WebMemo 22 Published by The Heritage Foundation No. 3111 January 20, 2011 Obamacare and Insurance Rating Rules: Increasing Costs and Destabilizing Markets Edmund F. Haislmaier The Patient Protection and Affordable Care Act (PPACA)1 sets new federal insurance rating rules that bar insurers and employer-sponsored health plans from imposing preexisting-condition exclusions under any circumstances, require insurers to provide individual insurance coverage on a guaranteed-issue basis, and limit the extent to which insurers can vary premiums based on an enrollee's age. The new limitations on age rating and the blanket prohibition on the application of preexistingcondition exclusions are particularly counterproductive and will have a destabilizing effect on health insurance markets. As such, they are prime examples of PPACA's fundamental design flaws.2 Summary. Effective in 2014, Section 1201(4) of PPACA imposes new federal rules on how health insurers may \"rate,\" or price, their products. Under the new rules, insurers will be allowed to vary premiums for coverage in the individual and smallgroup markets using only four factors: (1) by selfonly versus family coverage, (2) by geographic \"rating area,\" (3) by age, and (4) by tobacco use. In the cases of age and tobacco use, the new rules also limit the extent of the permitted premium variations. For tobacco use, the maximum allowed variation will be 1.5 to 1, meaning that a plan will not be allowed to charge a tobacco user more than oneand-a-half times (or 50 percent above) the rate charged to a non-tobacco user. With respect to age rating, the maximum allowed variation for adults will be 3 to 1, meaning that a plan will not be allowed to charge a 64-year-old more than three times the premium charged a 21-year-old for the same coverage. In addition, Section 1201(2)(A) prohibits employer-sponsored health plans and commercial health insurers from imposing a preexisting-condition exclusion on the coverage of any enrollee or applicant under any circumstances.3 This blanket prohibition took effect for children (under age 19) on September 23, 2010, and will take effect for adults on January 1, 2014.4 Under prior law, insurers and employer selfinsured health plans are required to provide coverage to enrollees in employer-sponsored plans on a guaranteed-issue basis and are prohibited from varying premiums based on individual health status.5 Sections 1201(2) and (4) of PPACA extend those requirements to the individual market as well, effective January 1, 2014.6 Impact. The effects of PPACA's new rating rules will be to increase premiums (particularly for younger adults), increase the costs of coverage subsidies, and destabilize insurance markets. Higher Premiums for Young Adults. Younger adults will be particularly hard-hit by PPACA's new restriction on age rating of premiums. The natural This paper, in its entirety, can be found at: http://report.heritage.org/wm3111 Produced by the Center for Health Policy Studies Published by The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002-4999 (202) 546-4400 heritage.org Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. No. 3111 WebMemo variation by age in medical costs is about 5 to 1 meaning that the oldest group of (non-Medicare) adults normally consumes about five times as much medical care as the youngest group. Thus, if an average 64-year-old consumes five times as much medical care as an average 21-year-old, PPACA's stipulation that an insurer cannot charge a 64-yearold more than three times what it charges a 21-yearold will have the effect of artificially \"compressing\" normal age-related premium variations.123456 This mandated \"rate compression\" forces insurers to both under-price coverage for older people and overprice coverage for younger individuals. Actuaries estimate that the effect will be to increase premiums for those ages 18-24 by 45 percent and those ages 25-29 by 35 percent while decreasing premiums for those ages 55-59 by 12 percent and those ages 60-64 by 13 percent.7 Forcing insurers to significantly overprice coverage for young adults will also result in more subsidies going to healthy young people than would otherwise be necessary if insurers had instead been allowed to continue charging lower premiums that more accurately reflect their lower health care costs. January 20, 2011 More Difficulty Covering the Uninsured. While younger adults generally tend to be in good health, they also tend to earn less than older workers with more experience. That combination makes young adults more sensitive to changes in the price of health insurance and more likely to decline coverage if it becomes more expensive. Indeed, young adults are already the age cohorts that are most likely to be uninsured. According to the latest Census data, 31 percent of those ages 19-24 are uninsured and 30 percent of those ages 25-29 are uninsured.8 Those two cohorts combined (ages 19- 29) account for 30 percent of the total U.S. uninsured population and 36.6 percentover a third of all uninsured adults.9 Thus, imposing rating rules that artificially increase the cost of health insurance for uninsured young adults is contrary to the goal of increasing health insurance coverage. Perverse Incentives for the Healthy to Avoid Buying Coverage. The combined effect of PPACA's new rating rules will be to encourage individuals to wait until they need, or expect to need, medical care before purchasing health insurance or enrolling in an employer-sponsored plan. PPACA creates this perverse incentive because its new rating rules 1. Congress cannot build sound market-based health care reform on the foundation of a flawed health care law. Therefore, the health care law must be repealed in its entirety. The House of Representatives has taken a major step towards full repeal of the Patient Protection and Affordable Care Act (PPACAotherwise known as \"Obamacare\"). Until full repeal occurs, Congress must continue to focus on the core failures and consequences of PPACA and block its implementation to allow time to achieve repeal and lay the groundwork for a new market-based direction for health care reform. 