May 23, 2012
More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014
By Jon R. Gabel, Ryan Lore, Roland D. McDevitt, Jeremy D. Pickreign, Heidi Whitmore, Michael Slover and Ethan Levy-Forsythe
The Affordable Care Act creates state-based health exchanges that will begin acting as a market place for health insurance plans and consumers in 2014. This paper compares the financial protection offered by today's group and individual plans with the standards that will apply to insurance sold in state-based exchanges. Some states may apply these standards to all health insurance sold within the state. More than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under the rules of the exchanges in 2014. These people were enrolled in plans with an actuarial value below 60 percent, which means that the plans covered less than that proportion of the enrollees' health expenses. Many of today's individual health plans are below the "bronze" level, the lowest level of plan that can be sold through exchanges. In contrast, most group plans in 2010 had an actuarial benefit of 80–89 percent and would qualify as highly rated "gold" plans in the exchanges. To sell to ten million new buyers on the exchanges, insurers will need to redesign benefit packages. Combined with a ban on medical underwriting, the individual insurance market in a post–health reform world will sharply contrast with the market of past decades.
From the Discussion
Using simulated claim payments, we found that the average actuarial value of group plans in 2010 was 83 percent, and the average for individual plans was 60 percent. For an average family, annual out-of-pocket expenses were $1,765 with group coverage, compared to $4,127 with individual coverage. For people in poor health who incurred high medical expenses, the differences between the group and individual markets were even more dramatic.
Our findings have notable policy implications. First, the majority of Americans with individual insurance coverage today are enrolled in a plan whose actuarial value is too low to qualify for a state-based exchange. Insurance reforms that went into effect September 23, 2010, raised the financial protection offered by exchange plans. For example, lifetime maximum benefits were eliminated, effective preventive services must now be offered without cost sharing, and annual limits on insurance coverage were removed. But to qualify for exchanges, insurers will need to lower the average deductible level for individual tin plans, which today average nearly $3,900 for a single person.
Second, about two-thirds of today's employees are enrolled in a gold or platinum plan. Families with coverage through the exchanges are likely to have less financial protection than employees with employer-based coverage enjoy today. Employers choosing to buy insurance coverage for their employees through the small-employer exchange, which could eventually include employers with more than a hundred workers, will probably obtain less extensive coverage if they opt to buy a plan in the silver tier than if they now offer a plan typical of those provided in the employer-based market today.
Third, very sick patients—those in the top 1 percent of medical spending—incur sizable out-of-pocket expenses regardless of coverage. For example, these top spenders face out-of-pocket expenses of nearly $3,800 in a group platinum plan. But there are substantial differences in out-of-pocket spending between plans with high actuarial value and plans with low value. A family in the top 1 percent of medical spenders with tin coverage in the individual market incurs annual out-of-pocket expenses of more than $27,000. ("Tin coverage" is a fifth tier created exclusively for this study. It is a level below the bronze tier - below 60 percent actuarial value - a level that will not be permitted in the state insurance exchanges.)
Comment: Reports of this study likely will celebrate the fact that very low actuarial value plans which are commonplace in the individual market today - those below 60 percent value (plan pays less than 60 percent of covered health costs) - will have to reduce their deductibles and perhaps make other changes to qualify under the Affordable Care Act. But is this enough?
The study compared group plans with individual plans. Group plans have an average actuarial value of 83 percent, whereas the average actuarial value for individual plans is 60 percent, with 51 percent of them falling below that threshold. Only 14 percent were silver (70% AV) and 2 percent gold (80% AV), and there were no platinum (90% AV) plans in the individual market.
The lower half of all individual plans will have to either bring their value up to 60 percent or drop out of the exchange market. This means that average actuarial values of plans in the individual market - those available through the exchanges - will still be in the low 60s - far below group plans with their average actuarial value of 83.
Further, it is likely that smaller employers will rely on the exchanges to provide coverage for their employees - again with lower actuarial value plans than is typical of employer-sponsored group plans. The impact on patients will be significant.
Repeating a quote from above, "... very sick patients—those in the top 1 percent of medical spending—incur sizable out-of-pocket expenses regardless of coverage. For example, these top spenders face out-of-pocket expenses of nearly $3,800 in a group platinum plan (the very best coverage available). But there are substantial differences in out-of-pocket spending between plans with high actuarial value and plans with low value. A family in the top 1 percent of medical spenders with tin coverage in the individual market incurs annual out-of-pocket expenses of more than $27,000."
Although "tin coverage" (plans under 60% AV) will be prohibited in the exchanges, the financial burden on patients who need significant amounts of health care will still be great, even with the subsidies and the elimination of maximum lifetime benefits. Instead of adding to the burden of illness, we should be attempting to preserve the financial security of patients, as we would be if we had a single payer national health program - an improved Medicare for all.