How the ACA Legal Challenge Could Hurt Insurers and the Insured

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Drexel's Robert Field and Katherine Hempstead of the Robert Wood Johnson Foundation discuss the Republican-led legal challenge facing the ACA.

Health insurance costs could increase for people with pre-existing medical conditions, if a lawsuit filed in February in a Texas federal court has its way. It could also limit their options to secure health insurance if the court verdict takes away existing protections of “guaranteed coverage” and “community ratings” that offer uniform premiums.

The case is now in the spotlight because the Justice Department earlier this month said it would not defend the ACA in the lawsuit, in a rare departure from established practice of the government protecting existing statutes. Essentially, that action by the Trump administration would leave those affected to fend for themselves. The Justice Department’s move also brings uncertainty to insurance companies at a time when they are busy determining premium levels for 2019, and the lawsuit could take years as the challenge may head for the Supreme Court before a final decision emerges, according to experts at Wharton and elsewhere.

A group of 20 Republican-led states has filed the suit, which contends that the entire 2010 Affordable Care Act is unconstitutional because the 2017 Tax Cuts and Jobs Act removed the tax penalty for those failing to comply with a mandate to buy health insurance. In the ensuing partisan divide, a group of 17 Democratic-led states filed a brief the same day in the Texas court, seeking to preserve the ACA.

The true impact of a court ruling that strips away those two provisions will be visible only when insurers adjust their coverage policies and premiums. “The real issue, if there is a decision, is what the court or the [Trump] administration will say about any transition from community rating/guaranteed issue to some alternative, and over what time period,” said Mark Pauly, Wharton professor of health care management. “If it continues to progress, more insurers will pull out of this tiny and unattractive market no matter what the final outcome.”

The guaranteed coverage provision ensures that insurers cannot deny coverage to individuals regardless of their health status, age, gender and other factors. Under the community rating provision, people in a specific geographic area would get uniform premiums, again, regardless of their health status. A New York Times report captures the potential impact: “Without guaranteed issue, a customer with multiple sclerosis could be denied health insurance. Without community rating, a customer with acne could be charged a much higher price than one without.”

Uncertainty over Coverage and Premiums

According to Pauly, insurance companies want policy predictability above all else. “Insurers can sell insurance in any regulatory regime, but regulation has to be stable – which federal regulation … is not,” he said. “Politics can kill insurance.”

Pauly noted that if insurers are allowed to exclude or charge higher premiums to high- risk individuals, the premiums for most people would fall. “But they cannot set premiums for 2019 in the exchanges without knowing what the rules will be then.”

As insurers plan for 2019, they have to decide if they would participate in specific markets, and what premiums they would charge. “Insurers hate uncertainty more than anything,” said Robert Field, professor of law, and health management and policy at Drexel University, who is also a lecturer in Wharton’s health care management department. “So this [lawsuit] just makes the markets that much less attractive to them.”

“Insurers can sell insurance in any regulatory regime, but regulation has to be stable – which federal regulation … is not. Politics can kill insurance.”–Mark Pauly

Field pointed out that when Congress repealed the individual mandate in the Tax Cuts and Jobs Act, “[it] chose not to repeal” the provisions for guaranteed coverage and community ratings. However, with the Republican-led case seeking to remove those provisions, insurers face uncertainty pending a decision, he said. “The more important effect is how much it disrupts the markets – and this seems like another attempt to spook the insurance companies.”

Field pointed out that the insurance companies are against the lawsuit. “They see it being in chaos, and they see the [health care insurance] exchanges, which have turned into a decent business opportunity for them, going away.” As it happens, nearly 12 million people signed up for coverage under the exchanges for 2018, representing a drop of 400,000 people but not as much as was predicted, as a Washington Post report noted.

Even if the court strikes down the provisions of guaranteed coverage and community ratings, “it becomes very difficult to figure out what that market would look like,” said Katherine Hempstead, senior adviser at the Robert Wood Johnson Foundation. “[That is] because the other components of the ACA like premium tax credits and the exchanges would ostensibly still be in place,” she added. “Anything that seeks to undermine these provisions of the ACA is not good news for people with pre-existing conditions.”

