Evaluating the "Keep Your Health Plan Fix"

President Obama's promise that Americans could keep their existing health care plan under the Affordable Care Act (ACA) has received increased scrutiny in the wake of millions of Americans having their existing plans canceled. The majority of cancellations have occurred in the individual or nongroup market—where individuals directly purchase health insurance plans from insurers, as opposed to the more prevalent practice of purchasing a plan through an employer group. According to the Kaiser Family Foundation, over 55 percent of nonelderly Americans have plans through an employer, whereas only 5 percent of nonelderly Americans purchase plans in the nongroup market (The Kaiser Commission on Medicaid and the Uninsured, 2013). Many of the existing nongroup plans provide limited coverage and do not satisfy the minimum coverage provisions of the ACA. As a consequence, insurers are unable to renew a large percentage of existing nongroup plans, precipitating large numbers of plan cancellations.

Amid criticism over consumers in the nongroup market losing their existing health insurance plans, President Obama announced a policy on November 14, 2013, to allow current nongroup enrollees to keep their existing plans, provided their state's health insurance commissioner permits the plans to be offered and their health insurance company decides to renew their plans. Two alternative proposals, one sponsored by Representative Fred Upton (R-MI) and the other put forth by Senator Mary Landrieu (D-LA), are more aggressive in extending non–ACA-compliant nongroup plans than Obama's policy. Passed in the House of Representatives on November 15, 2013, Representative Upton's bill allows anyone to purchase a non–ACA-compliant nongroup plan, not just current enrollees. Senator Landrieu's bill imposes a requirement that insurers continue to offer non–ACA-compliant nongroup plans indefinitely, but limits future enrollment in these plans to current enrollees only.

Broadly speaking, the three reform proposals to allow individuals to keep their existing health plan are closely associated with the following three general categories:

1. Optional extension: Insurers are given the option to extend non–ACA-compliant nongroup plans to current enrollees (e.g., President Obama's policy).
2. Mandatory extension: Insurers are required to extend non–ACA-compliant nongroup plans to current enrollees (e.g., Senator Landrieu's bill).
3. Optional extension plus buy-in: Insurers are given the option to extend non–ACA-compliant nongroup plans to anyone (e.g., Representative Upton's bill).

Although the reform proposals may allow millions of Americans to keep their health plan, critics contend that the ACA-compliant market, which includes the newly created state-based Marketplaces, would be deprived of the young and healthy enrollees it needs for premiums to remain affordable. According to the theory, the failure of the young and healthy to enroll in ACA-compliant plans in 2014 would lead to higher premiums in 2015, if insurers anticipate that lower-risk enrollees will have continued options to avoid enrollment in the ACA-compliant market. In the extreme, opt-out by young and healthy enrollees could lead to a "death spiral," a self-reinforcing cycle of increasing premiums and decreasing enrollment ending with the implosion of the ACA-compliant market.

The likelihood of a death spiral depends, therefore, on the extent to which the three proposed reforms discourage lower-risk individuals from enrolling in ACA-compliant plans and increase accessibility to the non–ACA-compliant market. Of the three proposals, the optional extension proposal places the greatest limit on access to the non–ACA-compliant market by leaving plan renewals to the discretion of the insurer and state insurance regulators, and only allowing current enrollees to retain their plans. The mandatory extension proposal mandates that insurers renew non–ACA-compliant plans owned by current enrollees, increasing the possibility of a death spiral by expanding the pool of lower-risk individuals who can remain in the non–ACA-compliant market. Finally, the optional extension plus buy-in proposal substantially expands access to the non–ACA-compliant market by allowing insurers to sell non–ACA-compliant plans to any enrollees they wish (while maintaining the option to deny coverage to high-risk applicants), potentially depriving the ACA-compliant market of the low-risk enrollees it needs to be sustainable.

In this research, our objective is to quantify how these proposals would affect the ACA-compliant nongroup market and to understand the impact of these changes on health insurance cost and coverage. In particular, we assess how changes to rules regarding plan cancellations will affect premiums and enrollment in the ACA-compliant market, the composition of the ACA-compliant market risk pool, and federal spending. For each reform proposal, we determine whether a death spiral would result. To estimate the potential impact, we use the RAND Comprehensive Assessment of Reform Efforts (COMPARE) model, a microsimulation developed by RAND researchers to predict the effects of health care reform proposals.

