President Obama has announced that health insurance issuers will be permitted to renew health insurance policies in 2014 that do not comply with certain provisions of the Affordable Care Act (ACA) that will be in effect in 2014. The transitional policy is an attempt to resolve growing complaints from policyholders who would not have been able to renew their current policies for 2014, because those policies are not ACA compliant. This transitional policy means that fewer people will have the full patient protections of the ACA in 2014, and the risk pool for Exchange enrollees may not be as healthy as it would otherwise have been.

Details of the Transitional Relief

Following the president’s announcement, the federal Centers for Medicare & Medicaid Services (CMS) sent a letter to state insurance commissioners explaining that, for individual or small group health insurance policies in effect on October 1, 2013, a health insurance issuer can choose to renew the policy for one year, starting before October 1, 2014, even if the policy does not comply with key ACA reforms, such as community rating, the prohibition on excluding preexisting conditions, or the requirements to cover essential health benefits, provide minimum actuarial value and limit cost sharing. If an issuer chooses to renew policies that are not ACA-compliant, the issuer must explain to enrollees what provisions of the ACA the policy is not complying with and their option to purchase a potentially subsidized ACA-compliant policy through an Exchange.

State insurance commissioners are not required to implement this transitional relief. States could continue to require that policies renewed in 2014 comply with the ACA requirements. As of November 20, 15 states have announced they will adopt it and 10 have said they will not. In states that choose to permit the fix, allowing non-compliant policies to be renewed in 2014, issuers could still choose not to offer non-compliant policies.

CMS says it will re-evaluate next year whether to extend this transitional relief beyond October 1, 2014. The National Association of Insurance Commissioners and America’s Health Insurance Plans have released statements expressing concern with the transitional policy.

EDITOR’S NOTE: Manatt has created a state-by -state chart of state decisions and insurer reactions, including key details and links. For more information, please contact Patricia Boozang at pboozang@manatt.com.

Implications and Open Questions

CMS’s action will likely have a greater impact on the individual market than the small group market, because the individual market is impacted more significantly by the ACA. Under existing federal law, small group products are sold on a guaranteed issue basis, and there are limits on pre-existing condition exclusions. Nevertheless, some of the potential impacts described below in the individual market could also impact the small group market.

  1. Risk Pool. Because the individual market is medically underwritten today (i.e. high-risk members can be excluded or charged more), the existing individual market is healthier on average than the existing uninsured population. A key strategy in the ACA to reduce insurance costs is pooling together the risks of the healthy and sick. Presumably, the only people who will decide to renew their policies under this transitional relief are those who are getting a better deal currently than they would under the ACA, although it is unclear how many people fit in this population. These individuals will likely be healthier than the average population. Therefore, permitting them to renew their current policies--and stay out of the 2014 community-rated risk pool—means the remaining individual market risk pool will likely be less healthy and more expensive than issuers had anticipated.

    Issuers have already set their rates for 2014. They may want to revisit those rates, however, in light of the transitional relief. This transitional relief could decrease profits and increase losses for issuers in 2014.

    CMS has announced that it will consider adjusting the temporary risk corridor program to address this problem. The risk corridor program permits CMS to compensate issuers that participate in Exchanges if they incur higher than expected losses. Such an adjustment would increase costs to the federal government and would not completely compensate issuers. The risk corridor program only compensates issuers for a fraction of their losses and only compensates those who participate in Exchanges, whereas the skewed risk pool will affect every issuer in the individual market. Finally, it is possible that this relief will not significantly alter the Exchange risk pool in states that were already permitting issuers to renew individual market policies in late 2013, permitting policyholders to maintain 2013 rates for most of 2014.
     
  2. Patient Protections. Individuals who choose to renew their existing non-compliant policies will not receive the full benefit of the ACA patient protections. The most important benefit these individuals will miss may be the lack of coverage of the complete essential health benefits package and the plan’s ability to exclude coverage of pre-existing conditions. But patients who choose to renew these policies must be notified of these deficiencies.

    The ACA establishes a category of grandfathered policies that were in place on March 23, 2010, and do not need to comply with the 2014 market reforms. The transitional policy does not change the definition of grandfathered plans. Because these non-compliant renewals are not grandfathered policies (as the term was used in the ACA), these policies will still be required to eliminate annual dollar limits on most benefits and have a minimum medical loss ratio.
     
  3. Rate and Form Filing. Health insurance issuers that permit renewals of non-complying 2013 policies in 2014 will want to adjust their rates to account for, at minimum, a year of medical inflation. Issuers and state regulators will need to work through this issue quickly, which will be challenging given the late date and the usual state insurance rate and form review processes.
  4. Statutory Authority. CMS does not cite any particular statutory authority for its action and appears to believe it is acting within the executive branch’s inherent authority to determine the manner in which laws are enforced. There are some legal limits to using enforcement discretion to modify how laws are applied, but courts tend to permit time-limited enforcement policies such as this.

Conclusion

Many key details on the transitional policy, as well as the responses of both states and issuers, are still emerging. Manatt will monitor the situation closely and keep you updated on current developments.