Hempstead noted that the insurance industry is already facing uncertainty on other fronts. “There’s already a couple of curveballs this year, one of them being the still pending release of the rules on short term and association health plans,” she said. “People don’t know what kinds of plans may be joining ACA-compliant plans in the market and what the timing of that is.” She expected insurers to also price in the repeal of the individual mandate, and said they may have already done that to a certain extent last year.

Field and Hempstead spoke about the implications of the lawsuit on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Potential Impact on Premiums

How bad could the outcome of the lawsuit get? “It is a threat to the market that was built after the ACA but, in the worst case, the market could return to what existed before the ACA that still covered millions of people, many of them high-risks — but probably not as many high-risks,” said Pauly. “The total size of this market would shrink if premium subsidies went away, but that is not the issue – as yet.”

Pauly noted that the ACA subsidizes the premium for people who earn below 400% of the federal poverty level (the 2018 federal poverty level is at $12,140 for an individual, and 400% of that is $48,560). High-risk people who earn below that level would not be affected by higher premiums insurers may charge them because they have subsidy protections, and only the subsidy cost to the taxpayers would go up, he said.

“The only group that would experience higher premiums are high-risk people with incomes above 400% [of the federal poverty level],” said Pauly. “[However], the total percentage of such higher income people among the uninsured (including low risks) is only 6%. So only a tiny fraction of the uninsured would be at risk for high premiums or being turned down for insurance.” He also noted that the Trump administration might want to change the method of subsidizing premiums in response to the lawsuit’s outcome, but said that that would be harder to achieve.

If a court decision strips away the two protections (guaranteed issue and community ratings), it would spare most high-risk people who have group insurance or individual insurance, because they are protected by guarantees that they cannot be charged higher premiums, Pauly noted. For those who are uninsured at current individual premiums, “it will not matter if premiums are higher for the insurance they were not going to buy anyway,” he added. “[However,] it will be harder for high-risk individuals who were just about to buy coverage if nothing replaces it — but Republicans have talked about subsidized high-risk pools as a [better] substitute.”

Internal Republican Divide

Hempstead noted that the lawsuit has received a “pretty lukewarm reaction” from other Republicans. “It seems like an exploding cigar and is not necessarily going to be helpful for them, especially with the midterm elections,” she said. Many Republicans do not want to revisit issues such as coverage for people with pre-existing conditions and community ratings “that are the most popular with voters,” she added. “So I’m not so sure this is a smart move for them.”

According to Hempstead, the Republican-led states opposed to the ACA may have mishandled their strategies. She said she wondered “if they’re actually afraid to succeed, because they really might not want to deal with that world, either.” She noted that “some of the states that are the most vociferously anti-ACA have done so many terrible things to their own markets and have created a lot of self-inflicted wounds.”

“It may turn out to be that your health care will depend on what state you live in.” –Robert Field

Hempstead said those states “have permitted several pre-ACA insurance products to stay on the books, allowed sales of different kinds of short-term plans, not extended Medicaid and made a series of decisions that have created bad outcomes in their own states.” At the same time, other Democratic-led states have lower premiums “and are doing a lot better,” she added. Added Field: “It reinforces my belief that this is really about energizing the base and less about implementing actual policy.”

Even if the ACA’s individual mandate has proved divisive, Field pointed to other positive features of the law such as Medicaid expansion, and access to bio-similars and generic versions of specialty drugs. Insurance companies see Medicaid expansion as “a key business opportunity,” while changes in reimbursements to doctors and hospitals encourage them to improve efficiencies and deliver higher quality, he added.

Hempstead agreed with Field. “There are so many other aspects to the ACA that the idea that you’re going to ‘pull it out root and branch’ … is not credible,” she said. She predicted difficulties in regulating a market that would emerge in that scenario. “Even if [the Republican-led states] were able to succeed and they ended up with an individual market that had tax credits and exchanges, but no requirement that [isurers] offer coverage that’s guaranteed issue and no requirement of community rating, I would say good luck to the regulators. I don’t really know how you would manage a market like that.”

