May 22, 2013

Patient Protection and Affordable Care Act; Health Insurance Market Rules; Rate Review

Summary

This proposed rule would implement the Affordable Care Act’s policies related to health insurance premiums, guaranteed availability, guaranteed renewability, risk pools, and catastrophic plans.

Additional details
Agency
Department of Health and Human Services
Regulatory Identification Number
0938-AR40
Rule Publication Date
11/26/2012
Comment Closing Date
12/26/2012
Dollar Year
2012 (millions)
Time Horizon (Years)
2013-2017

RULE SUMMARY

This proposed rule would implement the Affordable Care Act’s policies related to health insurance premiums, guaranteed availability, guaranteed renewability, risk pools, and catastrophic plans. The proposed rule allows health insurance issuers to vary premium rates for health insurance coverage in the individual and small group markets based on a limited set of specified factors: (1) whether the plan or coverage applies to an individual or family; (2) rating area; (3) age, limited to a variation of 3:1 for adults; and (4) tobacco use, limited to a variation of 1:5. The proposed rule also defines catastrophic plans to include preventative coverage.  

COMMENTARY

Although there is no formal model presented, the rule appears to assume that the penalty (tax) associated with no health-care insurance will cause enough low-risk individuals to enroll in a health care insurance plan in order to offset the high-risk individuals who will enroll given the lower premiums available to high-risk individuals under the new rules. Unfortunately, the rule fails to report the current rate premium differences by age or the current age cost curve used by health insurance issuers, so there is no information about how prices might change by age under the new rule. I would recommend that the rule report how various states regulate their age cost curves. It would also be helpful to see the shape of the age cost curves in states that do not set limits on how health care insurers set their age cost curves. The rule also lists a limit to the tobacco premium, yet it does not list what this premium is in various states. In addition, the rule limits states to seven geographic risk pool markets because that is the maximum currently allowed in any state: NJ, MA, and OR. Yet these pools are endogenous to the state rules, and so it may make sense to allow states that are large or have a large number of medical savings accounts (MSAs) to have more geographic market pools. Given the lack of an adequate analysis, one must wonder if the chosen regulation was the only one given true consideration and if the RIA was completed purely as a hoop to jump through rather than as an effective tool to aid in the process of deciding on the proper regulatory response. And, finally, it appears that there was only a 30-day comment period.

MONETIZED COSTS & BENEFITS (AS REPORTED BY AGENCY)

Dollar Year
2012 (millions)
 
Time Horizon (Years)
2013-2017
 
Discount Rates
3%
7%
Expected Costs (Annualized)
16
16
Expected Benefits (Annualized)
Not Reported by Agency
Not Reported by Agency
Expected Costs (Total)
Not Reported by Agency
Not Reported by Agency
Expected Benefits (Total)
Not Reported by Agency
Not Reported by Agency
Net Benefits (Annualized)
Not Reported by Agency
Not Reported by Agency
Net Benefits (Total)
Not Reported by Agency
Not Reported by Agency

