States Choosing Divergent Paths for Individual Market Coverage

by Manatt, Phelps & Phillips, LLP
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With Congress failing to reach agreement on a stabilization package for the individual market and repeal of the individual mandate set to take effect for 2019, states are considering different strategies, some that will stabilize their Affordable Care Act (ACA) compliant markets and others that will segment their individual markets. Stabilization strategies include restoring reinsurance and pursuing other 1332 waivers designed to keep premiums as affordable as possible across the individual market. Segmentation strategies include promoting short-term plans and other underwritten products that offer immediate benefits to the healthiest consumers and increase premiums for everyone else.

State choices will be influenced by the Department of Health & Human Services (HHS) administrative actions, which have complicated state decision making by pushing states in both directions. More specifically, 1332 policy continues to require careful balancing to ensure that affordability is preserved for all consumers, while the proposed rules for short-term plans and association health plans (AHPs) invite states to segment their risk pools with large rate disparities between ACA-compliant and underwritten risk pools. A recent report commissioned by the consumer representatives to the National Association of Insurance Commissioners (NAIC) sharpens the trade-offs between the two approaches, finding that “risk pool segmentation has the obvious effect of driving up premiums in the health plans that protect individuals from health status discrimination.”

Congress could still intervene with a stabilization package, but the more likely trajectory is action by a handful of states this year and another rocky open enrollment period for 2019. Congress will have another opportunity to act next year, but if no action is forthcoming, states will face even starker choices between stabilization and segmentation strategies next spring. What follows is a brief summary of state and federal actions that will shape the environment heading into the 2019 open enrollment season, which will begin with insurer rate filings over the next couple of months.

Stabilization Through Reinsurance. The governors of Maryland and Wisconsin have signed legislation authorizing 1332 reinsurance waivers, meaning that at least two states are poised to join the three states—Alaska, Minnesota and Oregon—that secured HHS approval for 1332 reinsurance waivers last year. Maine has scheduled a series of public hearings to restart its pre-ACA reinsurance program, as authorized by 2017 legislation, and state legislatures in at least four other states—Colorado, Hawaii, Louisiana and New Jersey—are actively considering bills to authorize similar waivers for the 2019 open enrollment season. With Center for Consumer Information and Insurance Oversight (CCIIO) Administrator Randy Pate actively promoting 1332 waivers at the recent NAIC national meeting, it is possible that the number of state-based reinsurance programs could double or even triple from 2018 to 2019. The three 2018 programs received federal matching funds of 50% to 98% and reduced individual market premiums by 7% to 20%. Similar results are projected for the 2019 waivers, with most states targeting 10% to 20% rate cuts. More than a dozen other states have explored reinsurance waivers and are likely to give them another look for 2020, particularly if new state waivers are approved on a timely basis this year and prove as successful as the three waivers already in operation.

Segmentation Through Underwriting. While the ACA prohibited insurers from denying coverage or charging higher rates based on health status, the law did allow people to keep their pre-ACA coverage in some cases.1 The Trump administration and some states are seeking to restore medical underwriting for new business, which has the potential to vastly increase enrollment in underwritten products, leading to expanded market segmentation. Iowa Governor Kim Reynolds (R) signed a bill on April 2 that follows a Tennessee law in exempting the state Farm Bureau from state insurance regulation so that the Bureau can offer cheaper coverage to those who can pass medical underwriting. Idaho is pursuing a variant of this strategy with the same goal: giving the healthiest consumers access to skinnier plans at cheaper rates than are available in the ACA-compliant market. If HHS broadens access to short-term policies as proposed, those policies will provide another path toward the same market segmentation goal.

State Disparities Likely to Increase. While many states will be pulled toward stabilization and segmentation strategies simultaneously, the two approaches are in direct conflict with each other. Reinsurance strengthens the ACA risk pool to the benefit of those who are dependent on subsidies or pre-existing condition protections, while alternative products undermine the ACA risk pool to the benefit of those who can pass medical underwriting. States with substantial segmentation already—such as Iowa, with a significant portion of its individual market in non-ACA-compliant plans and without subsidized coverage—face more pressure to find solutions for the portion of the unsubsidized population that can pass medical underwriting. Other states may face stakeholder pressure to allow access to cheaper short-term plans even as they pursue stabilization strategies to keep rates affordable for those who need more comprehensive coverage or qualify for subsidies. This will be especially true in states that have not regulated short-term plans in the past and would have to enact new laws to limit these plans. In any event, if a state ends up with widely divergent rates for the ACA-compliant market and the underwritten market, that state’s potential to pursue stabilization may be impeded. This will not have a direct impact on those eligible for subsidies since the federal government covers premium increases for that population, but it will drive up prices for unsubsidized individuals who have or will develop pre-existing conditions. At a broader level, it will magnify the disparities between states that have larger ACA-compliant risk pools that keep rates stable for subsidized and unsubsidized populations and states that have shrinking ACA-compliant risk pools due to the reintroduction of medical underwriting. It remains to be seen how medical underwriting may be regulated in states with dual risk pools. In pre-ACA days, most states put some limits on the use of medical questionnaires and other practices that led to retroactive cancellation of policies and increased consumer complaints.

