One of the most hotly debated Affordable Care Act (ACA) issues in recent months has been what is happening to the individual risk pool. Insurers have been proposing significantly increased premiums for 2017 and have sought to justify these increases by claims that enrollees in the individual market have presented higher claims costs than were expected. ACA critics have further claimed that the risk pool is deteriorating, threatening an insurance death spiral.
On August 11, the Centers for Medicare and Medicaid Services (CMS) released a data report containing good news regarding what has in fact happened to the risk pool. According to the report, between 2014 and 2015 per-member-per-month (PMPM) paid claims in the ACA individual market fell by one tenth of one percent. By comparison, per enrollee cost in the employer market grew by 3 percent, private insurance premiums grew overall by 4 percent, and insurers believe that the overall cost of medical care in the individual market grew 6 percent. Moreover, the estimate of flat growth likely overstates the true growth in claims costs as it does not account for improved claims data reporting in 2015.
CMS determined the 2014 to 2015 claims cost trends based on claims data submitted by insurers through their EDGE servers for purposes of the reinsurance program. The data include all ACA-compliant plans, including marketplace and off-marketplace plans, but not grandfathered or transitional plans. The data were adjusted to exclude data submitted by a small number of insurers that submitted erroneous data in either year and to remove the estimated effect of cross-year claims (claims that began in 2014 and were submitted in 2015) because no cross year claims were submitted in 2014, the first year of ACA market reform coverage. Cross-year claims costs accounted for about 4 percent of costs.
Data Suggests An Improving Risk Pool
The fact that claims cost growth was essentially flat from 2014 to 2015 strongly suggests that the health of the risk pool is improving as enrollment grows. This hypothesis is supported by the fact that cost growth was lower in states that saw greater growth in individual market enrollment.
Overall, marketplace member months increased 66 percent in 2015, reflecting increased enrollment and enrollment duration. In the 13 states with less than 50 percent member-month growth, PMPM claims increased 2 percent; in the 27 states with member-month growth between 50 and 100 percent, PMPM claims fell 3 percent, and in the 10 states with member-month growth exceeding 100 percent, PMPM claims fell 5 percent. Risk adjustment scores also fell in states experiencing high growth.
CMS contends that alternative explanations of the low growth in costs are less persuasive than the growth and improvement in the risk pool hypothesis. It cites studies that show that cost-sharing as indicated by actuarial value and network breadth remained roughly constant from 2014 to 2015. Pent-up demand from the previously uninsured may account for higher claims in 2014, but many uninsured individuals enrolled for the first time in 2015 and would have also brought pent-up medical care needs.
CMS expects the risk pool to continue to improve going forward. CMS has taken recently or has proposed a number of steps to improve the risk pool. These include tightening up on the use of some special enrollment periods; encouraging transitions to Medicare for 65 year-old marketplace enrollees and transitions to individual market coverage for 26 year-olds aging out of parental coverage; reducing the number of individuals losing coverage or financial assistance due to data-matching requirements; reaching out directly to individuals who have paid the individual responsibility tax; improving outreach to other populations; and attempting to discourage the abuse of short-term and excepted benefit plans.
The movement of individuals currently enrolled in transitional plans should further improve the risk pool as those plans end in 2016. CMS is also considering changes to the risk adjustment program which should help to further stabilize the risk pool.
If Costs Are Flat, What's Behind Premium Increases?
The report raises the obvious question: If the risk pool is improving and claims are not increasing, why do insurers continue to raise their premiums. In fact, premium increases in 2015 were quite minimal - 2 percent according to EDGE server data submitted by insurers. But there is considerable evidence that insurers underpriced for 2014, either intentionally to gain market share or because of actuarial miscalculations.
Researchers estimate that 2016 Marketplace premiums remain between 12 percent and 20 percent below the rates that the Congressional Budget Office (CBO) initially predicted. Insurers are still making up for lost ground. Moreover, insurers reduced their 2014 and 2015 rates to account for support they received from the reinsurance program, which has been phased out rapidly and ends in 2016; insurers must raise premiums to account for this lost support.
The bottom line of the CMS report, however, is that the risk pool in fact improved from 2014 to 2015 and there is every reason to believe that it should continue to improve for the future. This should in turn mean that the premium increases being requested for 2017 are not indicative of the future, and that in fact the individual market may be stabilizing and may continue to stabilize as it continues to grow.
CMS Proposes Amendments To Access Requirements For Limited English Proficiency Populations
The Affordable Care Act and related statutes and regulations impose a number of requirements on insurers and other regulated entities intended to ensure access for limited English proficiency populations. Among these is a requirement that web-brokers, qualified health plan (QHP) insurers, and marketplaces include on their websites and critical documents taglines in the 15 languages spoken most commonly by limited English proficient populations in their state indicating the availability of language assistance services.
