The Affordable Care Act and Health Insurance Markets: Simulating the Effects of Regulation

By Christine Eibner; Amado Cordova et al. | Go to book overview

Summary
The Patient Protection and Affordable Care Act as modified by the Health Care and Education Reconciliation Act of 2010, collectively known as the Affordable Care Act, makes sweeping changes to the regulation of health insurance markets in the United States.Specifically, the Affordable Care Act requires insurers in the nongroup and small group markets, including those offering coverage in the new state­level health insurance exchanges, to issue and renew policies to everyone who seeks coverage, regardless of health status. In addition, the Affordable Care Act limits insurers’ ability to charge different prices based on individual characteristics. Insurers can vary prices based only on a few factors:
(1). age
(2). tobacco use
(3). geographic location
(4). family size
(5). the actuarial value of the plan.
For these factors, only a certain amount of variation is allowed:
The oldest adult in the risk pool cannot be charged more than three times as much as the youngest adult. This requirement is known as 3-to-1 rate­banding.
In addition, smokers can be charged no more than 1.5 times more than nonsmokers (1.5-to-1 rate­banding).

These changes raise concerns that the Affordable Care Act could lead to substantial increases in premiums, especially in the nongroup market. For example, commentary in the Wall Street Journal published earlier this year suggested that premiums in some markets could double (Matthews and Litow, 2013). Large increases in premiums might occur because of requirements that health insurance be made available to all comers, regardless of health status, and that insurers cannot charge higher premiums based on such characteristics as health status or previous claims experience. Without other changes, these provisions could lead to adverse selection, in which only people with high expected expenditures enroll.

To address these concerns, the Affordable Care Act contains several provisions intended to increase the chances that younger, healthier individuals will get coverage. First, the act requires that all adults obtain a specified minimum level of coverage or pay a tax penalty. Second, the act offers tax credits that individuals with incomes between 100 and 400 percent of the federal poverty level (FPL) can use to buy coverage if they lack access through other sources, such as an employer or Medicaid. Other provisions, such as reinsurance and requirements that insurers limit the amount of premium revenue spent on nonclaims costs, could also reduce premiums relative to what would be expected without the law, potentially making insurance more attractive for younger, healthier enrollees.

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The Affordable Care Act and Health Insurance Markets: Simulating the Effects of Regulation
Table of contents

Table of contents

  • Title Page i
  • Preface iii
  • Contents iv
  • Summary vi
  • Acknowledgments xi
  • I - Introduction 1
  • II - The Affordable Care Act and the Nongroup and Small Group Markets 3
  • III - Compare Background 6
  • IV - Results 20
  • V - Sensitivity Analysis 28
  • VI - Conclusion 34
  • References 37
  • Figures 41
  • Appendix A- Sensitivity to Mlr Assumptions 62
  • Appendix B- Key Assumptions 63
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