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Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2014
Score: 29 / 60
RULE SUMMARY
This regulation implements additional attributes of the Affordable Care Act. Specifically, the regulation addresses two primary concerns: (1) an increase in the number of individuals with health-insurance coverage, and (2) the adverse-selection problem that is expected to result from the Affordable Care Act as a result of the newly enrolled population. Included in the rule are risk adjustment, reinsurance, risk-corridors programs, cost-sharing reductions, user fees for a federally facilitated exchange, advance payments of the premium tax credit, a Federally Facilitated Small-Business Health-Option Program (FF-SHOP), and the medical-loss-ratio program.
COMMENTARY
Whereas many rules associated with the Affordable Care Act either ignore or blatantly deny the potential for adverse-selection problems in the act's provisions, this regulation acknowledges the potential and attempts to minimize the increased risks and uncertainty to the issuers and prevent premium increases in the process. One aspect of this regulation that will not be noticed by many is its effective reduction of competition facing larger, national issuers: "Issuer characteristics, such as size and payment methodology, will also affect administrative costs. In general, national issuers will likely be better prepared for the requirements of risk adjustment than small issuers." In line with standard public-choice theory, larger, established firms tend to benefit from additional regulation on the industry, and it just so happens that the larger firms are also the ones which have a greater capacity for lobbying activity. Ultimately, we will see the market shares of the larger issuers rise—and greater monopoly power—as a result of this rule. The NPRM claims that cost-sharing reductions and advanced payments of the premium tax credit, combined with new insurance-market reforms, will significantly increase the number of individuals with health-insurance coverage. Premium-stabilization programs—risk adjustment, reinsurance, and risk corridors—are expected to protect against adverse selection in the newly enrolled population. The market reforms extend guaranteed-availability protections and prohibit the use of factors such as health status, medical history, gender, and industry of employment to set premium rates. The NPRM is vulnerable to the criticism that, although healthcare costs may fall for protected groups, costs may well increase for the population as a whole as insurers are prohibited from using health indicators to set their business practices over information processing.
MONETIZED COSTS & BENEFITS (AS REPORTED BY AGENCY)
| Dollar Year | 2012 (millions) | |
| Time Horizon (Years) | 5 | |
| Discount Rates | 3% | 7% |
| Expected Costs (Annualized) | 529.56 | 518.85 |
| 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? The regulation can be found on Regulations.gov via a keyword or RIN search. The HHS website provides a link to Regulations.gov, although the regulation cannot be found directly on HHS's webpage. | 4/5 |
| 2. How verifiable are the data used in the analysis? Data used in the analysis are generally well documented with citations to the original sources, which include past RIAs, past government-agency studies, and academic studies. | 3/5 |
| 3. How verifiable are the models and assumptions used in the analysis? While the risk-adjustment model is well documented in relation to past studies, the models and assumptions used in the RIA for the comparison of alternatives are less well documented or completely undocumented. | 3/5 |
| 4. Was the analysis comprehensible to an informed layperson? The analysis is generally comprehensible; however, some aspects get technical, such as the actuarial work, and some sections use more jargon than others. | 3/5 |
Analysis | |
| 5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them? | 3/5 |
| Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life? The overarching goal across all of the various Affordable Care Act–related regulations is to make affordable health insurance available to individuals who lack such access through employer-sponsored coverages. Beyond that, the analysis claims that this specific rule will also "affect the private sector, issuers, and customers, through increased access to health care services including preventative services, decreased uncompensated care, lower premiums, and increased plan (and thereby cost) transparency" (p. 73, 195). As a result, it is argued that greater health will generally be achieved at a lower per-person cost. It does not link this to measured welfare—only to the numbers enrolled. | 4/5 |
| Does the analysis identify how these outcomes are to be measured? Insurance enrollment can easily be tracked, as can the insurance rates charged on the exchanges. Monitoring the mandated and standardized plans available on the exchanges can allow verification of the reduced uncompensated care and other claims, although it is less clear how they will actually follow through with this. No measures of improved health are proposed. | 4/5 |
| Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes? The premium-stabilization programs decrease the risk of financial loss by issuers, thereby decreasing the expected rates to be charged. The cost-sharing-reductions program and advanced-payments program assist low- and moderate-income consumers purchasing health insurance (p. 73, 195). However, less effort is devoted to explaining how the rule should logically lead to improved health: only one study of Medicaid is used to provide some empirical evidence of health benefits of expanded coverage. It offers much assertion but little analysis. | 3/5 |
