The impact of the Patient Protection and Affordable Care Act (PPACA) on small group and individually purchased health insurance will depend upon many factors. These include the characteristics of the health insurance markets prior to reform, whether plans are grandfathered or are newly created under reform, the health status and claims experience of the covered group or individual, individual coverage decisions, policy decisions that will be made at the state level, and success of cost containment efforts. This brief presents the central factors that will influence premiums for coverage and identifies the direction of that influence.
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The impact of the Patient Protection and Affordable Care Act (PPACA) on small group and individually purchased (i.e., non-group) health insurance will depend upon many factors. These include the characteristics of the health insurance markets prior to reform, whether plans are grandfathered or are newly created under reform, the health status and claims experience of the covered group or individual, individual coverage decisions, policy decisions that will be made at the state level, and success of cost containment efforts. Thus, many factors will interact and affect premiums, making it difficult, if not impossible, to make generalized statements of the effect of the new law on premiums. Here, we present the central factors that will influence premiums for coverage of different types, identify the direction of that influence, but do not attempt to quantify the end result of the various interactions.
Prior to the passage of PPACA, in February 2010, California’s largest for-profit insurance carrier, Anthem Blue Cross Blue Shield, announced large premium increases for those enrolled in its non-group health insurance coverage, increases as high as 39 percent. In addition, Anthem warned enrollees that the company might begin to increase rates more frequently than annually. Following a public outcry and investigation by the California Department of Insurance, Anthem withdrew the planned increase. However, the episode heightened concerns that insurers might dramatically increase premiums and attribute them inappropriately to health reform. This brief attempts to identify the ways in which the new law could impact premiums, a first step toward preparing analysts and policymakers for assessing the source of any future changes.
Changes to Be Implemented in 2010
While the most significant changes to private health insurance markets under PPACA will not occur until January 1, 2014, there are a number of provisions that take effect in 2010. These changes affect both group and non-group plans and include: prohibitions on lifetime benefit limits and unreasonable annual limits, extension of dependent coverage to adult children up to age 26, prohibitions on rescissions, elimination of pre-existing condition exclusions for children, and elimination of waiting periods of more than 90 days.
The impact of these provisions on the premiums of current policy holders is a function of the type of coverage currently held. Federal regulations include estimates of the premium impacts of these provisions. In addition, we supply some rough estimates of these provisions that were provided confidentially by a private health actuary upon our request. The estimates from both sources are generally consistent, but both acknowledge the difficulty in generating such estimates and the uncertainty around them.
Those policies that did not include lifetime or annual limits prior to reform should see no premium impact of these provisions. For plans with lifetime maximums of $2 million or higher, removing the limits entirely will tend to increase premiums by less than 1 percent (with the small group impact being smaller than non-group). And according to America’s Health Insurance Plans, the vast majority of individual market plans have limits of $5 million and above, making it highly unlikely that this change will cause a noticeable impact on non-group premiums. Because small group plans tend to be more comprehensive than non-group plans, a measurable impact in that sector of the market is even less likely.
The federal agencies estimate that the provisions related to annual and lifetime limits will increase group premiums by about 1/2 of 1 percent and will increase non-group premiums by less than 1 percent. While premiums could increase modestly in such a way, out-of-pocket costs for those using care will fall as a result, potentially leading to very significant savings for those with serious health care needs.
The prohibitions against pre-existing condition exclusion periods for children, including denials of coverage due to such conditions, should have little to no impact in the small group market, which already is required to guarantee issue policies. The federal agencies estimate the effect to be negligible in the group market. Again, the provision will decrease out-of-pocket costs for those who would have had care excluded from reimbursement without the reform.
If the insurer charges a significantly higher premium for the family newly enrolling in coverage with a sick child, then the premium impact will fall on those families specifically and will not affect the premiums of others. This is the most likely scenario, as it is typical of rating practices in most non-group markets today. The federal agencies estimate the average effect of the prohibition on pre-existing condition exclusions for children will be 1 percent or less in the non-group market.
As a percentage of policies sold, the number of rescissions is actually very small. Consequently, the prohibition under PPACA should not have a significant effect on premiums in either market. Some insurers are concerned that the language of the law will increase the number of applicants misrepresenting their health status, which, if true, could have larger effects. The federal agencies estimate the rescission provisions will increase premiums by no more than a few tenths of 1 percent, while acknowledging that this is the roughest of the estimates provided.
Estimates of the group premium effect of extending coverage for young adults on parents’ policies are provided in another of the Obama administration’s interim final rules. The effect of this provision can be expected to be small in the group market as well, with estimates ranging from .5 to 1.2 percent of premiums, depending upon the participation assumptions made. With regard to non-group coverage, similar issues arise as detailed for the pre-existing condition exclusion period for children. Carriers are expected to charge the specific families enrolling high-cost young adults in non-group plans significantly higher premiums than similar families with healthier adult children, then there will be little to no impact on the general population of insureds.
(End of excerpt. The full brief is available in PDF format.)