2. Patient Protection and Affordable Care Act of 2010, Public Law 111-148, and Health Care and Education Reconciliation Act of 2010, Public Law 111-152. 3. New Section 2701 of the Public Health Service Act as added by the Patient Protection and Affordable Care Act of 2010, Public Law 111-148 1201(2)(a). 4. Patient Protection and Affordable Care Act of 2010, Public Law 111-148 1255. 5. 42 U.S. Code 300gg, 300gg-1, and 300gg-11. 6. New Section 2701 of the Public Health Service Act as added by the Patient Protection and Affordable Care Act of 2010, Public Law 111-148 1201(2)(a), and new Section 2702 of the Public Health Service Act as added by Public Law 111- 148 1201(4). 7. Oliver Wyman, \"Impact of Changing Age Rating Bands in 'America's Healthy Future Act of 2009,'\" Marsh Mercer Kroll, September 28, 2009, at http://www.oliverwyman.com/ow/pdf_files/OW_En_HLS_PUBL_2009_AgeRatingAnalysisFinal.pdf (January 14, 2011). 8. Kaiser Family Foundation, \"Adults' Health Insurance Coverage by Age Group, 2008,\" October 8, 2009, at http://facts.kff.org/chart.aspx?cb=57&sctn=160&ch=1256 (January 14, 2011). 9. Kaiser Family Foundation, \"Characteristics of the Uninsured, 2008,\" October 8, 2009, at http://facts.kff.org/ chart.aspx?ch=480 (January 14, 2011). page 2 No. 3111 WebMemo eliminate all existing rating \"penalties\" on individuals who do not buy coverage when they are healthy. Indeed, this perverse incentive will be further exacerbated by the extent to which other provisions of PPACAsuch as new mandated benefits and restrictions on varying premiums by ageartificially increase health insurance premiums for individuals. Imposition of an Individual Mandate to Fix Problems Created by Rating Rules. Inclusion in PPACA of an individual mandate to obtain health insurance coverage was, in large measure, an attempt by the legislation's authors to counter the perverse incentives created by their own badly designed changes in insurance rating rulesparticularly the prohibition on applying preexisting-condition exclusions under any circumstances. Still, it is likely that even with the mandate, many younger and healthier individuals will not buy coverage, as they will face higher premiums due to PPACA's \"rate compression\" provisions and new benefit mandates, making it cheaper for them to simply pay the fine. A New Direction. PPACA's new federal health insurance rating rules are counterproductive and destabilizing to insurance markets. The new Congress should simply scrap PPACA's restrictive pricing rules and leave any regulation in this area to the states, as has been the case until now. With respect to preexisting-condition exclusions, it is important to note that the authors of PPACA addressed what is, in reality, a very limited (though legitimate) problem with a solution that will create much bigger new problems. Over 90 percent of Americans with private health insurance are covered by employer group plans where existing rules governing the application of preexisting-condition exclusions are not an issue. Under current law, individuals with employer- January 20, 2011 sponsored insurance cannot be denied new coverage, be subjected to preexisting-condition exclusions, or be charged higher premiums because of their health status when switching to different coverage. Thus, in the group market, preexisting-condition exclusions apply only to those without prior coverage or those who wait until they need medical care to enroll in their employer's plan. These existing rules represent a fair approach: Individuals who do the right thing (getting and keeping coverage) are rewarded; individuals who do the wrong thing (waiting until they are sick to buy coverage) are penalized. The one legitimate problem is that those same rules do not currently apply to the individual health insurance marketwhich constitutes 9.4 percent of the total market for private health insurance. Thus, an individual can have purchased non-group health insurance for many years and still be denied coverage or face preexisting-condition exclusions when he or she needs or wants to pick a different plan. The obvious, modest, and sensible reform is to simply apply to the individual health insurance market a set of rules similar to the ones that already govern the employer group market. Thus, instead of a blanket prohibition on the use of preexisting-condition exclusions, as done under PPACA, the new Congress should return to the more sensible current-law approach for employersponsored coverage and then simply extend it to individual market coverage. Such a strategy fixes any legitimate problems without destabilizing health insurance marketsand in the process eliminates the rationale for retaining PPACA's unpopular and unworkable individual mandate. Edmund F Haislmaier is Senior Research Fellow . in the Center for Health Policy Studies at The Heritage Foundation. page 3 Running Head: THE PATIENT PROTECTION AND AFFORDABLE CARE ACT Topic: The Patient Protection and Affordable Care Act Name: Course: Instructor's Name: Date: Running Head: THE PATIENT PROTECTION AND AFFORDABLE CARE ACT Executive summary The Patient Protection and Affordable Care Act was effected in 2014 aimed at imposing new federal rules on how health insurers are supposed to (In Thompson, T, 2015) rate or price their products. The new regulation will permit the insurers to have a variety of premiums that cover the person in specific and a small group of markets by applying the four factors; age, tobacco use, geographic rating area and self only versus family markets. The new rules permitted variations in the premium and the users are not to be charged more than ones for the cases of age and the tobacco users. The section also banned employer self-sponsored health plans and commercial health insurer from imposing a preexisting condition exclusion on the coverage of any enrolled. The previous laws allowed insurers and business to give coverage to enrollees in employer-sponsored plans and did not authorize