| Does the analysis present credible empirical support for the theory? The analysis cites a study of expanded Medicaid coverage over a multiyear period which finds evidence of reduced mortality, an increased rate of self-reported health status, and a reduction in cost-related delays in care. Although it examines a different base population, the analysis claims the results of this study can be generalized to include increased access—a claim which is highly questionable. | 2/5 |
| Does the analysis adequately assess uncertainty about the outcomes? The analysis appears to state as a fact that the rule will result in the outcomes promised with little to no uncertainty. Uncertainty is poorly treated. | 0/5 |
| 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? Numerous other mandates from the Affordable Care Act create an adverse-selection problem in that those who participate in the exchanges will be in higher risk categories than the average insured are today. With the greater risk and uncertainty, insurers will probably increase rates without additional government action, although the analysis of this issue is not comprehensive. Thus, the analysis has named a problem that most economists would recognize, but the analysis of this issue is not comprehensive. | 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? New enrollees who participate in the exchanges will be of greater risk on average and will also have greater variance in their associated risk exposure to the insurers. This analysis appears to acknowledge the adverse-selection problem created by the Affordable Care Act that most of the analyses of other Affordable Care Act–related rules appear to ignore or dismiss. It cites moral-hazard and adverse-selection mechanisms in healthcare without much development or detailed application to facts. Low insurance levels are consistent with many causes. | 4/5 |
| Does the analysis present credible empirical support for the theory? It does not really present empirical support. While the theory is generally well accepted in this case, the analysis provides little, if any, empirical support for the existence or size of the adverse-selection problem—at least not directly. One could interpret the estimated amount of transfers in the risk-adjustment program ($45 billion from 2014–2017) as evidence of the problem, for instance. However, this evidence is more about the size of the rule rather than the existence of the problem. | 1/5 |
| Does the analysis adequately assess uncertainty about the existence or size of the problem? No, the analysis asserts that the adverse-selection problem exists due to other parts of the Affordable Care Act and provides point estimates concerning the amounts to be transferred to help alleviate the problem (and these could be interpreted as measures of the size of the problem), but there is no discussion of uncertainty. | 0/5 |
| 7. How well does the analysis assess the effectiveness of alternative approaches? | 2/5 |
| Does the analysis enumerate other alternatives to address the problem? Slight alternatives are discussed in the description of the proposed rule and in the RIA. For instance, adjustments to the risk-adjustment model (cost-sharing-reductions adjustments and reinsurance adjustments) are discussed briefly (p. 73, 138). Such adjustments would possibly produce modified risk-adjustment figures but would not be a true alternative to the type of policy proposed. It is also stated that a quarterly—as opposed to an annual—payment cycle was considered (p. 73, 198). They considered a percentage-of-premium approach in addition to the per-capita approach as well as a condition-based approach for the reinsurance-contributions program (p. 73, 198). While these alternatives are mentioned, little detail is provided about them in the analysis, notwithstanding their enumeration. | 2/5 |
| 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 range of alternatives is very narrow in that nothing outside of the "command and control"–style policy is considered. Ultimately, the alternatives involve the same policy but with a different means to computing the risk adjustment or reimbursement rate. The overarching rule itself would remain intact as proposed; however, the costs and transfer amounts would differ to some degree. | 1/5 |
| Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved? With the exception of one case, the analyis spends no effort commenting on how the alternatives affect the outcome achieved: "[T]he per capita approach [relative to the percentage-of-premium approach] will better enable HHS to maintain the goals of the reinsurance program by providing issuers with a more straightforward approach to reinsurance contributions" (p. 73, 198). | 2/5 |
| 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? While the analysis suggests that without this rule insurance rates will rise (due to adverse selection) and fewer new enrollees than intended will opt into the exchanges, no estimates are provided regarding the extent of this issue. The analysis lacks depth in this regard. | 2/5 |
| 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 does not identify and quantify the incremental costs of all alternatives. The costs of the chosen alternative are identified, including estimates of transfers between issuers in the risk-adjustment programs. Additionally, brief mention of the qualitative-cost comparison (smaller or larger) of the chosen rule and a couple of the alternatives is provided. It measures some costs but these are not linked to incremental change across alternatives. | 2/5 |
