On July 22, the U.S. Court of Appeals for Washington D.C. ruled that the Affordable Care Act limits subsidies to those states that established their own health insurance exchanges. While much of the resulting media guesswork has focused on the ruling’s prospects for survival, conjecture regarding what happens if the ruling is implemented has been more restrained. This restraint is peculiar given that this decision, should it survive an appeal by the Obama administration, could transform the market for privately purchased health insurance as much as the Affordable Care Act has.
To understand how that transformation might occur, we need to consider first the health insurance premiums for Affordable Care Act (ACA) compliant health plans. Due to a combination of factors including broader coverage requirements and the elimination of health status as a factor in insurance applications, the ACA produced a more expensive health insurance market than the pre-reform market it replaced. For people qualifying for subsidies, these costs are masked to a large degree. The Department of Health and Human Services reported that for the subsidized enrollees on the federal exchange, premiums were reduced from an unsubsidized average of $346 a month to a subsidized average of $82 per month. The elimination of health insurance subsidies in the 36 federal exchange states would increase both premiums and the uninsured population but could also serve as an engine of innovation in health insurance, politically as well as commercially.
One of the salient characteristics of the Affordable Care Act is its uneven distribution of health insurance improvements across the American population. Lower premiums apply to some incomes but not others. Some people are acquiring coverage for the first time while others have had existing coverage cancelled or face new coverage with a narrower network of healthcare providers. Should Democrats decide that compromising with Republicans is worth the return of subsidies to federal exchange states, there is the possibility that we could see new health reform measures that will bring improvements to a much wider population. Telemedicine is very promising in this regard. In many situations telemedicine’s internet-mediated care can produce substantially lower costs per patient than traditional face-to-face visits, improve the timeliness of care, and increase customer satisfaction. Unfortunately, state laws can prevent a patient in one state from receiving telemedicine services from a doctor in another state unless the doctor has medical licenses in both states. A federal law that establishes national telemedical qualifications and licensure would be a milestone in reforming American healthcare and lowering its attendant costs.
From a commercial perspective, the disappearance of subsidies for individually purchased health plans presents several opportunities for health insurance re-design. Traditional health plans will still be bound by Essential Health Benefit coverage requirements and actuarial values governing out-of-pocket obligations. However, the issue of premium affordability may give insurers adequate public support to get Congressional approval for a new, lower cost “copper” health plan design. This copper plan would have lower premiums but higher out-of-pocket costs than the current entry-level bronze plan under the ACA.
Just as the absence of subsidies may drive some cost-conscious consumers to copper plans, others may explore the short-term health insurance market. In turn, this market may respond with more diverse product offerings at a wider selection of price points below ACA-compliant health plans. Short-term plans, which must be reapplied for every 6 to 12 months, are not bound by the ACA’s Essential Health Benefit requirements or minimum actuarial value and, therefore, have more freedom to create plan designs that produce less expensive premiums. Inasmuch as short-term plans still use medical underwriting (as opposed to ACA-compliant plans), they are likely to attract healthier applicants from the 4.7 million losing subsidies since those people with poor health and chronic conditions are less likely to have a short-term health plan application approved.
In contrast to the opportunities for copper plans and short-term plans, smaller insurers such as CO-OPs who are heavily dependent on exchanges for marketing seem particularly vulnerable if subsidies in federal exchange states are disallowed. Aside from the messy matter of recovering money for subsidies if they are disallowed, there is the problem that their premiums will face greater price scrutiny and they will enroll fewer people due to the absence of subsidies. This would lead to smaller enrollment pools and less leverage with healthcare providers regarding their charges for medical services. Less leverage would likely result in higher medical costs for the health plan and, eventually, higher premiums for its enrollees. This cycle could lead to the collapse of some CO-OPs.
Should the D.C. appellate decision survive the Supreme Court, the last and perhaps most important healthcare innovation will be greater participation by the public. Public transparency has not been a hallmark of the passage of the Affordable Care Act nor its implementation. Should the decision on federal exchange subsidies become the law of the land resulting in new ideas from politicians and companies, these new ideas will face a more engaged and critical populace that, in a democracy, is never a bad thing.
Coleman is the head of Research & Data at HealthPocket, a free website that compares and ranks all health insurance plans available to an individual, family, or small business to allow consumers to make their best health plan decision and reduce their out of pocket costs. Learn more at www.HealthPocket.com.