There are strong rumors that President Trump will issue an executive order that will allow individuals to buy association health plans. These plans are not regulated by the ACA, instead they are regulated by ERISA. If the executive order or the subsequent rule making that comes from the order are upheld in court, these plans would be allowed to medically underwrite and risk rate their premiums.
So what does that mean for people who are looking to buy insurance on the individual market?
We need to split the universe of buyers into two risk groupings:high risk and low risk. Low risk individuals will get good underwritten rates and high risk individuals will get bad underwritten rates. Risk can be a function of medical history, hobbies, zip code, age or any other factor that an insurer has ever used to divide their risk pool. I think that we also need to divide the universe into three income groups. People who make too little for Exchange subsidies, people who make just enough for Exchange subsidies and people who make too much for Exchange subsidies.
I want to look through the distributional implications prospectively first:
People who receive Exchange subsidies will be no worse off. They can still get community rated, guaranteed issue, comprehensive insurance at a subsidized price. Some people among the low risk groups will move from the ACA Qualified Health Plan (QHP) to underwritten insurance as it is a lower premium and they are healthy enough to take that risk. This decision will be a function of county specific pricing strategies, individual incomes and individual risk tolerance. And if someone drops out of the community rated pool in the first year and then becomes high risk during that year, they can cheaply re-enter the community rated pool at the next open enrollment.
People who make too little to qualify for an ACA subsidy have mixed results. Some will be no worse off as they can stay on Medicaid in Expansion states. For people in non-Expansion states, the High Risk people will be no worse off as they won’t be able to afford an underwritten plan so they are either staying with their current full price ACA plan or are not covered. It does not make these people worse off. For Low Risk people who make too little to be subsidized, they are better off as some can afford a donut design bare bones, underwritten plan. Most people in this group won’t see an improvement, but some will.
The big distributional consequences are for the people who make over 400% Federal Poverty Line (FPL) and are either uninsured or in the individual market. Right now they are the only group of citizens who get no help for their health insurance. QHP coverage is expensive because it is community rated and guaranteed issue.
Individuals who are prospectively low risk are far better off. They can get much cheaper coverage in an underwritten pool solely due to group composition as there are no individuals with recurring million dollar claims. Premiums can be even lower if benefits become skimpier. I am at a stage in my life where my family could handle a super high deductible plan with no maternity coverage. If I did not have coverage through work, underwritten plans would be good for my family compared to QHPs.
However underwritten plans make high risk people who make too much for a subsidy worse off. They still have access to full price, no subsidy guarantee issue, community rated insurance. However the premiums for those plans will be higher. Most of the healthy non-subsidized population will have left the pool and a segment of the low risk, low cost subsidized population will also have left the pool. Individuals who make just over the subsidy threshold of 400% FPL will have very strong incentives to engineer their income to look like they make just 399% FPL. Other individuals will be facing implicit confiscatory marginal tax rates for every dollar they earn above 400% FPL. This groups will be worse off as they either face higher premiums or dump income until they qualify for subsidies.
Most people in most years have below average costs. This is especially true when we limit the population to people who are not covered by Medicare or Medicaid as those act as de facto limited high cost risk pools already by covering those who are old, those who are disabled, and those who need long term skilled care.
Most people are low risk and the Exchanges can hold most of the high risk people harmless especially if states actively manage their exchanges. The people with political power who are prospectively hurt under this proposal are people with significant pre-existing conditions (including age) and who make more than 400% FPL. The pain that these people feel will be real but they are already in pain due to their current non-subsidized coverage while they lose allies of low-risk high income individuals who are now better off in underwritten markets.