Individual- and Employment-Based Group Plans

The Affordable Care Act (ACA) addressed many problems in the private insurance market that had created barriers to private health coverage. Prior to the ACA, older adults who were too young to qualify for Medicare—and did not have access to job-based insurance—faced difficulty accessing coverage in the individual health insurance market. Older adults who needed to purchase coverage in the individual insurance market, such as people who were self-employed, were frequently denied coverage based on preexisting conditions. And they were often charged unaffordable rates due to their age.

The ACA implemented several requirements for insurers nationwide to address these and other access and consumer protection issues.

• It requires rebates to employers, consumers, or both if the plan does not appropriately balance spending on medical care with expenditures for administrative costs and profits. This balance is known as the medical-loss ratio.
• It creates standards for essential health benefits that private plans must cover.
• It bans annual and lifetime dollar limits on benefits.
• Factors that insurers can use to vary premiums, known as rating, are limited. Under the ACA, insurers can only vary premiums for small groups and individuals based on family size, geographic rating area, age (3:1), and tobacco use (1.5:1). Health status cannot be used to set premiums.
• Insurers are required to issue a health plan to any individual or group applicant regardless of their health status or other factors, known as guaranteed issue.
• Insurers and plans must use a standard summary of benefits and coverage and a uniform glossary. To help consumers look beyond premiums to a plan’s overall value, the summary of benefits and coverage provides information on a plan’s out-of-pocket costs as well as standardized coverage examples showing how a plan covers costs in a particular situation.

High-risk pools: Prior to the implementation of the above ACA provisions in 2014, many states used “high-risk pools” to guarantee access to coverage to people who were otherwise uninsurable. These high-risk pools have largely been phased out, but residual programs remain in some states. Some proposals to repeal the ACA would again rely on high-risk pools to serve high-risk people.

Premium stability programs: To help the individual market absorb more individuals with poor health, the ACA includes measures to spread the risk of insuring them during the transition to new market rules and then on a permanent basis. Risk adjustment, risk corridors, and reinsurance pools were enacted to help insurers handle the higher costs of covering this population. Risk adjustment is a permanent program, while the ACA created the risk corridor and reinsurance programs only through 2016.

Marketplaces: In the past, some states authorized public or private mechanisms to pool purchasers, structure plan choices, and in some instances, negotiate premiums. The ACA built on this idea, creating health insurance benefit exchanges (also called marketplaces) to provide a new path by which individuals and businesses could access insurance. Qualified individuals and small businesses can buy qualified health plans through these exchanges. States and the federal government have critical roles and responsibilities as they organize and maintain exchanges, set the benefit standards for coverage offered in the exchanges, and certify qualified plans. Education and outreach efforts are critical to helping people learn about the exchanges, their coverage options, the availability of subsidies to lessen the cost of coverage, and the enrollment process. Continued monitoring and oversight by state and federal regulators are needed to identify and correct problems and ensure that reform goals are achieved.

High-deductible health plans and health savings accounts: As health care costs and premiums rise, pressure grows to develop more affordable coverage options. In response, insurers have introduced products that make consumers bear more front-end out-of-pocket costs in exchange for lower premiums. These are known as high-deductible health plans (HDHPs). Congress gave a boost to HDHPs meeting certain parameters by authorizing tax breaks for health savings accounts (HSAs). HSAs can be used to pay out-of-pocket expenses under an HDHP. HSA contributions are tax-deductible up to a statutory limit. Interest accrued and withdrawals for health expenses are tax-free. However, contributions are not permitted after Medicare enrollment.

Proponents of these plans contend that they will contain cost growth by making consumers more cost-conscious when initiating and using care. However, the growth of these plans raises several concerns. First, people who choose these plans are more likely to be healthy. That leaves less healthy people in the more comprehensive products. This worsens the risk profile of those products and results in higher premiums for those who do not choose HDHPs. Second, consumers without the financial resources to pay for care before they meet the deductible may, therefore, be unable to obtain needed care. Those with low incomes and expensive chronic conditions are particularly vulnerable.

