Regulatory Rush Job Deprives Many of Health Insurance Plans They Liked

The media-verse is all a-Twitter with the revelation that the Department of Health and Human Services (HHS) admitted in 2010 that between 40-67 percent of individuals would lose their then-current health insurance plans under the Affordable Care Act (ACA). News coverage focuses on the termination letters sent to hundreds of thousands of holders of individual health insurance policies, along with the substantial premium increases for individuals in the new insurance exchanges. And of course, pundits are pouncing on the stark contrast to the president’s promise that if you like your current health insurance plan, you can keep it—but there’s more to this controversy than what this media coverage conveys.

The root cause of this controversy is a regulation on the “grandfathering” of existing health plans, rushed into place just three months after the ACA’s passage in March 2010. The regulatory rush job also prompted cursory analysis by HHS that requires a careful reading to discern any negative impacts from the ACA. A close inspection of the grandfathering regulation leads to even more shocking revelations: HHS expected the termination of many employer-sponsored plans because they run afoul of the strict requirements, and regulators actually knew that the ACA would increase health insurance premiums.

To prevent this kind of debacle in the future, Congress should require agencies to publish and seek public comment on a thorough analysis of their regulatory options before they make regulatory decisions.

In June 2010, HHS issued the regulation specifying conditions under which existing health plans could be “grandfathered” and hence not subject to all of the new mandates in the ACA. Grandfathered plans would not have to offer the extensive additional coverage the ACA requires new plans to provide, such as childbirth, substance abuse, pediatric vision care, and psychological services.

Previously, individuals who had no need for such coverage, or deemed it too expensive, could opt for cheaper insurance without such coverage. Indeed, HHS analysis admits that “grandfathering could potentially slow the rate of premium growth, depending on the extent to which their current plan does not include the benefits and protections of the new law.”

HHS didn’t calculate how much the participants in grandfathered plans would save, but such a figure would have highlighted the premium increases expected to flow from the ACA’s new mandated coverages. Last year, Duke University health care economist Chris Conover estimated that even if the new mandates cost only $100 per policyholder, grandfathering would save consumers $5.6 billion annually by allowing them to avoid this cost.

But the HHS analysis contains an even more telling admission. Prior to the now oft-quoted discussion of individual policies, the analysis estimated that 39-69 percent of employer plans would no longer be grandfathered by 2013. In other words, between one-third and two-thirds of employers would no longer offer health insurance without costly ACA mandates.

These employer-provided plans would lose grandfathered status because they were expected to make changes in copayments, percentage cost-sharing, or the percentage of premiums covered by the employer that exceed the limits specified by the grandfathering rules. Many of the rules are either extremely narrow or arbitrary. Modest changes policyholders regard as routine could disqualify a plan from being grandfathered.

For example, any change in percentage cost-sharing between the patient and the health plan (“coinsurance”) automatically disqualifies the plan from grandfathered status, even if all other terms of the plan remain the same. HHS declined to adopt a more flexible “actuarial equivalence” standard, which could allow an employer to adjust its health plan as long as it delivered the same dollar value of benefits to participants.

Actuarial equivalence is the concept used in the health care exchanges to determine whether a health plan is labeled “bronze,” “silver,” “gold,” or “platinum.” Yet HHS rejected an actuarial equivalence standard for grandfathered health plans as too complicated, while simultaneously preparing to use actuarial equivalence to regulate insurance plans offered on the exchanges.

Perhaps it’s inevitable that a regulation rushed into place just three months after the ACA’s passage would have substantial problems. Unfortunately, one of the biggest casualties was a transparent accounting of the ACA’s likely effects. Congress could avoid this transparency problem in the future by requiring agencies to publish a thorough analysis of their regulatory options before writing regulations.