Insurance Markets in a Post-King World

The Supreme Court is considering a case – King v. Burwell – that challenges the legality of premium and cost-sharing subsidies for low- and middle-income people buying insurance in states where the federal government rather than the state is operating the marketplace under the Affordable Care Act (ACA).

This perspective addresses how insurance markets might respond if the Court sides with the plaintiffs. More on the legal issues in the case can be found here.

The immediate effect of a Court decision in favor of the plaintiff would be to cut off subsidies in affected states, which could happen within a month of the decision. Currently, in 34 states the federal government is operating the health insurance marketplace, including 7 states where the state is performing some functions. Fourteen states are fully operating state-based marketplaces. And, an additional 3 states – Oregon, New Mexico, and Nevada — are approved as state-based marketplaces but are using to handle subsidy eligibility and enrollment. These 3 states, which are referred to as Federally-supported State-based Marketplaces, could potentially continue to provide subsidies. In the 34 federal marketplace states, 7.5 million people had signed up for coverage for 2015 as of mid-February and qualified for a subsidy. That figure is expected to ramp up significantly in the next year, assuming the Court does not invalidate the subsidies.

People receiving subsidies make up 87% of those who have signed up for coverage for 2015 in states using the federal marketplace. For the vast majority of them, coverage would be unaffordable without the subsidies. The subsidies average $268 monthly per person and cover 72% of the premium, leaving enrollees to pay for 28% of the premium (or an average of $105 per month). With the subsidies eliminated, those who had been receiving them would face an increase in their out-of-pocket premiums averaging 256%.

To encourage healthy people to buy coverage, the ACA includes not only a “carrot” in the form of subsidies but also a “stick” through the individual mandate. A Court decision to cut off the subsidies would eliminate the carrot and severely weaken the stick. The ACA exempts someone from the individual mandate if the lowest-cost insurance available would cost in excess of 8% of income. With subsidies available, less than 3% of uninsured people eligible for subsidies would be exempt. However, if the subsidies are invalidated, we estimate that 83% of those formerly subsidy-eligible uninsured people would end up being exempt from the individual mandate.

As a result, the elimination of the subsidies would destabilize the individual insurance markets in states not running their own marketplaces. Under the ACA, insurers would still be required to guarantee access to coverage irrespective of health status and prohibited from charging sick people more than healthy people. Even without the subsidies, many people who are sick would likely find a way to maintain their insurance in the face of substantial premium increases. However, people who are healthy would likely drop their insurance.

Insurers in the affected states would immediately find themselves in a situation where premiums revenues were insufficient to cover the health care expenses of the remaining enrollees, who would be far sicker on average than what insurers assumed when they set their premiums for 2015. This would trigger a classic adverse selection “death spiral,” where insurers would seek very large premium increases, which in turn would cause the healthier of the remaining enrollees to drop coverage.

These effects would occur for all ACA-compliant individual insurance products both inside and outside of the marketplaces in affected states because insurers are required to pool all of their individual enrollees when establishing premiums.

It is somewhat unclear how quickly insurers could respond by increasing premiums. Under ACA regulations, premiums for insurance sold inside the marketplaces are locked in for a full calendar year. So, the earliest those premiums could change would be January 1, 2016, though even that would be tricky since insurers will have already submitted proposed 2016 premiums to state insurance departments by the time the Court issues a decision. Depending on state laws, premiums for products sold outside of the marketplaces could potentially be increased more quickly. And even if insurers could adjust rates, establishing stable and sustainable premium levels in this type of environment is extremely difficult, because as rates move higher, more of the relatively healthy enrollees drop their coverage.

Because this may all happen very quickly, it is possible that many or all insurers would choose to exit the individual markets in these states rather than facing significant losses in a quickly shrinking market. Insurers that remain in the market risk being one of the only carriers continuing to guarantee access to coverage to people in poor health (since people who lose coverage from exiting insurers have special enrollment periods to choose new coverage). Leaving the market would not be an easy decision for insurers since many are counting on the marketplaces as an important source of future enrollment growth. And, under federal law, they could not re-enter the individual market for five years. Their decision of whether to stick it out would depend in part on whether they believe that policy solutions that would establish a growing and healthy market were likely in the near future. While some large insurers might be willing to withstand losses for a short period, no insurer will want to cover a significant number of people with high health needs, particularly in a regulated market, out of fear that they may be pressured to sustain the coverage at inadequate premium levels.

Some have suggested that states or Congress could take action to preserve or substitute for the existing premiums subsidies and thereby avoid severe market disruption.

Some governors and state legislatures would likely decline to establish marketplaces because they are opposed to the ACA and do not want to be involved in its implementation. Other states would want to act to keep subsidies flowing and maintain stable insurance markets. For example, seven states are operating marketplaces in partnership with the federal government, already performing some of the necessary functions. In addition, 29 states (including the District of Columbia) have chosen to expand Medicaid under the ACA, suggesting that the political environments in those states may be more amenable to participating in elements of the ACA.

However, even in states that want to act, there are logistical challenges to doing so quickly. Depending on state laws, beginning the process of establishing a marketplace would take either an executive order by the governor or, more likely, state legislative action. A state would then have to create an administrative apparatus to fulfill marketplace functions, including putting in place a governance structure, contracting with plans, running a consumer call center, issuing outreach grants, and setting up a subsidy eligibility and enrollment system (no doubt the most difficult task). It took existing state-based marketplaces several years to put the necessary infrastructure into place, and they were able to access federal start-up grants that are no longer available, so states would have to cover the initial administrative expenses.

Implementation would be eased if states could make use of the federal government’s technology. While state marketplaces are not permitted under the ACA to contract with the federal government, there are likely a variety of alternative ways in which state marketplaces could use For example, three states – Oregon, New Mexico, and Nevada – have federal approval to operate as state-based marketplaces even though subsidy eligibility and enrollment are handled through In fact, the ACA requires the Secretary of Health and Human Services to establish a system for determining eligibility for advance premium tax credits, not necessarily the marketplaces themselves.

But, even in the somewhat optimistic scenario that all these pieces fell neatly into place in many states, it would likely take months if not a year or more for state marketplaces to be up and running. Insurers may be reluctant to sustain losses for such a long period and might instead choose to exit the market, gambling that states or the federal government would find a way around the five-year ban for reentry. After all, state marketplaces would need insurers in order to be effective.

Congress could also act to preserve subsidies permanently. That could be accomplished by specifying that subsidies are available in marketplaces operated either by the federal government or states, though it is unlikely that Congressional opponents of the ACA would agree to do so without other changes to the law. And, it is difficult to imagine that negotiations over those changes both within Congress and with the President could happen quickly enough to prevent insurance market disruption.

One approach that has been suggested to address the timing issue is to extend the subsidies in affected states for a defined period, giving Congress time to consider alternative approaches and states time to begin the process of setting up marketplaces if they so choose. Such an extension would have to be put in place quickly to convince enrollees and insurers that a viable system will remain in place. And, given the logistical challenges in the states and the complexity involved in altering the law, subsidies would have to be extended for a significant period of time to permit a seamless transition and avoid disruption. In some ways, there may be a mismatch between the speed at which policy can respond and the speed at which it would need to respond to maintain stability in the insurance market.

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