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
At the time of this report, regulations.gov mistakenly reports that the RIN has not been assigned; as such, an RIN search does not produce the rule. A keyword search on regulations.gov does produce the rule. The HHS website directs all rule searches to regulations.gov. The rule was easy to find using both a keyword search and an RIN search using Google.
4/5
2. How verifiable are the data used in the analysis?
Sources for all data are provided but not necessarily linked. Almost all are verifiable. Many data are taken from published studies.
3/5
3. How verifiable are the models and assumptions used in the analysis?
There really isn't a model employed in the analysis. It is assumed that by limiting margins on which to assess risk, customers will be able to more easily compare alternative health insurance options and increase participation of high-risk individuals. Without a model with assumptions, such as the elasticity of demand of insurance in the face of a penalty (tax), one is unable to determine whether the rule will have the desired effect.
1/5
4. Was the analysis comprehensible to an informed layperson?
The analysis, if it can be called such, should be comprehensible to most laypersons. This is due mostly to the fact that the proposed-rule writers fail to provide any detailed analysis of what these rules intend to address and how these new regulations will actually address them. It is as if the rule were written by a layperson rather than an economist. Given the lack of analysis, it is difficult for anyone to understand how one can conclude that "the benefits of this proposed regulatory action would justify the costs" (p. 70605).
3/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
2/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
For those currently without coverage due to high cost (associated with health status, gender, etc.) or due to denial (due to health status), the regulation is argued to guarantee health insurance access at lower costs, allowing for greater health-care access, improved health, lower out-of-pocket medical costs, and greater financial stability.
4/5
Does the analysis identify how these outcomes are to be measured?
The analysis seems to largely assume increased insurance access—as measured by a reduction in the proportion of the population who are uninsured—will lead to improved health without adequately modeling or measuring improved health. "Lower rates for individuals in the individual and small group market who are older and/or in relatively poor health, and women; and potentially higher rates for some young men which will be mitigated by provisions such as premium tax credits, risk stabilization programs, access to catastrophic plans, and the minimum coverage provision" (p. 70606).
3/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
The regulation is expected to increase the number of insured individuals, providing wider access to medical care and improving the health and financial stability of those who gain coverage. However, the theory behind this expectation is highly questionable. The rule raises the rate on low-risk individuals, yet assumes these individuals will pay these higher rates, even though they are not currently buying insurance at the current lower rate. This rule relies on another component of the Affordable Care Act not analyzed in this proposed rule: the requirement to purchase qualified insurance. Without discussing behavior of low-risk individuals facing the penalty (tax) associated with failure to purchase insurance, there is no coherent theory as to how this ultimately increases insurance enrollment.
2/5
Does the analysis present credible empirical support for the theory?
Several peer-reviewed studies concerning the relationship between health insurance and health outcomes are cited and are supportive of the agency’s claims. In terms of insurance coverage, empirical support is derived from a 2006 Massachusetts rule. By 2011, only 3.4 percent of Massachusetts residents were uninsured, compared to 15.7 percent nationally. However, it is not stated what the uninsured rate was in Massachusetts in 2005, so it is unclear as to what the impact of the rule is on insurance rates. Furthermore, the RIA does not discuss the specifics of the analysis conducted in these studies; rather, the key conclusions are mentioned as evidence of its claims. For example, it is unclear as to whether or not the analysis includes the elderly or those with low incomes who are eligible, but not enrolled, in the percent insured, which could easily confound the causal conclusions given changes in Medicare, Medicaid, and other programs over the sample period.
2/5
Does the analysis adequately assess uncertainty about the outcomes?
The outcomes are discussed in a purely qualitative manner; no estimate of how many more people will gain insurance coverage and to what extent such coverage will improve their well-being is provided. Likewise, the analysis does not address the uncertainty of the outcomes. It is admitted that a lack of data does not permit a quantification of the impacts, and the lack of specifics does suggest uncertainty in the outcomes.
1/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
2/5
Does the analysis identify a market failure or other systemic problem?
According to the rule, "The current individual and small group health insurance markets generally are viewed as dysfunctional, placing consumers at a disadvantage due to the high cost of health insurance coverage, resulting from factors such as lack of competition, adverse selection, and limited transparency. In addition to affordability concerns, many people have difficulty finding and enrolling in coverage options. If employer-based coverage is not available, a person may find that affordable individual market coverage is not available due to medical underwriting" (p.70605). However, no support or evidence is provided for these claims. The motivation seems to be founded on the passage of the Affordable Care Act rather than on market failure grounds.
4/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
No theory of the systemic problem is provided. Rather, passing mentions to market failures are made without explaining the source of these issues. For instance, the proposed rule mentions that adverse selection may result in low-risk individuals not purchasing insurance causing rates to be high—high enough to cause other low-risk individuals to exit the market. "In addition, people previously enrolled in individual insurance with high health risks or costs are often further blocked from access to the market as they are put into ‘closed blocks’ of business that are not open to new enrollees, and subject to large premium increases each year" (p. 70586). The proposed rule only mentions that this adverse selection is more systemic because of rules governing what health insurance policies must cover.
2/5
Does the analysis present credible empirical support for the theory?
