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Could the individual insurance market collapse in some states? Here’s how that could happen

The website to sign up for health insurance in the exchanges,, could go away. REUTERS/Mike Segar

Much of the early analysis of the Republicans’ American Health Care Act (AHCA) has focused on the change in subsidies for people purchasing coverage in the individual health insurance market. The plan does away with subsidies and instead offers tax credits to help people pay for health insurance.

While the change is important, it may be a moot point if there is no individual health insurance market to subsidize.

That distinct possibility depends on how states and the federal government administer the AHCA, should it become law. The House Ways and Means Committee approved the AHCA March 9 and moved forward, despite significant resistance from groups such as the American Medical Association, the American Hospital Association and AARP.

Not truly a repeal

First, we should recognize that the AHCA does not fully repeal the Affordable Care Act. It retains the ACA’s rate regulation: Insurers must offer everyone coverage regardless of illness or preexisting conditions.

It also changes some of the incentives for consumers to purchase care.

This change is very significant because reducing incentives to purchase coverage may make the individual health insurance market disappear. That is because insurers base premiums on the average cost of claims of the individuals they enroll. If health insurers are required to cover anyone who accepts their premiums, the individuals most likely to sign up will be those with the greatest need for health care.

The individuals least likely to purchase coverage, if they purchase coverage at all, are healthy individuals with low probability of needing health care. This is known as adverse selection: Individuals select whether and how much health insurance to buy based on their own need for health care.

But when healthy individuals choose not to purchase health insurance, insurers are left with costs greater than their premium income. That forces insurers to increase their premiums, which in turn leads healthier individuals to drop coverage increasing average claims costs.

An adverse selection death spiral results when insurers can’t raise their premiums enough to cover their costs and they leave the market.

The Affordable Care Act (ACA) contains several measures to address adverse selection. The ACA levied a tax on individuals who did not have health insurance – the individual mandate.

To help individuals pay for insurance that the law mandates, the ACA defines what percentage of a family’s income is considered an affordable cost for health insurance. It subsidizes the difference between that amount and the actual premium.

Insurers have been protected to keep them in the market

Insurers were initially given several protections against adverse selection. One was a reinsurance program for plans sold in the exchange. Reinsurance defrays some of the insurers expenses of high-cost enrollees.

Another was a risk corridor program that limited insurer losses if their premium income was less than the claims costs of their enrollees. Neither of these programs was sufficiently funded to work as intended, and both of them ended in 2016.

Risk adjustment is another method to address risk selection. It redistributes premium income among insurers in the same market in an attempt to ensure that insurers with fewer health enrollees have sufficient funds to cover their costs. The risk adjustment method used under the ACA has been criticized as not accurately measuring risk.

Although many individual health insurance markets appear to be functioning well, a number of insurers have withdrawn from the ACA’s individual health insurance market for 2017, citing heavy losses in the marketplaces. They attributed those losses to facing sicker patients in the individual market than they had anticipated.

Healthy consumers chose not to purchase insurance, while people needing care did. Insurers argued that there were not enough incentives or strong enough penalties to keep healthier individuals purchasing coverage.

Brett Hutchson (L) helps uninsured Wendell Edwards sign up for the Affordable Care Act in Jackson, Mississippi. REUTERS/Jonathan Bachman

Incentives not strong enough to attract healthy people?

How does the House Republican plan address the danger of insurers of not offering care?

The House Republican plan changes the subsidies available to individuals and replaces the individual mandate with a penalty for those who purchase coverage after being uninsured. The ACA’s penalty for not buying coverage is 3 percent of adjusted gross income in every year a person does not buy coverage. The penalty under the Republicans’ American Health Care Act is a 30 percent higher premium for a year.

For example, a healthy 40-year-old whose income is US$40,000 faces a monthly premium of $400, or $4,800 a year. At her income ACA subsidy would be $1,392, making her net annual premium $3,408. If her premiums rise $50 a month ($600 annually) next year her subsidy would increase and she would still play $3,408 a year. If she chooses not to purchase coverage under the ACA she would pay a tax for being uninsured of $1,500 a year.

Under the House plan, a 40-year-old will be eligible for a $3,000 subsidy. Her net cost for coverage after the subsidy would be $1,800. If her premiums rise $50 a month ($600 annually) next year, her costs would increase to the $2,400. If she chooses not to buy coverage and never needed care she pays nothing: She’s saved $1,800 the first year and $2,400 the next.

If after a period of being uninsured, she becomes sick and needs care, however, her premium penalty is 30 percent of the $5,400 annual premium (assuming premiums don’t increase in the third year) which totals $1,620 for the next year. By waiting to purchase health insurance until she needs care, she has saved money.

If she remained uninsured one year and purchased coverage in the next year she would pay a penalty of $1,440 (30 percent of the premium of $4,800). If she remained uninsured for two years and needs to purchase coverage in the third year, she pays a penalty of $1,620. But now she is ill and needs medical care. The cost of the care she needs is likely to be greater than the premium she is paying, even with the 30 percent penalty.

Choosing to remain uninsured for two years cost this woman $3,000 under current law and a penalty of $1,620 under the House Republican plan. The premium subsidy for this woman is more generous at this premium under the House Republican plan but covers less of the costs as premiums increase. Under both plans an insurer would have to offer her coverage regardless of her health status when she chooses to purchase it. If she waits, her health care costs when she does purchase coverage are likely to exceed her premium. For an insurer, that results in an insurance market with losses that are not sustainable.

Speaker of the House Paul Ryan (R-WI) speaks about the American Health Care Act. REUTERS/Joshua Roberts

Not enough money for risk pools to keep premiums low for others

The American Health Care Act does allocate money to the states to create high-risk pools or develop new reinsurance programs to stabilize the individual health insurance markets. That would require states to create and administer the programs that relieve insurers from bearing the full costs of individuals like the person in the above example.

The bill allocates $15 billion in the first two years for market stabilization efforts and $10 billion annually until 2026.

A number of states had high-risk pools prior to the passage of the ACA, and the ACA funded a national Preexisting Condition Insurance Program (PCIP) prior to its full implementation in 2014. These programs covered between 2 and 12 percent of a state’s individual market, and were costly. Based on that experience, the money allocated in the bill would cover the increased costs of about 2 percent of the current individual insurance market. That may not be enough support to keep premiums low enough to attract sufficient numbers of healthier consumers to the individual health insurance market.

Depending on states’ actions, market could vanish

The American Health Care Act allows insurers to lower premiums for young people and increase premiums for older individuals. Currently, the ACA limits premiums for older enrollees to three times the premium for the youngest. The AHCA would increase that difference to five times.

The goal of that proposal is to decrease premiums for the younger and healthier to encourage them to buy health insurance coverage.

It will have the effect of increasing older individuals’ premium costs, encouraging the healthier of those individuals to remain uninsured until they are old enough for Medicare.

The total effect of these changes will depend entirely on how they are administered. Ensuring a sustainable individual health insurance market will require states to create and administer market stabilization programs such as high-risk pools or a reinsurance program with sufficient funding to keep premiums affordable.

States historically have taken widely different approaches to insurance regulation and currently have chosen different policies under the ACA. States may not have the resources or the regulatory expertise to maintain a fully funded market stabilization program. Insurers may not find it possible to offer coverage in states that don’t have such a stabilization program. If The American Health Care Act becomes law, it is entirely possible that in some states the market framework will result in no insurers offering coverage in the individual health insurance market.

One of the most high-profile problems with the ACA – insurers pulling out of the states’ individual health insurance marketplaces – may not be addressed under the House Republican bill, and may be compounded.

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