Risk pools, Executive orders and why my hair is not on fire

  • Juice
  • 12/10/2017
Politicos Adam Cancryn has a good long piece on the association health plan executive order that will be signed this afternoon:

Trump is expected to sign an executive order on Thursday directing an overhaul of major federal regulations that would encourage the rise of a raft of cheap, loosely regulated health insurance plans that dont have to comply with certain Obamacare consumer protections and benefit rules. Theyd attract younger and healthier people leaving older and sicker ones in the Obamacare markets facing higher and higher costs. lowering premiums for the healthiest Americans at the expense of key consumer protections and potentially tipping the Obamacare markets into a tailspin. The focus of the directive is association health plans, which allow small-business owners, trade groups and others to band together to purchase health insurance. Such plans would be exempt from certain Obamacares rules, including requirements that it cover standard benefits. The administration is also preparing to roll back Obama-era restrictions on short-term health insurance plans, allowing insurers to once again sell stopgap policies which dont cover pre-existing conditions, mental health services and many other costly benefits. Coverage could extend for as long as a year, up from a current three-month limit.. Within a year, this would kill the market, said Karen Pollitz, a senior fellow at the Kaiser Family Foundation who previously worked at former President Barack Obamas HHS Department.

I find myself in an odd spot. I dont think these changes are good for the risk pool but my hair is not on fire. This places me in an isolated minority position among liberal health care wonks. I want to work through my thought process.

There are two major risk pools in the ACA for most states. The individual market risk pool and the small group market risk pool. In most states those two risk pools never touch. A few states, like Vermont, have a merged risk pool. This analysis will differ in merged risk pool states. Association health plans will pull out healthier small groups if they can find some facially plausible reason to join an association that buys insurance. Some of the lower premiums will be due to selection of a healthier/younger population, some of the lower premiums may be due to fewer benefits being offered. The remaining firms in the ACA small group fully insured risk pool will face higher premiums and that will drive a few of the newly incrementally healthier groups out of the ACA and into association plans.

That is the definition of a risk spiral that could evolve into a death spiral. However, there has been a long standing out in place for small companies that wanted to avoid the ACA regulations and that is through Administrative Services Only (ASO) contracts with stop loss re-insurance. Effectively this means a small group would pay all of its claims up to a certain point where the stop-loss reinsurance kicks in. If the group has a good, low claim year, they dont spend much but the reinsurance limits their maximum exposure when they have a bad year.

Axene Health Partners is an insurance/actuarial consulting firm that offers a variety of flavors of this approach.

Level Funding is an ASO product with integrated stop loss coverage offered by insurance companies, brokers, and TPAs. Level Funding products are designed to allow the group to benefit from the advantages of self-funding, while limiting the disadvantages. As the name implies, groups with a Level Funding product will have fixed or level monthly costs associated with the funding of its members health coverage. For lower-risk groups, the monthly premium equivalents associated with a level funding product are often lower, sometimes much lower, than the premium the group would pay for the same benefits under the ACAs community rating rules. The Level Funding component that allows the group to pay fixed monthly payments is the Paid Claims Fund. The Paid Claims Fund is the product of the Aggregate Stop Loss (i.e., ASL) corridor and the groups projected paid claims below any Specific Stop Loss (i.e., SSL) deductible. The Paid Claims Fund pre-funds the groups maximum liability under a Level Funding product as actual paid claims over the ASL corridor are covered by the ASL insurance coverage. If the groups actual paid claims for the coverage period are below the ASL corridor, the group will receive some portion of the Paid Claims Funds surplus as a refund. The refund allows the group to benefit from its own favorable claims experience, and thus Level Funding is considered a self-funded product.

There is a lot going on in those two paragraphs but the short version is that this is a way to legally structure an insurance program as ASO/self-funded to avoid ACA mandates and regulations while mostly acting as if it is a fully insured product. This is already a well established out with dozens of different flavors that are offered by all of the major national carriers.I think the association health plan functions as another channel of good risk out of the small group risk pool but there are already large rivers that can bring good risk out of that pool. I am having a hard time seeing devastation.

Now in the individual risk pool, there are a few things going on that I am getting stuck on. I have five major things that are sticking in my head regarding the individual market.

The first is the rule that limits short term plans to only 90 days has only been in place for the 2017 and 2018 pricing years. Switching back to a 364 day short term plan rule is not helpful to bringing and keeping good risk in the single individual risk pool but it is no worse than policies that were in place for the 2014, 2015 and 2016 pricing years. John Graves at Vanderbilt raised a good point about relative pricing last night that I still need to consider:

More people now wont face mandate penalties because the high price of Bronze will generate more hardship exemptions in 2018 or 2019 than were generated in 2014. This is a sharp and subtle point.

Much like the small group market, there are a significant number of channels that bring good risk out of the individual risk pool. The proliferation of transitional grandmother plans in states like Iowa has held a lot of healthy, low risk individuals out of the shared risk pool. Tennessee Farm Bureau is allowed to sell underwritten policies on the individual market and this has allowed for a very sick ACA risk pool. Finally, Healthcare Sharing Ministries are allowed to sell underwritten and limited benefit plans nation-wide. They have seen an explosion of growth since 2011. These are all major outs where good risk leaves the individual unified risk pool. Reinstituing 364 day short term plans is functionally another path for good risk to exit.

Good risk matters for two groups of stakeholders over the long run. The first is the federal government as good risk lowers net subsidies paid. The second is non-subsidy eligible individuals who have expensive conditions that will preclude them from being allowed into any underwritten pool. But most of the people who receive subsidies are fundamentally indifferent to the underlying composition of a risk pool. The subsidy is price linked so a bad risk pool means higher premiums and higher subsidies. The subtle point is that subsidized individuals who want to buy Gold, Platinum or non-Benchmark Silver plans will pay more but this is subtle. The ACA subsidy structure insulates a lot of people and as base premiums increase in a uniformed fashion, more people at the top of the subsidy eligible income scale will see affordable Bronze plans. This analysis is not assuming any CSR pricing games that Ive gone into.

The big losers of this system are the non-subsidy eligible individuals with chronic conditions that will bounce them from any underwritten pool. High underlying base premiums for the ACA will make the community rated, guaranteed issued insurance unaffordable. The off-exchange/non-subsidized segment will death spiral. Insurers can protect themselves by increasing base premiums and cranking up the federal fire hose of premium tax credit subsidies for on-Exchange business. But this is the group that gets screwed.

Finally, all of these changes are not instantaneous. The association health plan changes and the short term insurance regulation changes will require new rule-making. Under the fast case scenario for major rule-making these changes may be in play for the 2019 Open Enrollment. I am seeing enough chatter on these changes to expect that there will be lawyers and there will be lawsuits that will slow this process down even more than the fast case scenario. This matters because insurers know how to price unhealthy risk pools and if they have sufficient time to price a bad risk pool, the on-Exchange markets are structurally stable. The off-Exchange market segment will be in trouble but again, insurers wont flee if they can get states to approve the rates needed for a high morbidity projected risk pool.

This is how I am thinking through this problem and why I am mostly blase to only mildly alarmed. I know this puts me at odds with a lot of analysts whose intelligence and track records I respect, but I have a hard time lighting my hair on fire right now.
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