Actuaries working in the health insurance industry must be intimately familiar with the Affordable Care Act (ACA). The ACA (also known as Obamacare), is one of the most significant health reforms of all time. Though the ACA is very comprehensive, it can be broken down into ten key points that are significant for actuaries to understand.
1) The 10 Essential Health Benefits
The ACA mandated that all insurance plans in the Individual and Fully-Insured Small Group markets are required to offer the following 10 essential health benefits (EHBs):
- Outpatient Care
- Inpatient Care
- Emergency Room Services
- Pregnancy Care (Before and After Birth)
- Mental Health & Substance Abuse Services
- Prescription Drugs
- Rehabilitative Services
- Laboratory Services
- Preventive Services
- Pediatric Services (Including Dental Care and Vision Care for Children)
Large Group plans and Self-Funded plans are not required to comply with the EHB requirement. However, a Large Group plan covering an EHB or multiple EHBs cannot place an annual coverage limit on those benefits.
2) Free Preventive Services
Preventive services are health services that reduce the probability of future major health issues, thus reducing the frequency of high medical costs for insurance companies. Preventive services are completely free for all insured individuals, regardless of whether or not an individual has met the yearly deductible. Free preventive services are split out into three groups: all adults, women, and children. Some examples of free preventive services include vaccinations, HIV screenings, and blood pressure screenings. The complete list of free preventive services is available for view here.
3) Pre-Existing Medical Conditions Must be Covered
Prior to the passage of the ACA, health insurance companies could deny insurance to individuals with past medical issues, or simply charge them a much higher monthly premium. Now, health insurers are not allowed to reject individuals with pre-existing conditions. Additionally, individuals with pre-existing conditions do not pay any additional monthly premium.
4) Premiums Cannot Differ by Gender
Prior to the passage of the ACA, males and females could have been charged different premiums. Men between the ages of 20 an 30 typically paid lower monthly premiums compared to women in the same age range due to the additional pregnancy-related costs for women. Now, health insurers are not allowed to discriminate based on gender. Today, a man and woman of the same age, living in the same location, pay the same monthly premium for the same health insurance plan.
5) Premiums Differ by 5 Factors
Monthly premiums can differ by age. Older individuals pay a higher monthly premium than younger individuals. However, at a maximum, insurers can only charge older individuals up to 3 times the premium than younger individuals.
Monthly premiums can differ by location due to differences in cost of living and other factors.
Individuals who use tobacco may be charged up to 50% more than individuals who do not use tobacco.
Individual vs Family Enrollment
The number of individuals enrolled in a health plan has an impact on the monthly premium.
Individuals may choose among five plan categories (explained in the next section). Monthly premiums differ across the categories.
6) The 5 Plan Categories
On average, insurers pay 60% of medical costs for bronze plans, whereas consumers pay 40%. Bronze plans have the lowest monthly premiums, but are the most expensive when healthcare is needed. Bronze plans usually have the highest deductibles.
On average, insurers pay 70% of medical costs for silver plans, whereas consumers pay 30%. Silver plans have higher monthly premiums than bronze plans, but are less expensive when healthcare is needed. Silver plans usually have lower deductibles than bronze plans.
On average, insurers pay 80% of medical costs for gold plans, whereas consumers pay 20%. Gold plans have higher monthly premiums than silver plans, but are less expensive when healthcare is needed. Gold plans usually have lower deductibles than silver plans.
On average, insurers pay 90% of medical costs for platinum plans, whereas consumers pay 10%. Platinum plans have the highest monthly premiums, but are the least expensive when healthcare is needed. Platinum plans usually have the lowest deductibles.
Catastrophic plans have very low monthly premiums, but very high deductibles. These plans are meant to serve as an affordable way for individuals to protect themselves from worst-case scenarios, such as serious illness or injury. Individuals must either be under the age of 30, or qualify for an affordability/hardship exemption to purchase a catastrophic plan.
7) Tax Subsidies
The ACA tax subsidies are also known as Advanced Premium Tax Credits (APTCs). An individual or family that is eligible to receive APTCs will have them applied to the monthly health insurance premium, thus making health insurance more affordable. The eligibility requirements for the premium tax credits are as follows:
- Must buy health insurance plan through a state-based exchange or federal health insurance marketplace (HealthCare.gov)
- Household income between 100% to 400% of the Federal Poverty Line
- No access to health insurance through an employer or other government plan, such as Medicare or Medicaid
- Married and file a joint tax return OR single and not claimed as a dependent by another person
8) Cost-Sharing Reduction Subsidies
The ACA also includes another subsidy, known as Cost-Sharing Reduction (CSR). An individual or family that is eligible for CSR will have a lower deductible, out-of-pocket maximum, copays, and coinsurance. Whereas APTCs help make premiums more affordable, CSR helps make healthcare costs more affordable for those who have lower incomes. The eligibility requirements for CSR are the same as the requirements for APTC, except:
- Household income between 100% to 250% of the Federal Poverty Line
- Must purchase a silver health insurance plan (CSR only applies to silver plans)
So, if individuals eligible for CSR are paying less for healthcare costs, how are health insurance companies making up the difference? Up until October 2017, the federal government was reimbursing insurers through CSR subsidy payments. Trump put a stop to those reimbursements. Since then, insurers have been “silver-loading” to make up for the crucial reimbursements that they are no longer receiving.
9) No Annual Limits on Coverage
Prior to the passage of the ACA, health insurance plans typically had annual coverage limits. If an individual reached the annual coverage limit, any medical expenses thereafter were the responsibility of the individual. This was problematic for individuals with critical illness, who reached the coverage limits within short time frames. Therefore, the ACA included a ban on annual coverage limits.
10) 80/20 Rule (Medical Loss Ratio)
Out of all the premiums received by an insurance company, at least 80% must be spent on healthcare and quality improvement, whereas 20% is to be spent on business expenses. This is also known as the 80/20 rule, or the Medical Loss Ratio (MLR). The MLR for an insurance company is the percent of premium spent on healthcare and quality improvement. Insurance companies are required to provide data showing that they have met the 80% MLR requirement. Additionally, if an insurance company spends less than 80% on healthcare, individuals are entitled to receive a rebate for the difference.
Large Group insurance plans (more than 50 employees) actually have an MLR requirement of 85%, instead of 80%.