Individual- and Employment-Based Group Plans

Background

The Affordable Care Act (ACA) addressed many problems in the private insurance market that previously 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 pre-existing conditions or 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 including:

  • requiring rebates (to employers and/or consumers) if the plan does not appropriately balance spending on medical care with expenditures for administrative costs and profits, a balance known as the medical-loss ratio (or MLR);
  • creating standards for essential health benefitsA set of 10 categories of services health insurance plans must cover under the Affordable Care Act. These include doctors' services, inpatient and outpatient hospital care, prescription drug coverage, laboratory services, preventive care and chronic disease management, pregnancy and childbirth,… that private plans must cover;
  • banning annual and lifetime dollar limits on benefits;
  • limiting the factors that insurers can use to vary premiums (known as rating); 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.
  • requiring insurers to issue a health plan to any individual or group applicant regardless of their health status or other factors, known as guaranteed issue; and
  • requiring insurers and plans to 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), which can be used to pay out-of-pocket expenses under an 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 Medicare enrollment.

Proponents of these plans contend that they will limit 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, worsening the risk profile of those products and resulting in higher premiums for those who don’t 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, but 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, but 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, or 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 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 Employee Retirement Income Security Act (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, which 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, which are unrelated to the actual generosity of benefits (see also Chapter 3: 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 this chapter’s section  Health Care Coverage: Private Insurance—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 larger relative to the income of employees with lower wages than to that of employees with higher wages. Thus, the distributional impact of the excise tax could disproportionately affect workers with lower wages 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

Federal and state policymaker should enact 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. Any expansions of allowable insurance arrangements designed to enhance access to coverage and plan choice, such as association health plans or sales of health insurance across state lines, or other arrangements should also be subject to those same rules and must:

  • not restrict participation or coverage on the basis of demographic characteristics, health status, or type of employment;
  • not discriminate in pricing based on age, or weaken existing pricing protections for older adults (e.g., limitations on age rating);
  • not undermine existing state and federal consumer protections by allowing sales of new plans that are subject to weaker oversight and consumer protections than plans sold under current law;
  • include sufficient federal and state oversight to ensure consumers are protected; and
  • provide consumer access to fair grievance and appeals procedures.

Furthermore, federal policies on private insurance markets should set a floor for states but should not preempt or circumvent higher state standards.

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 to ensure that rates are reasonable and fair. This information should be transparent and made available to the public (see also Chapter 11, Financial Services and Consumer Products—Insurance for discussion of the authority to approve rates prior to their implementation). 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 ensure consumers have access to clear information to help them understand how to compare and shop for health plans, use their coverage, and make meaningful decisions.

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

Policymakers and others should explore reinsurance, risk adjustment, or similar mechanisms to spread the insurance risk more broadly. These mechanisms should be improved and extended in order to strengthen the functioning of the individual and small-group health insurance markets, including exchanges. In states with high-risk pools, policymakers should provide a funding base that is sufficient to bring rates in line with those in the broader market and ensure that all who need to enroll can do so. Subsidies should be provided to make coverage affordable for those with modest incomes.

Exchanges/Marketplaces

In this policy: FederalState

Exchanges, both public and private, should:

  • negotiate with plans and vendors to contain costs for participating employers and individuals;
  • ensure that consumers have meaningful choices among plans, including by standardizing 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 options, 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 ofADLs or Activities of Daily Living are the basic tasks of everyday life, such as eating, bathing, dressing, toileting, and transferring. IADLs or Instrumental Activities of Daily Living are activities related to independent living and include preparing meals, managing money, shopping for… the exchange;
  • ensure that 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 insurance exchanges

In this policy: FederalState

Policymakers should ensure that state and federal health insurance marketplaces 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, and offers a simple application and enrollment process.

Policymakers should ensure that state and federal health insurance marketplaces:

  • give consumers an informed voice on the governing body;
  • have, and exercise, the authority to contract selectively with plans offered through the marketplace, to negotiate with insurers for packages of benefits and coverage that meet minimum coverage requirements, and to negotiate plan premiums; and
  • maintain standards for benefit offerings that are based on consumer desires, including the desire for choices they can easily understand and compar

State and federal marketplaces must be publicly accountable and must oversee the activities ofADLs or Activities of Daily Living are the basic tasks of everyday life, such as eating, bathing, dressing, toileting, and transferring. IADLs or Instrumental Activities of Daily Living are activities related to independent living and include preparing meals, managing money, shopping for… the plans offered.

Essential health benefits

In this policy: FederalState

Policymakers should support essential health benefit (EHB) requirements under the Affordable Care Act to ensure that consumers who purchase individual and small group health plans have comprehensive coverage. Federal and state policymakers should continue to monitor implementation of essential health benefit requirements and assess their impact on consumers including standards surrounding the benefits; variation in the minimum benefits across the states; adequacy of prescription drug coverage and other benefits; and the affordability of premiums and cost-sharing. Any changes to EHB requirements should continue to ensure comprehensive coverage for consumers and strong protection against annual and lifetime limits on coverage for people enrolled in private coverage, including those in large group employer coverage.

Cost containment

In this policy: FederalState

Policymakers should use cost-containment features, such as chronic disease management and incentives for administrative effectiveness (see also Private Health Plans: Managed Care in this chapter for policy regarding value-based benefit design and reference pricing.)

 

High-deductible health plans (HDHPs)

In this policy: FederalState

Policymakers should monitor these products to determine how they compare with traditional products. HDHPs, even when paired with health savings accounts, are not an optimal approach to providing adequate, affordable coverage to consumers who currently lack access to health insurance.

Policymakers should monitor:

  • 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.

High-deductible plans should cover preventive services and certain maintenance drug treatments as benefits not subject to the deductible.

Employee Retirement Income Security Act (ERISA) and state-regulated health plans

In this policy: Federal

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

Congress should amend ERISA to allow states to apply their health care reforms to both ERISA-covered health benefit plans and state-regulated insurance plans.

These 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

In this policy: Federal

AARP supports the overarching goals of the excise tax to achieve greater progressivity in the tax code and constrain health care inflation. Federal policymakers should carefully implement the excise tax on high-cost employer-sponsored health coverage to ensure that it does not disproportionately penalize employers with older workforces, discourage employers from hiring and retaining older workers, or disproportionately increase costs for workers with low incomes. 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, gender, and geographic location (see also Chapter 3, Taxation: Tax Expenditures and Incentives—Taxing Employer-Provided Benefits and later discussion in this chapter’s Retiree Health Coverage section).