The proposed rule repeatedly supports the adverse selection theory by citing that in 2011, approximately 48.6 million people were uninsured in the United States, while only around 10.8 million were enrolled in the individual market. The claim is that this is a small fraction of the target market and "in part reflects how expensive the product is relative to its value, people’s resources, and how difficult it is for many people to access coverage" (p.70586). It does not report prices or whether customers might be able to afford the coverage.
1/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
It is not explained in relation to the above-mentioned claimed systemic problems, but there is some—although very little—consideration to the uncertainty of the problem. For example, it cites evidence from the GAO that between 36 and 122 million adults (20–66 percent) aged 19–64 have medical conditions that could result in coverage denial.
1/5
7. How well does the analysis assess the effectiveness of alternative approaches?
0/5
Does the analysis enumerate other alternatives to address the problem?
It is stated that "allowing insurers to set their own rating curve," "including a tobacco component for the rating curve and keeping the rating factor for tobacco use separate from the wellness program rules" were considered by the CMS. No formal description or analysis is provided for these alternatives. Ultimately, the analysis does not give adequate consideration to other approaches to addressing the problem and then proceeds to severely restrict the variation in the chosen approach. It is unclear if there are any true alternatives to the proposed rule addressed here. A true alternative would be to allow states to set the required ratios independently.
1/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
The alternatives are only slight variants of the proposed rule with no substantive difference.
0/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
A short narrative is provided, stating without support that the chosen rule provides for improved risk adjustment, transparency, and insurer flexibility. However, there is no analysis provided for any alternatives.
0/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
No specific mention of the baseline is provided. It seems as though the analysis assumes that no other states will attempt to address the health insurance issue in a timely and creative manner and the status quo will remain. However, given the lack of detail, the choice of baseline is uncertain.
0/5
8. How well does the analysis assess costs and benefits?
2/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
The analysis of the costs lacks breadth and depth. Other than a short narrative, no analysis of the alternatives is provided, and no estimates of the costs are provided for the alternatives. The rule mentions the one-time administrative costs of the rule ($16 million), but the agency fails to perform any analysis of the costs that will be faced by insurers and their customers on an annual basis. Without this information, one cannot estimate whether this method of regulation or the nonexistent alternatives maximize welfare.
1/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
The proposed rule does a poor job of identifying expenditures and seeks to avoid mentioning higher expenditures of any kind. It mentions that issuers of insurance will incur greater costs but states that "potentially higher rates for some young men which will be mitigated by provisions such as premium tax credits, risk stabilization programs, access to catastrophic plans, and the minimum coverage provision" (p.70606).
2/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
According to CBO and JCT, average premium rates in the individual market would fall by 7–10 percent by 2016, ceteris paribus. But this rule changes a number of structures. The characteristics of people in the large and small group markets would change slightly, and projected premium rate changes would range from a 1 percent decrease to a 2 percent increase. Given that the rule creates an Effective Rate Review Program, it looks like the agency recognizes that its regulation will result in higher insurance premiums and higher rate increases in premiums in the future.
3/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
The potential increase in the occurrence of adverse selection issues in that high-risk individuals will be insured is discussed in narrative form. The costs associated with an increase in administrative duties as insurers seek approval for rate increases is addressed explicitly (although still briefly) and is estimated at $16 million. The analysis seems to focus on the insurance market but spends little time looking at how the health-care providers may respond to insurance issuers that are now required to meet these new regulations.
3/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Only a point estimate of the administrative cost is presented. No other costs are estimated, let alone presented with uncertainty.
0/5
Does the analysis identify the alternative that maximizes net benefits?
No, but "in accordance with Executive Order 12866, CMS expects that the benefits of this proposed regulatory action would justify the costs" (p. 70605).
0/5
Does the analysis identify the cost-effectiveness of each alternative considered?
No. Only the change in administrative costs for the chosen alternative is estimated. No benefits or other associated costs are estimated.
0/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
Grudgingly admits that younger individuals, those in relatively good health, and men "potentially" could witness higher rates. The analysis fails to address how these regulations could affect overall prices and utilization of health-care services. The proposed rule notes that states will have to incur the costs of establishing rating areas and age ratings curves.
2/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
Generally, yes. Lower rates for individuals in the individual and small group market who are older and/or in relatively poor health, and women stand to gain.
3/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
No. Given the lack of extensive analysis, it appears that the preferred policy was determined ahead of time. Furthermore, there is evidence to the contrary in that the rule claims repeatedly that it is concerned with affordability, all the while raising the costs associated with providing health insurance.
0/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
The proposed rule fails to quantify many of the potential costs and benefits. No alternatives are presented on which to choose.
0/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
The rule creates an Effective Rate Review Program that will be able to track information about coverage and premiums.
2/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
Again, no discussion is provided concerning any sort of measurement of future performance of the regulation. Given the concentration on the number of uninsured individuals in the motivation for the regulation, it is clear the agency expects to observe a reduction in this figure as a result of the regulation.
1/5
 
Total 20 / 60