For the fifth autumn in a row, the Affordable Care Act (ACA) is spurring waves of health-insurance policy cancellations. As I explained in a recent video and article, some of the most recent cancellations (with more to come in future years) result from an odd and unnecessary regulation that sets up a conflict between the ACA's "metallic tiers" (bronze, silver, etc.) and a phenomenon we can call "actuarial value drift."
To understand the problem, let's begin with some history. In 2010, ACA supporters -- including the president -- told Americans, "If you like your health insurance, you can keep your health insurance." They pointed to the law's "grandfathering" provision, which allowed people to keep existing plans that lacked some ACA bells and whistles.
But in specifying the precise conditions under which you could keep your plan, this regulation virtually guaranteed you couldn't. Its restrictions effectively said, "If you like your insurance, you can keep your insurance -- as long as your employer isn't worried about cost and your insurer doesn't mind losing money."
The White House acknowledged this three months into the ACA, and the grandfathered policies soon began dropping away. Some remain on life support (via administrative delays), along with "grandmothered" policies, an ad hoc variation added to slow the arrival of cancellation notices.
But at least grandfathering cancellations are time-limited; once grandfathered policies are gone, the problem is over. But metallic-tier cancellations will be a permanent fixture, re-emerging every year.
Here's why: Under the ACA, insurers must restrict individual and small-group policies to four narrow tiers of "actuarial value" (AV) -- the average percentage of medical expenses a plan pays. The ranges are bronze (58 to 62 percent), silver (68 to 72 percent), gold (78 to 82 percent), and platinum (88 to 92 percent).
ACA supporters have referred to canceled plans as "subpar." But ironically, while a plan paying 59 percent of medical expenses is okay (because it lies in the ACA-approved bronze range), a plan paying 96 percent of expenses is considered too generous; any plan paying more than 92 percent is forbidden.
Narrow tiers would be bad enough in a static world -- like restricting men's trousers to sizes 18, 28, 38, or 48. Pity the guy with the 33" waist.
But it's even worse. A plan's AV changes over time, partly because the calculation is recalibrated annually by the Department of Health and Human Services (HHS). Annual increases in the ACA's out-of-pocket maximum will push a plan's AV downward. Future medical-care price increases will have a similar effect. The problem may go critical in 2017, when many of the ACA's temporary fixes fall away.
With narrow tiers, AV drift forces insurers to either cancel policies or undergo considerable effort to push them back into compliance. Adjustments may render policies unprofitable. "Fixing" a plan means a new actuarial analysis and a costly, time-consuming process of submitting the amended plan to state and local officials for approval.
AV-drift cancellations will be worse for patients than the grandfathering cancellations. ACA plans have notoriously narrow provider networks, so unlike with earlier cancellations, switching plans nowadays often means switching doctors and hospitals. Even the act of tweaking an existing plan back into compliance may require the insurer to drop some doctors and hospitals from its network. Prepare for recurring news stories about cancer patients losing long-time oncologists.
Why did HHS decide to limit purchasers to such narrow AV bands? Ostensibly, narrow tiers were intended to provide "ease of comparison" -- ironic, given the mass confusion surrounding the exchanges. Commenters warned HHS that AV gaps could cause problems, but the agency decided consumers couldn't handle the range of choices they routinely enjoy in computers and cars and other types of insurance.
Insurance broker and InsureBlog contributor Pat Paule warned early on about AV drift (here and here). He and I co-authored a similar article here. This memo from the University of Virginia shows the somersaults required when a plan drifts out of its tier -- and the negative financial impact on those insured. Duke University's Chris Conover noted that if HHS had defined the tiers without gaps between, the drift problem wouldn't exist.
How big is this problem already, and more important, how much bigger will it get? Regrettably, these questions are impossible to answer, as HHS has not provided adequate ACA data. Insurance expert Robert Laszewski recently noted that we don't even have a reliable estimate of the single most basic number -- the number of people enrolled in ACA plans.