Public Policy Analysis & Opinion
ACA is under attack as advocates tout short-term, low-value policies
Call me an old guy, but the nuns who taught me in preschool, kindergarten, and elementary and high school taught me a hardline approach to obeying the law. “Duck and cover” was not a Civil Defense exercise—it was a way of life when an angry nun beelined toward my desk.
Cherry picking destroys insurance pools, which results in failed insurance mechanisms. Such failures break trust with the public, and the business of insurance depends on public trust.
With this background disclosed, it should not surprise readers that a direct attack on the honest implementation of the Affordable Care Act (ACA) of 2010 makes me uncomfortable.
Repeal of the ACA is a policy issue and may draw differing opinions from reasonable people; the rule of law, however, is not such an issue. When public officials and political pressure groups begin to advocate evading the law, we have a problem.
Over the past few months radical state officials, insurance trade associations, and the presidential administration have all called for regulations that insert poison pills into ACA implementation. Rather than repealing the law, some officials advocate ignoring or perverting various provisions of the ACA.
Proposals to expand the use of lightly regulated short-term, limited-benefit health insurance policies do not call for a statutory amendment to the ACA.
The radical officials simply channel the governors of the Confederate rebellion and propose nullifying the ACA limits on the duration of the low-value policies. When short-term policies are expanded to a term of one year, they become unregulated, alternative, ACA-compliant policies. These political actors call for nullification or twisting of an existing statute, which is not consistent with constitutional democracy.
Un-group
The American system of healthcare financing, anchored by group health insurance policies linked to employer sponsors, became established as a means to evade wage and price controls during World War II. The government viewed employee benefits as separate from wages, so employers used several kinds of insurance benefits to attract employees.
This system worked well for nearly 40 years. Government augmented the system with Medicare and Medicaid because elderly and poor individuals found it difficult to obtain reputable individual coverage. Then the American economy moved away from giant corporations that employed large numbers of workers, and this undermined the healthcare financing framework that relied on group health insurance tied to employment.
Over the past 30 years, individual health products have expanded market share. In recent years the individual health insurance market has topped 22 million people. Few of these presumably informed consumers understood insurance.
Insurance mechanisms transfer a commodity that we call risk, which cannot be seen, smelled, tasted or heard, and can be measured only through mathematical calculation. The vast majority of Americans have no background in measuring the weight of risk generated by financial losses from healthcare costs.
Consumers just want something called “affordable health insurance.” For decades, insurance carriers defined what that term meant, which did not always result in transfer and distribution of the risk of financial loss.
Consider the situation in terms of a Monty Python-style comedy skit. Think of a John Cleese type playing a shopper who enters a hardware store to buy a screwdriver. The shopper engages a clerk, perhaps played by Michael Palin, who will show the shopper only his inventory of hammers—at 20% off!
Shopper: But are you sure this will work to drive screws?
Clerk: It’s much cheaper than those old-style tools you asked for and we offer hammers at a 20% discount!
Shopper: But it works for turning screws?
Clerk: Well, you don’t use it for very long, and it’s much cheaper than the normal price!
Shopper: But if I buy this hammer at 20% off and I can’t turn a screw with it, didn’t I really pay 100% too much?
Clerk: Communist! Get out of my store!
The drafters of the ACA attempted to define what a health insurance policy is. The drafters understood that many carriers designed products with so many exemptions that the product could not qualify as an insurance mechanism.
Bells and whistles?
At the center of these efforts is the “contra-statutory” expansion of an ACA provision that deals with short-term policies, which would allow carriers to evade regulation of policy design and pricing. Furthermore, the expansion appears aimed at undermining the insurance pool, which would mean a return to 40 million or more Americans living without health insurance.
And that ejection from the insured pool raises prices for those left behind, leading to more ejections and higher prices. Welcome to the death spiral.
The ACA provides for these short-term, limited-benefit products as a means of bridging the gap between no coverage and full coverage. The provision exempts the temporary products from many regulatory requirements that govern product design and pricing.
By changing the regulatory definition of short term from three months to one year, federal officials could undermine the entire benefit and pricing framework of the ACA. States that move to make that change before federal officials do will simply channel the Confederacy and treat the U.S. Constitution with contempt.
Advocates for expanding the use of short-term, limited-duration health insurance policies—and there are plenty of them—argue that the products provide an affordable alternative to ACA-compliant plans.
Spokespersons who defend the move toward contra-statutory health products argue that the ACA loaded up health insurance products with bells and whistles that many consumers neither want nor can afford. Let them buy a hammer to drive screws at 20% off!
