Gaming The Exchanges And Mini Health Insurance Plans

Yesterday, Aaron Carroll noted how private HMOs participating in Medicare successfully pushed sicker individuals off their rolls and suggested that insurers’ knack for manipulating the system holds important lessons for health reform implementers. Indeed, many are already raising alarms about a little noticed provision in the health care law that would allow insurance companies to lure younger and healthier Americans out of the exchanges and into so-called mini health plans, which have low annual limits and very modest benefits.

As Ken Terry explains, if an insurer can prove that “switching to comprehensive coverage would lead to significant premium increases or force employers to drop insurance benefits,” they can continue to offer low-cost, low-benefit plans:

This lack of universality could cause the same kind of “death spirals” that occurred in the small-business health insurance purchasing alliances of the 1990s. If healthy people tend to buy low-cost insurance outside of the exchanges, the increasing proportion of sick people in the exchanges could force rates up and induce carriers to withdraw from them. […]

This is where the HHS determination on waivers comes in. A restrictive approach would mean that most plans offered outside of the state exchanges would have to be similar to those inside of them. This offers the best chance for the exchanges to survive: Because people would receive federal subsidies only for insurance purchased through an exchange, healthy people would be less likely to leave the state-sponsored market to buy a policy that was nearly identical to one offered through the exchange. But if HHS takes a looser stance, and mini-plans endure, many healthy people and firms with healthy employees will buy their insurance outside the exchanges, even without subsidies. If so, the exchanges will become unprofitable for insurance companies to participate in.

HHS certainly has its hands full — allowing insurers to offer mini plans outside of the exchanges could undermine the entire foundation of the law; cutting them off would force some businesses to drop coverage all together and push some beneficiaries into more comprehensive and more expensive coverage. But health experts and consumer advocates I spoke to believe that in some ways the problem is overstated. They claim that beginning in 2014, demand for the mini plans will naturally diminish since these policies won’t offer the standard benefit packages or meet the actuarial value of creditable coverage — the insurance that complies with the individual mandate requirements. The problem is in the interim. As younger and healthier individuals continue to buy these subprime policies, they will fall victim to the fine print and annual limits and abdicate their eligibility in more comprehensive programs like Medicaid.

In 2014, the more pronounced opportunity for cherry picking is in the structure of the Bronze plan. Under the law, insurers that participate in the exchange are required to market the Silver and Gold tier plans in the exchanges but are exempt from marketing the Bronze plans to exchange beneficiaries. Insurers could therefore sell the lower-cost/high deductible Bronze plan outside of the exchange or stay out of the exchanges altogether and attract healthier people into the non-exchange nongroup market. Some states like California are trying to avoid this outcome by requiring insurers “to provide the same types of policies inside and outside of the exchanges.” But as expected, they’re receiving a lot of opposition from the insurance industry.