Enrollment in HDHPs accounts for a growing share of both the individual and group markets. In the case of consumers with modest incomes or facing high premiums, an HDHP may be someone’s only affordable option. In the small-group market, employers facing steep annual premium increases may also turn to HSA-qualified HDHPs instead of more comprehensive health plans. Employees of large employers also represent a growing share of beneficiaries in these products. However, many people enrolled in HDHPs do not have an HSA account to help reduce their out-of-pocket costs.

Research suggests that, at least in the short term, total health spending is lower for beneficiaries with HDHPs. Still, due to the relatively brief history of these products, the research is ongoing. Evidence points to plan savings. However, results indicating whether people get the care they need are more mixed. Some recent findings suggest that access to care is a greater issue in HDHPs than in more traditional coverage. That access is an issue for all people with modest incomes regardless of health plan type. Also, it is unclear whether deferred treatment results in higher spending later in one’s life.

Private exchanges: In the group health insurance market, health care consulting companies and others have created private exchanges that negotiate health plan offerings. These exchanges market themselves to employers as a way to lower health benefit, administrative, and operational costs. Private insurance exchanges negotiate health plan offerings and take on other tasks that employers used to assume when they offered health insurance benefits. As private exchanges have different business models and features, they may target different segments of the group (and, in some cases, individual) market. They may also offer employees or retirees new or additional coverage choices. Private exchanges and participating employers have the flexibility to structure the benefits but must still comply with federal and state insurance rules, broker licensing requirements, and Employee Retirement Income Security Act (ERISA) regulations.

Federal vs. state oversight: Regulation of private health insurance, including individual health insurance and many job-based group plans, has traditionally been a state responsibility. However, regulation of self-insured employer benefit plans is a federal responsibility through the federal ERISA. State requirements are often preempted by ERISA rules. Consequently, consumers have different protections depending on their state of residence and whether they are covered by an insured or self-insured health plan.

Excise tax on high-cost employer-sponsored health coverage: The ACA includes a provision that many economists believe may help constrain growth in health care spending. The law imposes a 40 percent excise tax on employer-sponsored health coverage that exceeds specific dollar thresholds. This is designed to prompt some employers to limit or reduce generous health coverage. In turn, this would reduce demand on health care services and thus limit health care spending.

No research has been conducted to determine if imposing the excise tax will have the intended effect. A major concern about the tax is that employers with an older workforce and those in high-cost geographic areas will be penalized for these factors unrelated to the actual generosity of benefits (see also Taxation of In-Kind Benefits).

The ACA originally called for the tax to become effective in 2018, but Congress delayed implementation until 2020 and then again until 2022. Under the original provision, the thresholds in the first years of the tax are $10,200 for self-only coverage and $27,500 for other than self-only (family) coverage. In subsequent years, these thresholds will be indexed annually at a rate tied to changes in the Consumer Price Index (CPI). Since CPI has historically risen more slowly than medical inflation, an increasing number of employers are expected to be impacted by the tax over time. The ACA provides for adjusted (higher) thresholds for qualified retirees age 55–64, workers in high-risk professions, and workforces with age and gender demographics that differ from the national average (see also Retiree Health Coverage for discussion of the adjustment for qualified retirees).

The federal government will still need to determine implementation details for the excise tax through the regulatory process. Issues to be addressed include how different types of health coverage (such as HSA contributions) will be counted toward the cost thresholds, how employers will determine coverage costs and assess tax liability, and how employers will calculate threshold adjustments allowed by the law (including higher thresholds for older workforces). It remains to be seen whether the tax will be implemented in a manner that achieves its intended goal without disproportionately penalizing employers who face high costs due to factors unrelated to the generosity of benefits, such as an older workforce or geography.

Also at issue is whether workers with lower wages will suffer a disproportionate impact when employers choose to pay the tax rather than reduce their health coverage. If employers choose to pay the tax, they will likely shift that cost to employees through lower wages. The amount of excise tax passed through to employees would be a larger percentage of the total income earned by employees with lower wages than that of employees with higher wages. Thus, the excise tax could disproportionately affect workers with lower wages if employers spread the costs associated with the tax evenly across all workers.