A lengthy report published by the Kaiser Family Foundation predicts widespread market disruption if ACA premium subsidies are lost under King vs. Burwell. Adverse selection, insurers exiting markets, and higher rates are just some of the possibilities.
Healthy consumers will cancel their coverage. Insurers, left to cover a sicker group of customers, would be forced to raise premiums, in a classic adverse selection “death spiral.” Some insurers, fearing they would not be allowed to raise prices to cover costs, would simply exit states if foresee mounting losses.
These are just some of the dire predictions that authors Larry Levitt and Garry Claxton predict in their essay, “Insurance Markets in a Post-King World,” published late yesterday by the Kaiser Family Foundation. Levitt and Claxton are the latest to weigh on what they say will be chaos for consumers, insurers, and state officials if the US Supreme Court accepts the arguments of plaintiffs in King vs. Burwell, which is set for oral arguments on March 4, 2015.
The case hinges on what Congress intended when it drafted the 2010 Patient Protection and Affordable Care Act. Plaintiffs have seized on a drafting error to assert that only those consumers living in the 14 states with their own exchanges can benefit from the premium subsidies called for in the law. As it turned out 34 states rely completely on the federal exchange, HealthCare.gov, and 3 states run exchanges but use HealthCare.gov to calculate the premium subsidy. The IRS has ruled that Congress intended for consumes to receive assistance, no matter where they live.
The stakes are high, as Levitt and Claxton point out. Their perspective spells out how the markets would likely respond in the wake of a ruling that takes subsidies away. Statistics from the US Department of Health and Human Services (HHS) state that 87% of consumers in at-risk states get subsidies, with the average one being $268.
Chaos in the Market
As the authors write, an adverse ruling that allows no grace period would see healthy policyholders begin to cancel coverage within a month of an adverse ruling, which would likely come in June. Insurers, meanwhile, would have already been asked by regulators to submit their proposed 2016 rates without knowing the outcome of King, although many states would make some allowance for this.
The real problem, the authors note, is that as healthy consumers exit the market, insurers will be left with a sicker population and no ability to raise rates before January 1, 2016. “This would trigger a classic adverse selection ‘death spiral,’ where insurers would seek very large premium increases, which in turn would cause the healthier of the remaining enrollees to drop coverage,” they write.
Levitt and Claxton predict that some insurers will simply leave markets where they see losses mounting, even though they would be unable to re-enter for 5 years. Depending on their size and their individual plans for a given market, each insurer will have to weigh whether to stay put or ride out the wave of uncertainty, as some regulators will be more willing to allow rates to go up to cover losses than others.
But without subsidies, keeping rates “affordable,” per the requirements of the ACA, will prove difficult.
Will a Grace Period Matter?
There has been speculation that the justices, knowing the chaos that would ensue if subsidies evaporated overnight, might allow a grace period of 6 to 12 months. This would give Congress time to correct the drafting error or let states without exchanges to create them. Levitt and Claxton reflect on this possibility:
· Governors and legislators who declined to set up exchanges initially might not be inclined to do so; however, they see possibilities in the states that use HealthCare.gov but did expand Medicaid (such as New Jersey, Ohio, and Arizona.)
· Levitt and Claxton see little hope that Congress would fix the ACA language. “It is difficult to imagine that negotiations over those changes both within Congress and with the President could happen quickly enough to prevent insurance market disruption,” they write.
· Setting up exchanges may take longer that the court will estimate, although the process could be eased, they write, if states could make use of federal technology. Also, finances could be a challenge, since states that set up exchanges “were able to access federal start-up grants that are no longer available.”
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