverage in a newly configured insurance market, where starting in 2014 small businesses and individuals will be able to purchase insurance through new state-based purchasing exchanges. A key way in which the Patient Protection and Affordable Care Act (ACA) makes insurance more affordable for people is by providing tax credits to those with incomes up to four times the poverty level (now about $89,000 for a family of four) who buy coverage on their own through the exchanges. For example, a family of four with 40-year old parents and income of $50,000 in 2014 might face an insurance premium of $12,130, but the tax credit would reduce the family’s annual cost to $3,385. (We have a subsidy calculator that illustrates how much these tax credits would be.) Low-income families are also eligible for help with their deductibles and copays, since the patient cost-sharing in the standard plans is likely to be quite high. And, the exchanges will also refer eligible low-income families to Medicaid and the Children's Health Insurance Program. People who have employer health coverage available to them aren’t eligible for the tax credits, though there are exceptions if the employer-provided coverage isn’t affordable.

The details of how this will all work are still unclear. Hopefully the process will be as streamlined as possible, though people are inevitably going to need help, much like they do with their tax returns. They are going to have questions about whether they are eligible for tax credits. And, because people’s lives change throughout the year – they get married, they get divorced, they have kids, they lose jobs, they get new jobs, they get raises, etc. – the tax credits and programs they qualify for could change in complicated ways. Subsidies in the exchanges are provided in advance so people can afford their health insurance premiums, but then reconciled at the end of the year based on actual income through income tax returns. This means that people may have to pay back some or all of their premium subsidies if their income changes. Given the complexity and uncertainty for families seeking assistance, and the fairly large amounts involved, people will want someone to talk with who can take the time to explain all of this in a clear way.

For all the talk about the role of insurance agents, this is not an area where they necessarily have expertise. They’ll also provide grants to so-called “Navigator” agencies, who will distribute information to consumers about health plans and facilitate enrollment. Private companies may step in, much like they have in providing in-person and computer-aided tax preparation assistance. But there is also a tremendous opportunity for state exchanges to innovate in providing help to consumers to make sure they get their tax credits. And, states have no financial disincentive to do so, since the federal government pays for 100% of the subsidies provided to Exchange enrollees. So, the more people who qualify for tax credits and cost-sharing subsidies, the greater the amount of federal dollars flowing into the state.

– Larry Levitt

CBO's Estimate of Repealing Exchange Grants: The Importance of Being Effective

Wed, 01 Jun 2011 13:26:00 GMT

The Congressional Budget Office (CBO) recently released an analysis of a bill that would repeal grants to states under the health reform law to help them establish health insurance purchasing exchanges. Not surprisingly, CBO finds that the bill would reduce federal spending due to the fact that expected grants won't be provided, to the tune of $1.9 billion over ten years.

But, that's not the biggest effect on the federal budget. CBO also finds that state exchanges will "face greater challenges in becoming fully operational" and that "the federal government will be required to take responsibility for setting up exchanges in more states than is expected under current law." According to CBO, this would "temporarily limit the desirability of exchanges as an alternative to other sources of coverage, reduce the capacity of some exchanges to process enrollment and ultimately lower enrollment by an estimated 5 percent to 10 percent below the levels expected under current law between 2014 and 2016." CBO estimates that two million fewer people would be enrolled in exchanges in 2015 – meaning they wouldn't have access to tax credits to make insurance more affordable – and about half a million more people would be uninsured. Taking all this into account, the budget office says the net effect on the federal budget would be savings of over $15 billion over ten years.

One thing this budget scoring exercise illustrates is how complex it is to forecast changes in health policy. A seemingly simple proposal to reduce grants to states has tentacles that extend widely, to state legislative actions, to individual decisions about whether to buy insurance, and to employer decisions about what benefits to offer to their workers. Preparing estimates like this is not a simple matter of adding and subtracting a bunch of numbers; it requires judgments about how political leaders and people will respond, and how those actions may in turn trigger further responses.

It also illustrates the somewhat intangible but important factor that effective implementation will play in how well the reform law works. States face decisions about whether or not to operate exchanges or leave that job to the federal government, and then further decisions about how those exchanges will operate. Some states may choose to create exchanges that are aggressive negotiators, while others may decide to implement exchanges that focus instead on facilitating a more open market for insurance.

No matter what direction states go, though, all exchanges – those operated by states and the backup version operated by the federal government – will face one big challenge: getting people enrolled. This is, of course, important to people, in particular those eligible for subsidies to help them purchase insurance or to enroll in Medicaid (since exchanges are required to direct people to Medicaid if they are eligible). It is also important to a well-functioning insurance market. Once insurance is made accessible regardless of pre-existing conditions in 2014, people who are sick will almost certainly take immediate advantage of the opportunity to get coverage. Whether the insurance risk pool is healthy or not will depend on whether exchanges also are effective at encouraging healthy people to enroll. An exchange with low enrollment is likely an exchange with a sicker than average population and high premiums.

Implementation of the Affordable Care Act will undoubtedly take many twists and turns between now and 2014, with legislative and regulatory decisions big and small at the federal level and in the states. The accumulation of these decisions will shape in a significant way how the law plays out and how real people and businesses will see and experience the health insurance system.

– Larry Levitt