Individual- and Employment-Based Group Plans

Background

Regulation of private health insurance has traditionally been a state responsibility. However, regulation of employers’ self-insured benefit plans, which are covered by the Employee Retirement Income Security Act (ERISA), is a federal responsibility, and state requirements are often preempted by ERISA rules. As a result, consumers have different protections depending on their state of residence and whether they are covered by an insured or self-insured health plan.

The federal government and many states have regulated market practices that hamper access to private health coverage. The ACA improves transparency and oversight of insurers through rate review, and by requiring plans to provide rebates if they do not appropriately balance spending on medical care with spending on administrative costs and profits, a balance known as the medical-loss ratio. It also creates standards for essential health benefits that private market plans must cover, and bans annual and lifetime dollar limits on benefits.

To help consumers better understand their coverage options and how their plan works, the ACA requires insurers and plans to use a standard summary of benefits and coverage (SBC) and a uniform glossary. To help consumers look beyond premiums to a plan’s overall value, the SBC 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.

The ACA also limits the factors that insurers can use to vary premiums. Insurers can vary premiums for small groups and individuals on the basis of family size, geographic rating area, age, and tobacco use. While health status cannot be used to set premiums, the ACA does permit some premium discounts or rebates, as well as adjustments in cost-sharing that are related to health promotion and to disease-prevention or wellness programs.

Another ACA provision requires insurers to issue a health plan to any individual or group applicant regardless of their health status or other factors, also known as guaranteed issue. Prior to the implementation of this provision 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.

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.

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 this new pooling mechanism. States and the federal government have critical roles and responsibilities as they organize exchanges, set the benefit standards for coverage offered in the exchanges, and certify qualified plans. Education and outreach efforts are critical to help people learn about the exchanges, their coverage options, the availability of subsidies to lessen the cost of coverage, and the enrollment process.

As the ACA’s private-market reforms continue to be implemented, monitoring and oversight by state and federal regulators are needed to identify and correct problems and ensure that reform goals are achieved.

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

High-deductible health plans—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 HDHPs meeting certain parameters a boost by authorizing tax breaks for health savings accounts (HSAs), which can be used to pay out-of-pocket expenses under a HDHP. HSA contributions are tax-deductible up to a statutory limit, and interest accrued and withdrawals for health expenses are tax-free. However, contributions are not permitted after age 65.

Enrollment in HDHPs accounts for a growing share of both the individual and group markets. In the individual market, where consumers pay the full premium (unless they qualify for ACA subsidies), a 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 who are enrolled in HDHPs do not have an HSA account to help reduce their out-of-pocket costs.

Proponents contend that HDHPs will limit cost growth by making consumers more cost-conscious when initiating and using care. However, a number of public policy concerns are associated with the spread of HDHPs and HSAs in the private market. The first is risk segmentation. Enrollment in these products draws healthier people away from more comprehensive products, which could become too expensive to sustain if those who remain are less healthy. A second concern is that consumers without the financial resources to pay for care they receive before they meet the deductible may be unable to obtain needed care. Those with low incomes and expensive chronic conditions are particularly vulnerable.

Research suggests that, at least in the short term, total health spending is lower for beneficiaries with HDHPs, but due to the relatively brief history of these products, the research is ongoing. It 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, but that access is an issue for all people with modest incomes regardless of health plan type.

Excise tax—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 high-cost employer-sponsored health coverage that exceeds specific dollar thresholds. This tax is intended to prompt employers to limit or reduce generous health coverage, which would reduce demand on health care services and limit health care spending. (For related discussion, see Chapter 3, Taxation: Tax Expenditures and Incentives—Taxing Employer-Provided Benefits.)

The ACA originally called for the tax to become effective in 2018 but Congress delayed implementation until 2020. 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. (For discussion of the adjustment for qualified retirees, see this chapter’s section Health Care Coverage: Private Insurance—Retiree Health Coverage.)

The federal government will 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 generosity of benefit, such as an older workforce or geography.

Also at issue is whether lower-wage workers 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 larger relative to lower-wage employees’ income than to that of higher-wage employees. Thus the distributional impact of the excise tax could disproportionately affect lower-wage workers if employers spread the costs associated with the tax evenly across all workers.

Individual- and Employment-Based Group Plans: Policy

General

In this policy: FederalState

AARP supports health care reform that achieves universal access to health care coverage and provides adequate protection against health care costs.

To ensure a level playing field, reforms should apply uniformly to all insurers and self-insured plans in a particular market, covering all individual, small-group, and large-group purchasers. Associations, Multiple Employer Welfare Arrangements, and similar nontraditional pools should be subject to the same rules as the rest of the market. Federal policies on private insurance markets should set a floor for states but should not preempt higher state standards.

Policymakers regulating the private insurance market should provide and enforce:

  • guarantees that all individuals and groups wishing to purchase or renew health insurance can do so;
  • prohibitions on selective premium increases for individuals based on their health status or claims experience;
  • limits on waiting periods, credit for policyholders’ prior coverage as well as prohibitions on preexisting-condition exclusions or other discriminatory practices; and
  • rating rules in the ACA.

AARP supports efforts to strengthen health insurance market reforms that improve the affordability and accessibility of coverage in the individual and small-group health insurance markets and the functioning of public exchanges.

Policymakers should examine changes to ACA rating requirements to further phase down age variation from 3:1 to pure community rating.

Policymakers should carefully monitor premium increases and trends as well as medical-loss ratios in order to make sure that rates are reasonable and fair, and should make this information transparent to the public (for discussion of the authority to approve rates prior to their implementation, see Chapter 11, Financial Services and Consumer Products—Insurance). To ensure ongoing affordability of private health coverage, policymakers should monitor premiums of comprehensive health products as well as their deductibles, cost-sharing formulas, and out-of-pocket maximums.

