Another Obamacare Fix

The big news of the day is that the Obama administration has announced yet another “fix” for individuals who are having their health insurance policies canceled because they do not comply with the requirements of the Affordable Care Act.

The cancellation letters that millions of Americans were receiving from their insurance companies made headlines several weeks ago, causing many to ask whether President Obama was breaking his promise that “if you like your health plan, you can keep it.” Following the media and political turmoil and a public opinion poll showing the President’s approval rating slipping, the administration announced a “fix” for the problem: insurance companies would be able to renew consumers’ plans in 2014 even if they didn’t comply with the new rules.

However, this solution was subject to state and insurance company approval, and a number of states and carriers decided not to play along – changing the rules at the last minute could throw off their forecasts and cause rates to increase for everyone else, so they declined to participate. Because the administration’s fix wasn’t an option for everybody, yesterday President Obama announced two additional solutions:

Hardship Exemptions – Anyone receiving a cancellation notice is eligible for an exemption from the individual mandate.

Catastrophic Plans
– People whose policies are being canceled have the option of purchasing a catastrophic plan. These plans were originally intended for young adults under the age of 30.

As Politico and practically every other news outlet is reporting, the latest move by the administration doesn’t make the insurance companies very happy. AHIP President Karen Ignagni says that the “rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers.”

In reality, the exemption from the mandate isn’t that big of deal. While it could cause some to forego coverage, people in the insurance industry have argued for years that the mandate penalty isn’t big enough to encourage people to purchase coverage, so the absence of the penalty probably isn’t enough to get people to drop coverage. Plus, these are people who purchased coverage before there was a mandate. They’re upset that their policies are being canceled. They want insurance. They’re not looking for a way around the individual mandate.

The option to purchase catastrophic coverage is a bigger deal. The catastrophic plans are supposed to be “scaled back” policies that don’t include all the bells and whistles of the more comprehensive “metallic” plans, but in reality they’re not that scaled back. They still include all of the essential benefits and still have to comply with the out-of-pocket limits, so the biggest difference in benefits is the actuarial value, which can be lower than 60%. For insurance companies, though, giving people the option of purchase catastrophic coverage could cause adverse selection issues if a lot of people over the age of 30 start opting for these less expensive options. That’s because catastrophic plans are pooled separately from the metallic plans.

As explains in a November 20th article, the ACA “specified that all insured would be grouped in a single risk pool. But Health & Human Services regulations effectively created a separate catastrophic pool primarily for those up to age 30.”

Since individuals who already had health insurance were at least healthy enough to make it through underwriting, insurance companies need them to be part of the bigger risk pool to help offset the costs of older, sicker individuals who will now be signing up for coverage. Pooling them instead with healthy young adults increases the risk for the insurance companies and could cause price increases for everyone else.

The President announced the latest rule change right before the December 23rd deadline for January 1st effective dates and right before heading to Hawaii for a two week vacation.

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