variation in premiums basing on the health status. Key issues The young adults were charged high premiums where the older ones are underpriced while overpricing, the younger individuals. It was harder to cover the uninsured (Davidson, S. M, 2013) where the young ones are generally in good health and are sensitive to the changes in the prices of the health insurance. Situational analysis Distribution shortfall - the problem of misdistribution existed whereby the professionals were highly concentrated in urban centers. Running Head: THE PATIENT PROTECTION AND AFFORDABLE CARE ACT Population growth and aging population - the aging population, has grown, and the population is associated with chronic diseases and this lead to stress on the health care workforce. The workforce supplied has failed to meet the demand associated with population growth and the aging population. More paperwork - the system is overregulated thus leading to enormous paperwork that has increased the cost of providing care. A lot of time is needed by the workers to fill the forms instead of helping the patients. More staff needs to be hired and more focus put on investing in infrastructure that will enhance completion of necessary tasks. Strategy formulation The act was aimed at increasing the number of healthcare workers in rural and underserved areas since there was inequality in the distribution of access to care between the urban and rural areas. There was a challenge of geographical rating that affected the health of the Americans in the countryside who were faced with longer wait times, long distance of travel, difficulty in accessing care and the resources were limited. Recommendations More workforces are needed because there is a shortage of primary care physicians and specialists. The workforces have continued to be strained because of the too much work. Running Head: THE PATIENT PROTECTION AND AFFORDABLE CARE ACT New rules that aim at reducing the time spent on one patient need to be introduced. The rules will reduce the unnecessary burden on the workforce by saving the time required to care safely for patients. The ACA reauthorized loan repayment and forgiveness where the medical students were given scholarships. It was enhanced by increasing funding for the public health service. It was intended at reducing the rural shortages of doctors. Focus on the mission rather than money - it is assumed that (In Abernathy, S. R, 2014) money can lure someone to work in the countryside like Mississippi, but it is not the case, the lowincome medical students applicants will require scholarships and programs that will enable them to repay their loans if they wind up working where they are most needed. Selection model - the selection of the applicants is made reasonably from a small cohort of relatively affluent students who have been raised up in the city, and they will not accept to work in the poorest areas. The criteria for selection should allow those from the countryside to have slots. Implementing strategies Improve education - the biggest problem is in the academic, professional training and the terms and conditions of training and teaching. The (Davidson, S. M, 2013) school system should focus on improving the health professions by reducing the financial burdens associated with the education. The policy makers must address the pressing issues that limit provision of education, for example, the debt load. Running Head: THE PATIENT PROTECTION AND AFFORDABLE CARE ACT The admission criteria that attract students from areas and the curriculum that meet the challenges of practice in a rural environment need to be adopted. The students in the countryside need to be identified, and this will make planning for primary care in the countryside accessible. The current Graduate Medical Education plan to be reevaluated by the Congress to ensure that the people residing in those areas have reserved slots for the enrollment. The additional slots create for the rural, and underserved communities will help in increasing the number of specialists who will provide the primary care. Remove barriers to access - the practicing rules can contribute to the cost and inefficiency of the health care system by creating barriers that limit access to care. Acquiring of more nurses will improve the timeliness of care and access. The nursing department should partner with other health professionals to improve the health care system. More additional doctors need to be trained to curb the impending shortages of the workforce that resulted from the increasing aging population and the demand for innovative models. Promote efficient care delivery - the human capital is the core requirement in the health industry. The process is labor intensive and recruiting, and retention of the workforce is essential. It will strengthen the workforce and lead to innovation in (Davidson, S. M, 2013) areas allocated thus increasing efficiency and productivity. The relevant tasks and roles for the professions need to be defined so that they might be able to meet the growing demand by inventing new ways of utilizing limited personnel efficiently. Improve the practice environment - the retention of staff need greater incentives that will attract the staff to remain at the place of work. The workers need physical, emotional and psychological protection that will enhance a healthy workforce. Running Head: THE PATIENT PROTECTION AND AFFORDABLE CARE ACT Benchmark for success and contingency plans The health policy should aim at eliminating the limited or no access to care, improving the quality of care and reduce the waits. The policy makers should establish the root problem and the government officials who are not accountable to be dealt with. The Americans should be allowed to have the right of self-determination in health care. References In Thompson, T. (2015). The Affordable Care Act. In Abernathy, S. R. (2014). The affordable care act: Developments and considerations. Davidson, S. M. (2013). A new era in U.S. health care: Critical next steps under the Affordable Care Act