On February 22, 2013, the Centers for Medicare & Medicaid Services (“CMS”) released final regulations on health insurance market reforms (“Final Regulations”) as provided for under the Patient Protection and Affordable Care Act of 2010 (the “ACA”). The Final Regulations apply to the health insurance markets for individuals and small groups for policy and plan years beginning on or after January 1, 2014.
Under the ACA, the small group market is for employers with generally no more than 100 employees. However, states may lower the employee count limit to 50 for plan years beginning before January 1, 2016. California has adopted this lower limit in the interim. In general, the Final Regulations do not apply to grandfathered health plans.
In summary, these regulations primarily seek to assist individuals and small groups who have historically been denied health insurance, charged higher than average premiums, forced to accept less-than-adequate coverage with treatment of certain medical conditions excluded (i.e., due to pre-existing conditions), or forced to choose between no coverage or a more comprehensive coverage than necessary or affordable.
Areas of Reform Covered by the Final Regulations:
The five major areas of reform covered by the Final Regulations are as follows:
Guaranteed Availability of Coverage
The Final Regulations prohibit health insurance companies from discriminating against people with pre-existing conditions by denying such people coverage or relegating them to policies with less than adequate coverage. All policies in the applicable individual or group market will be guaranteed to be available to all individuals or employers, as applicable, in the state.
For individuals, these policies will be offered during the initial and annual open enrollment periods. At other times during the year, individuals will also have special enrollment opportunities when they experience certain qualifying events, similar to those that currently apply to group health plans.
All policies in the small group market will be available year-round. Nonetheless, a health insurer may limit the availability of coverage to a one-month long annual enrollment period in the case of a small employer which is unable to comply with a material plan provision relating to employer contributions or group participation rules. Additionally, a health insurance company may limit the employers who may apply for coverage to those with employees who live or work in the service area of a network plan.
Guaranteed Renewability of Coverage
The Final Regulations require health insurance companies to renew coverage at the option of the individual or plan sponsor. A health insurer cannot refuse to renew coverage because an individual or employee becomes ill or has a pre-existing condition. Nonetheless, a health insurance company may refuse to renew coverage or may discontinue coverage based on limited, specified reasons such as:
- Nonpayment or untimely payment of premiums
- Fraud or intentional misrepresentation
- Violation of participation or contribution rules pursuant to applicable state law
Health Insurance Premiums
Under the Final Regulations’ provision for fair health insurance premiums, a health insurer may not consider factors such as health status, gender, occupation, or past insurance claims in varying premiums amongst its enrollees. Health insurers may adjust or vary premiums for the following factors only:
The premium cannot vary by more than 3 to 1 for adults (age 21 and over). For example, if the monthly premium for a 21-year-old person is $1,000, then the maximum premium for an older person under the same policy is $3,000. States have the flexibility to eliminate the permitted variation in premiums based on age or to set a lower ratio, such as 2 to 1. Insurers must use a single age band for individuals under age 21 and another single age band for individuals age 64 and older. CMS proposes an age band for each age from 21 through 63.
- Tobacco Use
Tobacco use means use of any tobacco product (excluding religious or ceremonial use) four or more times per week within a period that extends no longer than the past 6 months. The premium cannot vary by more than 1.5 to 1. For example, if the monthly premium for a non-smoker is $1,000, then the maximum premium for a smoker under the same policy is $1,500.
In the small group market, consideration of this factor is subject to regulations related to wellness programs and prohibiting discrimination based on health status. Thus, a tobacco user enrolled in a small group plan may avoid paying the extra charge by participating in a tobacco cessation program. Additionally, states have the flexibility to permit a lower ratio (e.g., 1.25 to 1) or to completely eliminate the permitted variation in premiums based on tobacco use. In California, for example, health insurers may not consider tobacco use in varying premiums.
Each state is expected to establish geographic rating areas based on counties, three-digit zip codes or metropolitan statistical areas (“MSAs”) and nonmetropolitan statistical areas (“non-MSAs”). If a state fails to establish such rating areas, the default will be one rating area for each MSA in the state and one rating area consisting of all non-MSAs in the state.
- Family Size
The premium may vary based on whether the plan or policy covers an individual or family. The total premium for family coverage may be determined by summing the premiums for each individual family member (including the premiums for no more than the three oldest covered children under age 21) or by family tiers under a community rating system established by the state.
The total premium charged to employers in the small group market is determined by adding the premiums of covered employees and their dependents. Nonetheless, states may require health insurers to offer premiums based on average employee amounts where every employee in the group is charged the same premium.
Single Risk Pool Requirement
Currently, health insurance companies may segment enrollees into separate rating pools in order to charge higher premiums to higher-cost enrollees. The Final Regulations require health insurance companies to maintain a single statewide risk pool for the individual market and a single statewide risk pool for the small group market. A state may require health insurance companies to merge the individual and small group markets into a combined risk pool for both markets. Premiums and annual rate changes for all enrollees will be based on the total claims experience and projected trend of the applicable, single statewide risk pool, subject only to certain permitted plan-level adjustments.
Catastrophic Plans for Young Adults and Others
The Final Regulations provide for enrollment in catastrophic plans. These plans will generally have lower premiums, protect against high out-of-pocket costs, provide coverage of essential health benefits, cover at least three primary care visits per year before reaching the deductible, and cover preventive health services without costsharing. Under the ACA, catastrophic plans are available to individuals who are:
- under age 30 at the beginning of the policy or plan year, or
- certified by the exchange as being exempt from the individual responsibility requirement because they cannot afford more comprehensive coverage.
Employers would do well to understand these health insurance market reforms, particularly employers that fall into the small group market. Nonetheless, large employers should also have a basic understanding of these rules for two main reasons:
- To assist their part-time employees and over-age dependents who are ineligible for coverage under group health plans
- To anticipate the employees’ alternate landscape should the employer choose to “pay” instead of “play”