Our model results suggest that the key provisions embraced by the proposed legislation will have a modest to moderate impact on the ACA-compliant market, as compared to a case in which all nongroup plans are canceled. Of the three proposal types, optional extension of non–ACA-compliant nongroup plans to current enrollees would lead to the smallest decrease in ACA-compliant market enrollment and the smallest increase in ACA-compliant market premiums. Mandatory extension of non–ACA-compliant nongroup plans to current enrollees would have a slightly more adverse impact on ACA-compliant market enrollment and premiums, but the effects are still relatively small. By contrast, opening non–ACA-compliant plans to anyone would have a far more detrimental effect on the ACA-compliant market, raising premiums by as much as 10 percent and decreasing enrollment by 3.2 million. However, opening non–ACA-compliant nongroup plans to anyone would increase health insurance enrollment overall, relative to other scenarios. For the optional extension plus buy-in proposal, federal spending on the ACA's coverage provisions would rise by more than $5 billion (or 6.3 percent) in 2015, while the optional extension and mandatory extension proposals would lead to increases in spending of 0.8 percent and 1.4 percent, respectively. None of the three proposals would lead to a death spiral. As compared to the case in which all nongroup plans are canceled, our key findings with regard to the key provisions of the three proposal categories are as follows:

• Premium increases are small to moderate: ACA-compliant market premiums in 2015 would rise from a low of 1 percent under the optional extension proposal to a high of 10 percent under the optional extension plus buy-in proposal.
• ACA-compliant market enrollment declines are modest to substantial: Under the optional extension proposal, enrollment in the ACA-compliant market would decline by 500,000 (4 percent). The optional extension plus buy-in proposal would lead to a decrease of 3.2 million enrollees (26 percent), the largest of the three proposals.
• The number of uninsured decreases: The optional extension and mandatory extension proposals lead to small decreases in the number of uninsured of 260,000 and 450,000, respectively. Under the optional extension plus buy-in proposal, the number of uninsured would drop by 2.5 million. One important caveat to this seemingly positive outcome is that the non–ACA-compliant plans may have a significantly lower actuarial value than plans offered in the ACA-compliant market and provide more limited coverage.
• ACA-compliant market enrollees are older and less healthy, while non–ACA-compliant nongroup plans retain and/or attract young and healthy individuals: ACA-compliant market enrollees are at least eight years older, on average, than participants in the nongroup market and spend twice as much on medical care.
• The net cost of the ACA's coverage provisions will increase, particularly under the optional extension plus buy-in proposal: Despite declining enrollment in the ACA-compliant market, we find that the amount spent by the federal government on premium tax credits and cost-sharing subsidies actually increases, while revenue from the individual mandate penalty decreases. The optional extension proposal would add $0.6 billion in net cost in 2015, while the optional extension plus buy-in proposal would increase federal spending by $5.2 billion.

Hence, the proposals to allow people to "keep their health plan" will have an adverse impact of varying degrees, but will lead to neither a death spiral nor the implosion of the ACA-compliant market. Several key reasons for the sustainability of the ACA-compliant market include:

• Restricting subsidies to the ACA-compliant market: The ACA provides subsidies only to enrollees in the ACA-compliant market through the Marketplace. Therefore, individuals with incomes below 400 percent of the federal poverty level may be foregoing substantial subsidies to remain in the non–ACA-compliant market (or in the case of the optional extension plus buy-in proposal, to remain or enroll in the non–ACA-compliant market).
• Marketplace subsidy structure: The design of the subsidy formula shields subsidized enrollees in the Marketplace from premium shocks. An individual's subsidy is calculated such that the individual's out-of-pocket premium for the second-lowest cost "silver" plan will be limited to a fixed percentage of his or her income. The fixed percentage is set in the ACA on a sliding scale from 2 percent to 9.5 percent, depending on the individual's income level. For individuals whose unsubsidized premium currently exceeds their fixed percentage, a subsequent premium increase will have no bearing on their out-of-pocket premium (i.e., the government will increase the subsidy amount to keep the out-of-pocket premium constant). In some cases, the unsubsidized premium for the second-lowest cost silver plan faced by a young adult could be sufficiently low that it is less than the fixed percentage. These young adults would receive no subsidy and could be vulnerable to small premium increases, but would have their out-of-pocket premium capped.
• Reinsurance: These funding sources are designed to keep premiums reasonable during the first few years of the ACA-compliant market to protect against adverse selection. Reinsurance provides a fixed amount of money (i.e., independent of the number of enrollees) that is used to lower premiums in the ACA-compliant market. If fewer people enroll in the ACA-compliant market than expected, the fixed amount of money will be divided over fewer people, implying that there will be a greater per-capita amount of funds available to help keep premiums in check. Similarly, risk corridors will help insurers offset some of the costs associated with setting premiums too low, although we did not model risk corridors in our analysis.
• Composition of the buy-in population: The main objection to the optional extension plus buy-in proposal is that it will deprive the ACA-compliant market of the young and healthy enrollees it needs. While we found that some individuals who are expected to enroll in the ACA-compliant market may opt to buy a non–ACA-compliant plan instead, the majority of the buy-in population consists of those who would be otherwise uninsured. Many in this population are ineligible for subsidies on the Marketplace because their income is above 400 percent of the federal poverty level or they have access to an "affordable" employer-sponsored insurance offer.