Let’s look at one of these bells and whistles. The ACA prohibits “rescission”—insurers’ technical term for an action that consumers call a ripoff. Under a rescission, a carrier denies coverage for claims after the subscriber or policyholder submits them, thus returning the risk of financial loss to the consumer after the fact.
Regulatory provisions that prohibit the use of rescission exempt situations where the subscriber knowingly submits false or misleading information. The ACA does not allow fraud by the subscriber; without the ACA rescission prohibitions, however, carriers may commit ex post facto fraud by walking away from sick people.
In addition to the prohibition against rescission, the ACA exempts short-term, limited-benefit products from the law’s prohibitions against the following methods of avoiding risk: pre-existing condition exclusions; lifetime benefit caps; exemptions for maternity care and other women’s healthcare costs; exemptions of prescription drug coverage.
The ACA includes these product design and pricing requirements to ensure that products sold as health insurance conform with the definition of an insurance mechanism: the transfer and distribution of the risk of financial loss. Without these legal provisions, we know from experience that, left to their own devices, some carriers will offer just about any stack of paper and call it a health insurance policy.
Hey, Jack, that’s a nice-looking cow—want to trade her for some magic beans?
Dirty secret
Those of us who have worked in the insurance industry for decades should show the strength to admit a dirty little secret: These short-term health insurance products are not very effective insurance mechanisms. The products do not move risk; therefore, they are only a pretense of insurance coverage.
If we are honest with ourselves, we know that many of the products sold as short-term, limited-duration policies provide only illusory benefits. If sold to a healthy individual, the illusion of coverage may be all they ever want. At least until an unusual financial loss related to healthcare besets them.
An insurance mechanism transfers and spreads the risk of financial loss. These short-term products do not move much risk. As insurance mechanisms, the features of these products roughly equate to the performance specifications of those little spare tires that come in new cars.
In the past several years, these products “saved” the consumer only 20% of the price of a real health insurance policy—and yet the consumer received so much less.
On March 29 of this year, the Commonwealth Fund published a report that identifies some policy types that slip through loopholes in the ACA: short-term, limited-duration policies; association health plans (AHPs); healthcare sharing ministries (HCSMs); and transitional policies tendered between 2010 and 2014.
“Prior to health reform, insurers in the individual market had wide latitude to deny coverage, charge an unaffordable premium, or limit benefits based on a person’s medical history,” according to the report.
In other words, carriers designed individual health “insurance” products to avoid risk through contractual provisions and pricing. An insurance mechanism transfers and spreads the risk of financial loss; therefore, those individual policies bore less and less resemblance to insurance before the ACA.
The report continues, “As a consequence, individual market health insurance routinely proved inadequate for consumers’ health and financial needs and was often inaccessible to those with even minor health problems.”
A National Public Radio story cites National Association of Insurance Commissioners (NAIC) data to explain that the move toward these unregulated short-term policies has accelerated.
“Short-term plans serve a tiny but growing proportion of the roughly 22 million people who have coverage on the individual market. At the end of 2013, before the health law’s major reforms took effect, there were approximately 108,800 people covered by these policies, which earned premiums
of $97.5 million. Two years later, roughly 148,100 people had short-term plans, and premium earnings had grown to $160.5 million.”
In February of this year, the Urban Institute issued a report that warns about the deleterious impact of short-term policies on the insurance pool: “The introduction of expanded short-term, limited-duration policies, consistent with proposed regulations, would increase the number of people without minimum essential coverage by 2.5 million in 2019. Of the 36.9 million people without minimum essential coverage, 32.6 million would have no coverage at all (completely uninsured), and 4.2 million would enroll in expanded short-term, limited-duration plans.”
Trust
Encouraged by a presidential administration that appears driven to join Grant, Harding, and Nixon in the list of ethically bankrupt presidencies, some officials want to extend the short-term policies’ duration to a full year.
As such, these policies would provide a low-cost (and low-value) alternative to products governed by ACA guidelines. Those policies provide something called “insurance” at a discounted price, which allows carriers to cherry-pick young and healthy people from the general pool—then drop them when they start to generate claims.
Some steely-eyed lobbyists and commentators will welcome the damage done to the ACA insurance pool. For philosophical or political reasons, they want the system to fail. They might just get what they want.
Cherry picking destroys insurance pools, which results in failed insurance mechanisms. Such failures break trust with the public, and the business of insurance depends on public trust.
We need to think about trust before we breach it.
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.