On August 10, the Centers for Medicare and Medicaid released a Frequently Asked Question (FAQ) guidance proposing amendments to the language access tagline requirements. The FAQ states that CMS intends to amend the tagline requirement so that web-brokers, QHP insurers, and marketplaces that serve multiple states may aggregate the limited English proficient populations of all the states that they serve and only provide taglines in the top 15 languages spoken by the aggregated limited English proficient populations of those states. QHP insurers that are part of an insurer control group or subsidiaries of a corporate entity that serves multiple groups may aggregate the limited English populations of all states served by the control group, even though the group does not participate in the marketplaces in all states that it serves.
The FAQ also states that CMS intends to amend its rules to provide that a marketplace, QHP insurer, or web-broker satisfies the tagline requirement with respect to website content if it prominently posts on its homepage a link directing individuals to the full text of the required taglines and separately include the taglines on each critical standalone document linked to or embedded in the website, such as a document in PDF or word processing format. For example, a QHP insurer that linked its provider directory from its website would need to provide the taglines on the provider directory PDF as well as on its website. Until it amends its rules, the Department of Health and Human Services (HHS) will not be taking enforcement action against entities that comply with the FAQ guidance.
OIG Weighs In On Reduction Of CO-OP Loan Repayment Burden
On August 9, the HHS Office of Inspector General (OIG) released a report on the conversion of Consumer Operated and Oriented Plan (CO-OP) startup loans to surplus notes. The ACA created the CO-OP program to increase the choices available to consumers in the marketplaces and to introduce competition into individual and small group markets, which are often dominated by a few insurers. Because CO-OPs are nonprofits and because they were startups in a high-risk market, they had limited access to capital.
Recognizing that this was likely, Congress provided in the ACA for federal loans to the CO-OPs for startup costs (to be repaid within five years) and to ensure solvency in accordance with state law (repayable in 15 years). CMS awarded $2.4 billion to 23 CO-OPs, $358 million on startup loans, and $2.08 billion in solvency loans.
Recognizing in 2015 that a number of the CO-OPs were facing financial difficulty, CMS issued a guidance on July 9, 2015 allowing CO-OPs to convert their startup loans to “surplus notes.” A surplus note is a bond-like instrument intended to provide needed capital for an insurer. Under the terms of the surplus notes, the CO-OPs are not required to make a repayment that could lead to financial distress or default. State insurance regulators must give their approval before any payments of principal or interest can be made on a surplus note.
CO-OPs interested in converting their startup loans to surplus notes had to apply to CMS and provide an actuarial analysis of their projected financial condition with and without the conversion. They also had to obtain approval for the conversion from their state regulator.
Twelve of the operating CO-OPs converted their loans in accordance with the guidance. Three did not convert their loans during the period the OIG studied, although one of them has subsequently. The effect of the conversion was to subordinate the federal government's startup loans to most other creditors and to make repayment of the loans less likely.
The conversions were approved by CMS in accordance with the guidance and did improve the capital and surplus levels of the CO-OPs, although for four CO-OPs projected improvement in capital did not reach CMS-required levels. Four of the 12 CO-OPs ceased operations within six months of the conversion and three more have ceased subsequently. The OIG concluded that the conversions reduced the likelihood of the federal government being able to recover loan repayments because of the reduced priority of their loans and the need for state insurance commissioner approval of repayment.
The OIG recommended that CMS document the negative impact of loan conversion on distribution priority and quantify its likely impact on the government's ability to recover loan payments before allowing any further conversions. CMS responded that it had considered these factors (although it was unable to document its consideration of the priority issue) in approving earlier conversions, but that other factors were also important to its consideration, presumably protecting CO-OPs and their enrollees from the effects of insolvency.
Court Refuses To Revive Challenge To Transitional Policy
On August 10, the Circuit Court of Appeals for the District of Columbia denied a motion for rehearing en banc in American Freedom Law Center v. Obama. This case challenged the administration's transitional policy, which allowed the continuation of ACA non-compliant plans in 2014. The case had been dismissed by the district court for lack of standing in 2015, and that decision was affirmed by a D.C. Circuit panel in May of 2016. Judges Brown and Kavanaugh would have granted a rehearing.
GAO Report Addresses Section 1332 State Innovation Waiver Process
Finally, the Government Accountability Office released an August 5 report that it had presented to Congress a month earlier on the Section 1332 state innovation waiver process. The report summarizes the provisions of the ACA that can be modified or waived through the 1332 waiver process, the conditions a state must fulfill to be granted a waiver, and earlier HHS guidance on the 1332 process and requirements.
The report noted that as of May 2016, HHS and the Treasury Department, which must jointly consider waivers, were still developing more specific procedures for coordinating review of 1332 waiver requests. They are coordinating with other federal agencies, including Labor and the Office of Management and Budget, in developing procedures. HHS was still in the process of developing resources, including tools and protocols, for application review.
HHS has indicated that staff with Medicare and Medicaid expertise will assist in reviewing waiver requests, but 1332 waiver proposals will be assessed independently of Medicaid waiver requests. HHS and Treasury have had joint conceptual discussions with Vermont and Hawaii, the states that were furthest along in the waiver application process as of the date of the GAO review.
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