In contrast with most of our findings, the result that the three reform proposals expand coverage--particularly the optional extension plus buy-in proposal--stands out as a seemingly positive outcome of the reform proposals. The individual mandate penalty combined with very low premiums in the non–ACA-compliant market entices those who might be otherwise uninsured to buy a plan in the non–ACA-compliant market. However, a non–ACA-compliant plan may have very high cost-sharing obligations and limit coverage for very basic benefits, such as hospitalization. Thus, a non–ACA-compliant plan could leave enrollees exposed to financial risk and may increase the burden on the rest of the system if enrollees cannot pay for uncovered care. We did not consider or model the repercussions that this potential for uncompensated care would have for premiums elsewhere in the health care system, including the ACA-compliant market.

Many experts have predicted that the optional extension plus buy-in provision would lead to a death spiral in the ACA-compliant market, as the provision would deprive the ACA-compliant market of the young and healthy enrollees that it needs. We find that the ACA's safeguards, including the subsidy availability, subsidy structure, and reinsurance, will likely prevent the feared death spiral from occurring. In other words, it is because of the ACA's defense mechanisms that the ACA-compliant market is robust enough to escape a death spiral. Attempts to modify, weaken, or repeal the ACA's defense provisions or to extend the optional or buy-in programs to subsequent years without robust reinsurance might lead to a very different outcome, and a death spiral might ensue.

As with any model, COMPARE has several key limitations. Most notably, COMPARE is an equilibrium model that is best suited to project the ACA's impact in 2016 and beyond. By 2016, the majority of the ACA's major reforms will have been implemented and most consumers will, presumably, have learned of the ACA-compliant market and acquired sufficient information to understand how the offered plans might fit their needs. In this analysis, we assess the expected impact of the "keep your health plan" proposals in 2015, a year during the ACA's phase-in period when ACA-compliant market enrollment may still be in flux. To the extent that adverse selection is stronger than COMPARE predicts as the ACA is being implemented (i.e., a higher-than-expected proportion of older and sicker individuals enroll in 2014 and 2015), our estimates of the impact of the reform proposals could be understated, particularly for the optional extension plus buy-in proposal. Some of the temporary defense mechanisms, particularly the reinsurance program, may lead to a further underestimate when applied to an equilibrium pool. However, we find no evidence that would change the key qualitative result of our analysis; namely, that the proposals do not lead to a death spiral.

In summary, our analysis found that none of the three reform proposals would result in a death spiral. Comparing the three proposals, we observed that the optional extension proposal has the least disruptive impact on the ACA-compliant market, having a minimal impact on premiums, enrollment, and federal spending. By contrast, the optional extension plus buy-in proposal has the most significant impact of the three proposals on the ACA-compliant market, having a pronounced negative impact on premiums and enrollment while increasing federal spending by more than $5 billion. The reforms have the beneficial effect of expanding coverage through the non–ACA-compliant market, although this coverage may be inferior to insurance available on the ACA-compliant market. The bottom line of our study is that the proposed reforms to allow people to keep their existing health plans will not result in the unraveling of the ACA-compliant market.

Key Findings

• Premium increases are small to moderate.
• ACA-compliant market enrollment declines are modest to substantial.
• The number of uninsured decreases.
• ACA-compliant market enrollees are older and less healthy, while non–ACA-compliant nongroup plans retain and/or attract young and healthy individuals.
• The net cost of the ACA's coverage provisions will increase, particularly under the optional extension plus buy-in proposal.
• None of the proposals will lead to a death spiral or the implosion of the ACA-compliant market.

Reference

The Kaiser Commission on Medicaid and the Uninsured, The Uninsured: A Primer--Key Facts About Health Insurance on the Eve of Coverage Expansions, Menlo Park, Calif.: The Henry J. Kaiser Family Foundation, October 2013. As of December 14, 2013:
http://kff.org/uninsured/report/the-uninsured-a-primer-key-facts-about-health-insurance-on-the-eve-of-coverage-expansions

Support for this research and for RAND Health's Comprehensive Assessment of Reform Efforts (COMPARE) initiative is provided by RAND's corporate endowment and through contributions from individual donors, corporations, foundations, and other organizations. This work was also supported in part by an internal investment from RAND Health, a division of the RAND Corporation.