Federal Guidance on 1332 Waivers. CCIIO has provided strong support to states seeking reinsurance waivers, and CCIIO Administrator Randy Pate recently told the NAIC to expect revised 1332 guidance that will increase state flexibility for broader 1332 waivers as well. He also said that “enhanced direct enrollment,” which allows qualified carriers and web brokers to enroll people on their own websites rather than through Healthcare.gov, would open up new opportunities for the 39 states that are currently dependent on Healthcare.gov for enrollment. Pate noted that these states could work with direct enrollment partners to customize their websites and propose 1332 changes, such as reconfiguring the metal levels, which would not be possible through Healthcare.gov. New guidance may allow states more flexibility by loosening the guardrails that require coverage to be at least as generous as the ACA, but those trade-offs will not present the same threat to market stability as underwritten products do.

State Actions May Depend on Timing of the Final Federal Rule on Short-Term Plans. The recently proposed rules for short-term plans and AHPs invite states to segment their risk pools with large rate disparities between ACA-compliant and underwritten risk pools (for more information on the proposed rule, see Manatt’s summary). Because the proposed rule is not yet finalized and therefore not in effect, states have some time to consider how they may want to regulate such products. State regulations could include banning short-term plans, limiting their reach through state-imposed duration limits, incorporating underwriting restrictions and/or providing consumer education. In most states, legislative action would be required to implement substantive regulations such as duration limits, though most if not all state insurance regulators have some administrative flexibility to regulate underwriting practices. The proposed rule would give states full flexibility, though the final rule could limit state authority or enhance the marketability of what has been a niche product until now. It also remains unclear whether states that want to pursue market segmentation strategies will gravitate toward short-term plans (as HHS Secretary Alex Azar encouraged Idaho to do, following the state’s attempts to advance non-ACA-compliant plans), or will be more interested in alternatives such as the Farm Bureau approach used in Iowa. One downside to the latter approach is that it eliminates the insurance regulatory role entirely, precluding intermediate options such as the partial regulation that Idaho had proposed before its approach was rejected by Secretary Azar.

Silver Loading. As the administration continues to give conflicting signals on market stabilization and segmentation, it is possible that other federal initiatives will impact state choices. For example, Centers for Medicare & Medicaid Services (CMS) Administrator Seema Verma recently expressed concerns about “silver loading”—the response adopted by virtually every state to the termination of cost-sharing reductions (CSRs) in September 2018. Silver loading increased federal costs, but the benefits to consumers were substantial, and forcing states to change rating practices again without restoring CSR payments would be highly disruptive. This makes a federal prohibition on silver loading unlikely, but Administrator Verma’s comment illustrates that there could be other unexpected changes in federal policy that support or undermine state choices.

Insurer Participation. The Congressional Budget Office (CBO) projected that elimination of the mandate will cause rates to increase 10% and the introduction of underwritten products could have an even bigger impact on rates in some states. At the same time, despite political uncertainty and the continued evolution of policies, insurers’ balance sheets are generally improving. Nonetheless, a significant portion of counties in the country have only one or two Marketplace insurers in 2018. There is also potential for the bare counties problem to reappear, with states having to scramble to ensure coverage for underserved, typically rural areas. This combination of factors makes for a highly uncertain environment as insurers over the next few months file their 2019 rates (for the majority of states, rates are due in June).

ACA open enrollment periods have tended to bring a high level of uncertainty and drama, and the 2019 open enrollment period promises more of the same. For the first time, however, some states may be pursuing market segmentation strategies that have been precluded under the ACA and could pose new risks to their ACA-compliant markets.

1. The ACA itself allowed individuals and small groups to keep policies in force in 2010 (grandfathering), and states were allowed to extend this same approach to policies in force in 2013 (grandmothering). These pre-ACA policies were medically underwritten. Federal law has prohibited insurers from denying coverage to small groups based on medical underwriting since 1996, but most states allowed limited rate variations in the small group market based on the group’s claims experience prior to the ACA.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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