Four Steps That Could Stabilize the Health Insurance Market


Aug 25, 2017

Health care professional reviews insurance information with patient

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This commentary originally appeared on The Hill on August 25, 2017.

Since the Affordable Care Act's major requirements took effect in 2014, insurers have had trouble finding their sea legs in the individual health insurance market, which now provides coverage to about 22 million Americans. The individual market includes plans offered on the ACA's marketplaces and other, unsubsidized plans subject to the ACA's regulations.

Inexperience with ACA regulations and last-minute rule changes played a role in health insurers mispricing plans early on, leading to losses for insurance companies and subsequent premium increases. Heading into 2018, insurers face new uncertainties that include lack of clarity on how the Trump administration will enforce Obama-era policies, which could affect insurers' pricing and participation decisions. As a result, some insurers are exiting the marketplaces, and others have proposed rate increases of 30 percent or more.

Rising prices could leave some consumers unable to afford coverage. Declines in insurer participation could leave people with limited choices, and, in some cases, with no access to insurance. Many Americans find this unacceptable.

In September, Congress will hold bipartisan hearings to discuss options to stabilize the individual market and ensure that all Americans have access to affordable coverage. Here are four options they could consider.

Incentivize Enrollment

When more people enroll, it is easier for insurers to accurately set premiums, and insurers' administrative costs are spread over a larger base. People who are on the fence about enrolling—and might need an additional incentive—also tend to be healthier and have lower costs. Research that my colleagues and I conducted for the Commonwealth Fund identified several options that Congress could consider that would expand enrollment and reduce premiums by bringing healthier people into the market. For example, extending tax credits to those with incomes above the current threshold of 400 percent of federal poverty level could cover an additional 1.2 million people and cause premiums to drop by 2.6 percent. In another scenario, offering young adults an additional $50 per month in tax credits could insure just under a million additional enrollees. Congress could also set aside resources to raise awareness of the coming open enrollment period and encourage Americans to sign up.

Invest in Reinsurance

Reinsurance is a form of insurance for insurers that offsets some or all of the costs in the event that an enrollee has an unusually expensive condition. Because reinsurance reduces the risk that insurers bear for covering the sickest individuals, it can reduce premiums. From 2014 to 2016, the ACA included a temporary reinsurance program funded through a tax on individual and employer health plans. Recent GOP plans to repeal and replace the ACA have included federal funding (PDF) that could be used for reinsurance. Because reinsurance would reduce premiums, it would also reduce federal spending on premium tax credits. For this reason, the federal government agreed to help finance a reinsurance program in Alaska, and has encouraged (PDF) other states to consider the Alaska model.

Fund Cost-Sharing Reductions

Insurers are facing uncertainty regarding the fate of federal funding for cost-sharing reductions, which are reductions to out-of-pocket costs that insurers must offer to low-income marketplace enrollees. While cost-sharing reductions are required under the ACA, Congress has not appropriated money to fund them, and there is pending litigation over the issue. If the federal government opts not to fund cost-sharing reductions, insurers could be left with a $10 billion (PDF), unfunded requirement to subsidize low-income enrollees. Such an outcome could lead to premium increases, and may cause some insurers to exit the market altogether.

Enforce the Individual Mandate

Insurers also face uncertainty regarding whether the ACA's individual mandate, which requires most people to obtain coverage or pay a penalty, will be enforced. If not, healthy individuals would have little incentive to enroll, causing premiums to rise by as much as 20 percent, according to the Congressional Budget Office. Other approaches to incentivizing enrollment, such as imposing penalties for those who fail to maintain continuous coverage, could also be considered. However, the CBO has cautioned (PDF) that continuous coverage requirements could dampen enrollment over time by making it harder for those with a coverage gap to re-enter the market.

The debate over whether the ACA should be repealed, repaired, replaced or improved may continue for some time. For now, the ACA is the law of the land, and many Americans rely on its individual insurance market for access to affordable health care. While a combination of factors has led to instability in this market, policymakers could take immediate steps to improve the situation by encouraging enrollment, making targeted investments to reduce premiums, funding cost-sharing reductions and enforcing the individual mandate.

Christine Eibner is the Paul O'Neill-Alcoa chair in policy analysis at the nonprofit, nonpartisan RAND Corporation and a professor at Pardee RAND Graduate School.