One big unknown is the fate of short-term insurance plans and how insurance buyers might view those. “A lot of the repeal-replace proposals did involve making it easier for people to buy coverage that was less good,” Hempstead said. “Over time, people are starting to realize that is inferior coverage.”

Field agreed and said that “the short-term policies with minimal coverage” may hurt insurers’ profits as well. “We see people buying coverage and then dropping it, and then picking it up again when they get sick. How serious is that for the bottom lines of insurers?” he asked. However, even with the uncertainty ahead, he did not see insurers deciding to walk away from markets. “Even with all the turmoil, it seems like that isn’t happening.”

Relative Stability Foreseen

Even as the lawsuit has rattled the industry, Hempstead did not expect it to cause insurers to scramble in and out of markets in the short run. She said the individual market is “cruising at a lower altitude than people thought and hoped it would, but I don’t think it’s terribly unstable right now.” In fact, the year ahead could see new insurers offering policies. “I think we’re going to see some entry of carriers this year, because many carriers had a good year last year.” The exchanges serve a market made up largely of individuals who get premium subsidies, and that population continues to be underserved, she added.

While last year’s filing season was “very rocky with lots of exits” by insurers, the coming year offers a more “stable environment” for them, she said. For sure, the latest lawsuit brings uncertainty, and while “they’re not shrugging it off, they’re proceeding and filing their plans,” she added. “I don’t think we’re going to see anybody pull out because of this news.”

“It seems like an exploding cigar and is not necessarily going to be helpful for [the Republicans], especially with the midterm elections.” –Katherine Hempstead

Hempstead expected many states to insist on regulating their individual marketplaces with comprehensive policies with the provisions of guaranteed issuance and community rating. While states like Nebraska or Wyoming might not do that, she expected states with large populations, like New York and New Jersey, to set down their own terms, with support from the insurance carriers and other stakeholders in the health care system. “Everybody’s going to say, ‘Don’t blow up our market.’” Field saw the emergence of “a two-tier health care system – red [states] and blue [states].” He noted that a couple of Democratic-led states have already imposed their own state-level mandates, and that most Democratic-led states had their own exchanges that are doing much better than the federal exchange. “It may turn out to be that your health care will depend on what state you live in.”

No Quick Resolution

The Republican-led lawsuit and the Justice Department explained why they felt the ACA could not stand without the individual mandate and penalty. “Without the ‘essential’ mandate, coverage will decrease, premiums will rise, and markets will become irrational,” the lawsuit contends. The Justice Department agreed that the individual mandate with the penalty was “essential” to the operation of the guaranteed-issue and community-rating provisions, “because otherwise individuals could wait until they become sick to purchase insurance, thus driving up premiums for everyone else.”

While the Justice Department backs the repeal of the guaranteed coverage and community rating provisions, it has not sought to dismantle the ACA in its entirety by delinking them from the other features of the statute, such as Medicaid expansion.

Field said it is “highly unusual” for the Trump administration to decide not to defend the ACA in the lawsuit. But he noted the partisan aspect in the case. “A Republican attorney general is bringing the case, and Democratic attorneys general are fighting it.”

At the same time, Field said he could not see why the case is necessary in the first place. “It would be hard for me to imagine a more frivolous lawsuit,” he said. “The basis for the claim is that because the mandate penalty was taken away by Congress, the mandate is unconstitutional. But the mandate doesn’t exist without a penalty. So how can something that doesn’t exist that’s been repealed be unconstitutional?” Added Pauly: “I am not a lawyer, though it seems weak on common sense grounds. But most of the legal decisions about the ACA have defied common sense.”

Hempstead forecast “a long term question mark” over the case, and predicted “it will most likely be tied up in court for years.” Field agreed, and said he expects it to head to the Supreme Court.

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