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How Mini-Health Plans Could Sink Health-Insurance Exchanges

One challenge in implementing healthcare reform is that there's a lot of fine print in the Affordable Care Act (ACA). And some of that fine print could subvert the goals of the overall legislation.

One example -- the subject of a recent Kaiser Health News report -- is the waiver process that would allow insurers to continue offering low-cost, low-benefit plans that don't provide real access to healthcare when the insured become seriously ill. Favored by small businesses and larger companies with low-wage workers, these "mini-plans" have low benefit limits. They may cap the amount the plan will pay for doctor visits or hospital care or may have low overall limits on coverage. For example, some plans will not pay more than $50,000 a year.

Under the ACA, the minimum annual coverage limit for health plans is supposed to be $750,000 per person, rising to $2 million in September 2012. Ceilings on annual coverage are supposed to be eliminated entirely by 2014. But insurance companies can obtain waivers to keep their mini-plans if they can show that switching to comprehensive coverage would lead to significant premium increases or force employers to drop insurance benefits.

Insurers and consumer advocates are lobbying the Department of Health and Human Services (HHS) to write rules that would favor their point of view. If HHS takes a liberal stance on waivers, many workers would continue to be bankrupted by high medical costs that exceeded their coverage. But if its regulations are very restrictive, some employers may drop benefits rather than increase them. This will be an increasingly difficult problem as premiums continue to rise, although it's unclear whether the law authorizes waivers after 2014.

HHS' decision on this issue could also affect the viability of state insurance exchanges. As I explained in this space last week, the Achilles heel of the insurance exchanges, as envisioned in the ACA, is that the government doesn't require all individuals and small firms to join them. This lack of universality could cause the same kind of "death spirals" that occurred in the small-business health insurance purchasing alliances of the 1990s. If healthy people tend to buy low-cost insurance outside of the exchanges, the increasing proportion of sick people in the exchanges could force rates up and induce carriers to withdraw from them.

States could avoid that outcome if insurance companies were required to provide the same types of policies inside and outside of the exchanges. California lawmakers are considering such a provision as part of the legislation authorizing the creation of that state's insurance exchange. But insurers, naturally, are pushing back hard, and they can be expected to prevent other states from adopting similar measures.

This is where the HHS determination on waivers comes in. A restrictive approach would mean that most plans offered outside of the state exchanges would have to be similar to those inside of them. This offers the best chance for the exchanges to survive: Because people would receive federal subsidies only for insurance purchased through an exchange, healthy people would be less likely to leave the state-sponsored market to buy a policy that was nearly identical to one offered through the exchange. But if HHS takes a looser stance, and mini-plans endure, many healthy people and firms with healthy employees will buy their insurance outside the exchanges, even without subsidies. If so, the exchanges will become unprofitable for insurance companies to participate in.

As usual, the devil is in the details. But in this case, the stakes in this small provision of the reform law are much higher than would appear on the surface.

Image supplied courtesy of Flickr.