The Supreme Court's decision to uphold the constitutionality of the Affordable Care Act answered one question but leaves many others unanswered. A new paper released by Milliman, the international actuarial firm, explores some of the challenges that stakeholders face as more parts of the Affordable Care Act come online in 2014.
One of the key points Milliman explores is whether the individual mandate, which many predicted would be struck down by the Supreme Court, will have strong enough penalties to encourage the uninsured that are healthy to purchase health insurance. If this population segment decides to pass on choosing a health plan because the penalties are too weak ($695 or 2.5 percent of income by 2016), there will likely be an adverse selection problem, meaning that there won't be enough healthier people in the insurance pool to offset the costs of sicker people.
Another issue is what will happen in states that opt out of Medicaid expansion, since the Supreme Court allows them to do so. In those states, Milliman researchers question how many of the people below 133 percent of the federal poverty level will be eligible for subsidies and tax credits to help purchase health insurance (since the previous assumption was that they would be covered by Medicaid).
The decision could have an impact on the penalties faced by employers in states that choose not to pursue Medicaid expansion. Employers that have more than 50 workers could possibly be subject to plan affordability penalties for workers that are under the 133 percent FPL who don't qualify for the state's Medicaid program (again, since the previous assumption was that they would be covered by Medicaid).
For health insurers, pressures from increased rate review scrutiny and minimum medical loss ratio requirements will make it harder to turn a profit. Federal regulators define a rate increase of more than 10 percent as unreasonable. In some states that already have a strict rate review process, it is evident that some insurers are struggling because increases have been limited.
For example, in Washington, Regence Blue Shield, one of the largest plans in the state, recently requested an average rate increase of 14.7 percent for individual plans, even though the insurer still estimates that it will lose $4.5 million on the individual line of business this year. From 2009 to 2011, Regence has incurred a net loss of $4.6 million on individual plans that it offers. The Washington Office of the Insurance Commissioner frequently limits rate increases requested by insurers in the state.
If adverse selection occurs as more unhealthy people become eligible for insurance because of PPACA, insurers will face both mounting costs and limited ability to raise rates.
Another challenge that Milliman points out is the medical loss ratio rules that require insurers to spend 80-85 percent of premiums on medical care. MLR provisions make it harder for insurers to build reserves during years with lower claims costs to cover costs from years when claims are higher. If the individual mandate does not work as planned, then insurers will be walloped with additional costs resulting from adverse selection.
In addition, MLR requirements could result in fewer high-deductible plans being offered by insurers since members that never meet their deductible are not counted toward helping meet MLR requirements. High-deductible consumer-driven health plans are gaining more popularity among employer groups as a way to hold down healthcare costs. According to HealthLeaders-InterStudy's latest enrollment survey, enrollment in CDHPs has increased from 13 million lives in 2011 to 15 million lives in 2012. Milliman actuaries predict that the growth in these types of plans could slow, unless adjustments are made to MLR rules.
As with all huge policy changes, those brought about with the ACA create bumps in the road. It remains to be seen whether the bumps will smooth out as millions of Americans gain access to care.