| Does the analysis identify all expenditures likely to arise as a result of the regulation? The analysis does a fair job of identifying and attempting to estimate the costs associated with this regulation. Direct costs include the administrative costs to the states, issuers, and exchanges. Transfers from the Treasury and from plans with lower-risk enrollees to plans with higher-risk enrollees are also estimated. The analysis acknowleges its failure to measure the costs of providing additional medical services to newly enrolled individuals and the user fees paid by insurance issuers for the federally facilitated exchange. | 3/5 |
| Does the analysis identify how the regulation would likely affect the prices of goods and services? The purpose of the regulation is to prevent insurance premiums from rising above current levels. However, the analysis fails to address the impact on the medical-services market altogether, including the cost of such services. There is an effort to project the impact of subsidies on premiums. | 2/5 |
| Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation? If the rule is effective in expanding insurance coverage, demand for medical services will certainly rise, particularly given that a high proportion of these new enrollees will be high risk. This aspect is ignored altogether. Changes in behavior on the part of enrollees and insurers as they relate to the cost of providing insurance are addressed to a modest degree. | 1/5 |
| If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis? No consideration is given to uncertainty in the cost estimates. | 0/5 |
| Does the analysis identify the alternative that maximizes net benefits? Qualitative comparisons of costs are addressed in the case of two alternatives and qualitative comparisons of benefits are presented in the case of the third alternative. However, this discussion is deficient and cannot be considered to be a full net-benefits comparison. It presented very little here. | 1/5 |
| Does the analysis identify the cost-effectiveness of each alternative considered? No, only a qualitative cost or benefit comparison is provided for each of the alternatives relative to the chosen rule. The discussion of alternatives is very much lacking. | 0/5 |
| Does the analysis identify all parties who would bear costs and assess the incidence of costs? Costs identified include transfers from the US Treasury and from insurers with low-risk enrollees, and administrative costs to the states, insurers, and exchanges. Reinsurance contributions are likely to raise premiums in the total market by roughly 1% (p. 73, 199). The administrative costs will likely harm smaller insurers more than the larger, national insurers who can spread the costs over a larger number of policies (p. 73, 197). What seems to be lacking is an estimate of the costs to HHS associated with managing these complex programs. Some social groups are identified, such as lower-income users, providers, and insurers, but the incidence remains unexplored. | 3/5 |
| Does the analysis identify all parties who would receive benefits and assess the incidence of benefits? Dollar estimates of benefits are not provided. Consumers are claimed to benefit by an increase in consumer surplus by up to "20 percent of the premium cost of coverage" due to the additional plan choice (p. 73, 202). Due to the reinsurance program, premium decreases in the individual market of between 10 and 15 percent are anticipated (p. 73, 199). Insurers with high-risk enrollees stand to gain in the risk-adjustment program, with much of this benefit passed on to enrollees in the form of lower insurance premiums. | 3/5 |
Use | |
| 9. Does the proposed rule or the RIA present evidence that the agency used the analysis? Given the lack of detail in the description and analysis of the alternatives, it is unclear whether the analysis was used to make an informed decision concerning this rule. With that being said, reasonably valid qualitative statements concerning the alternatives do favor the chosen rule, so it is possible the analysis played a minor role. | 3/5 |
| 10. Did the agency maximize net benefits or explain why it chose another alternative? Net benefits are not computed for any alternative because benefits are not estimated. However, relative costs or benefits (not both) of each alternative with respect to the chosen rule are discussed. They don't make it entirely clear as to why they chose the chosen rule. | 1/5 |
| 11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future? The primary goal of the rule is to stabilize insurance premiums such that the adverse-selection problem resulting from other aspects of the Affordable Care Act don't lead to increasing premiums. As such, they clearly expect relatively stable insurance rates, but they do not discuss what is acceptable and what is not. | 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? While not stated in the analysis, they could clearly monitor insurance premiums to determine whether increases have been observed and to what degree. Similarly, they can monitor the percentage of the population who remain uninsured. One aspect the analysis does discuss is the possible modification of minimum participation rates if higher or lower rates become customary or required by statute on a state-by-state basis so as to not diminish the rule's goals of stable premiums and expanded insurance access. | 1/5 |
| Total | 29 / 60 |
Additional details
- Agency
- Department of Health and Human Services
- Regulatory Identification Number
- 0938-AR51
- Rule Publication Date
- 12/07/2012
- Comment Closing Date
- 12/31/2012
- Dollar Year
- 2012 (millions)
- Time Horizon (Years)
- 5