Policymakers should monitor implementation of the uniform summary of benefits and coverage, and use consumer research to refine it as needed to improve consumer understanding of:

  • benefits, limitations, and exclusions;
  • what spending will and will not count toward satisfying deductibles, how deductibles for family policies work, and whether network discounts apply to services received before the deductible is met;
  • potential out-of-pocket costs under the plan; and
  • provider performance, to the extent it is available.

Insurers and private sponsors of health plans that include health savings options should disclose ownership of, carryover provisions in, and retention rights to health account funds; contribution and spending rules for the accounts, including their tax treatment; and fees, charges, and limitations associated with accounts.

Insurers and health plans should prominently disclose in plain language to new and renewing consumers if a health product (whether a major-medical or a limited-benefit plan such as an indemnity or dread-disease plan) meets the standard to satisfy the ACA’s individual shared-responsibility requirement.

Risk pooling and risk-sharing mechanisms

In this policy: FederalState

AARP may support reinsurance, risk adjustment, or similar mechanisms to spread the insurance risk more broadly. AARP may support improvements to, or extensions of, these mechanisms in order to strengthen the functioning of the individual and small-group health insurance markets, including exchanges.

Where high-risk pools continue to exist, policymakers should provide a funding base adequate to bring rates in line with those in the broader market, and sufficient to ensure enrollment does not close. To make coverage affordable for those with modest incomes, funding for subsidies should be available.

Exchanges

In this policy: FederalState

Exchanges, both public and private, should:

  • negotiate with plans and vendors to contain costs for participating employers and individuals;
  • standardize benefit offerings to simplify plan comparisons;
  • consider limiting the number of offerings so consumers have a manageable choice among meaningfully different products;
  • provide consumers with information and decision supports to help them navigate their choices, including easy-to-find and easy-to-use information on plan networks and drug formularies; and
  • offer a simple enrollment process.

Employers contracting with private exchanges should:

  • oversee the activities of the exchange,
  • ensure consumers have access to fair grievance and appeals procedures,
  • ensure employees pay a premium that does not vary by age, and
  • continue to provide reasonable contributions toward employee premiums on a pretax basis

Public Exchanges

In this policy: FederalState

Policymakers should ensure that exchanges:

  • give consumers an informed voice on the governing body;
  • have, and exercise, the authority to contract selectively with plans offered through the exchange, to negotiate with insurers for packages of benefits and coverage that meet minimum coverage requirements, and to negotiate plan premiums;
  • maintain standards for benefit offerings that are based on consumer desires, including the desire for choices they can easily understand and compare; and
  • maintain an application-and-enrollment system and infrastructure that provides consumers with a single point of access to coverage choices, helps them navigate their options, offers a simple application-and-enrollment process, and ensures they are not stigmatized.

Exchanges must be publicly accountable and must oversee the activities of plans offered.

Essential health benefits

In this policy: FederalState

Federal policymakers should conduct a thorough review of the essential health benefits under the ACA benchmark approach used from 2014 to 2016, and extended to 2017. The review should consider the variation in the minimum benefits and standards surrounding the benefits, cost-sharing, and other aspects of the packages across the states. The review should assess the adequacy of prescription drug coverage and other benefits, as well as the affordability of the benchmark package premiums and cost-sharing.

Cost containment

In this policy: FederalState

Policymakers should use cost-containment features, such as chronic disease management and incentives for administrative effectiveness.

(Also see section below, Private Health Plans: Managed Care, for policy regarding value-based benefit design and reference pricing.)

High-deductible health plans

In this policy: FederalState

AARP does not view high-deductible insurance products paired with health accounts as an optimal approach to providing adequate, affordable coverage to consumers who currently lack access to health insurance. AARP urges policymakers to conduct research on and monitor these products in terms of how they compare with traditional products with respect to:

  • characteristics of enrollees;
  • health service utilization and health outcomes among enrollees; and
  • affordability of coverage and health spending, especially for vulnerable populations for whom high deductibles and cost-sharing may be a barrier to care, may exhaust savings, or may result in unaffordable medical bills.

Policies governing high-deductible health coverage should require that plans cover preventive care and certain maintenance drug treatments as benefits not subject to the deductible requirement.

ERISA and state-regulated health plans

Federal insurance reforms should apply equally to ERISA plans and state-regulated health plans.

AARP supports changes in ERISA that would provide a means for states to apply their health care initiatives to both ERISA-covered health benefit plans and state-regulated insurance plans. Such reforms might include:

  • consumer protections and grievance procedures,
  • broad-based financing strategies to contain costs or provide funding to improve access and coverage,
  • health insurance market reforms,
  • financial solvency guarantees,
  • uniform claims procedures, and
  • uniform utilization and cost data.

Excise tax on high-cost employer-sponsored health coverage

AARP supports the overarching goals of the excise tax to achieve greater progressivity in the tax code and constrain health care inflation. However, federal policymakers should carefully implement this tax to ensure that it does not result in unintended consequences. Potential unintended consequences include disproportionately penalizing employers with older workforces, discouraging employers from hiring and retaining older workers, or increasing costs for lower-wage workers disproportionately more than higher-wage workers. Adjustments to dollar limit thresholds should adequately account for employers’ variation in health costs that are unrelated to the generosity of their coverage, such as their workforce’s age and gender demographics, and geography. (Also see Chapter 3, Taxation: Tax Expenditures and Incentives—Taxing Employer-Provided Benefits and later discussion in this chapter’s Retiree Health Coverage section).