Impact of the Patient Protection and Affordable Care Act on Costs

December 3, 2009

By Jason Grau & Kurt Giesa[1]

Introduction

The nation is seeking to improve the affordability of health insurance, extending coverage to many of the 45.6 million uninsured and reforming a fragmented healthcare delivery system. Central to the debate over healthcare reform in Washington is how to make health insurance more accessible and affordable for millions of Americans who purchase coverage in the form of individual policies, as well as for small employers.

The Patient Protection and Affordable Care Act (PPACA), currently pending in the United States Senate, includes significant reforms to health insurance industry practices in both the individual and small-group markets. These reforms would require insurers to: 1) offer coverage on a guaranteed-issue basis with no exclusions for pre-existing conditions, 2) discontinue the practice of adjusting premiums ("rating") on the basis of health status and gender, 3) limit how much premiums vary because of age ("age bands"), and 4) sell only insurance policies that meet new minimum benefit levels.

The consulting firm Oliver Wyman, which has extensive experience in health insurance and actuarial analysis, modeled the impact of these provisions, along with a variety of other changes included in the legislation, including subsidies, grandfathering, and reinsurance, to estimate their impact on insurance premiums in the individual and small-group markets.

The key implication of our analysis is simple: For these types of insurance reforms to be successful and sustainable, it is imperative to get broad participation. Young and healthy people need to be part of the insurance pool, and people cannot defer buying insurance until they are sick or at high risk. This is true no matter who is paying the premiums—individuals, employers, or the government.

In looking at PPACA, we modeled the impact of all the bill's major elements related to insurance. Of the expected changes to the insurance market, four will have the greatest influence on the future insurance pool, medical claims, and, by extension, premiums:

Guaranteed issue: Provisions that require insurance carriers to offer coverage to all who apply for it will draw more people with high expected medical costs into the market; it also creates risk that people will buy insurance only when they need it. Guaranteed issue will help provide access to insurance for high-risk people, but will increase average prices in the individual market.
Rating changes: Tighter age bands and the elimination of health status rating will also significantly increase premiums for younger and healthier people, while reducing premiums for the older and less healthy.
Minimum benefit requirements: The Senate bill mandates minimum benefit levels higher than those in many existing policies sold in the market. Ensuring adequate coverage is a logical goal of reform. But raising minimum benefit levels raises costs.
Expected medical costs of the uninsured: Consistent with the Congressional Budget Office (CBO) and others who have evaluated the impact of reform, we believe the uninsured are healthier than the current total insured market. But we disagree with CBO's belief that the uninsured are healthier than the current individual market, which is significantly healthier than the total insured market. We estimate the uninsured, on average, will have medical claims about 20% higher than the current individual market.

PPACA contains provisions to mitigate the undesirable effects of these changes and improve affordability. While these "stabilizers" will reduce out-of-pocket costs for those eligible for subsidies, our analysis indicates that they will not have a sufficiently broad effect on coverage to offset the disruption of the insurance risk pool. Specifically, it will be a challenge to have adequate participation among the young and healthy in the future, reformed market.

Our model provides a detailed, granular analysis of the impacts rating reform and the influx of millions of newly insured people will have on the individual and small-group insurance markets over a five-year period. The model was built over eight months and uses a database of information on actual insurance policies covering nearly six million people—more than 10% of the current membership of the individual and small-group markets. Because of this, we believe our model provides the most robust current evaluation of how reforms will affect actual insurance policies.

The key findings of our analysis are consistent with other recently published analyses, including CBO's report on the impact of the proposed legislation on premiums. However we differ from CBO on some critical assumptions that affect the magnitude of expected premium changes. Because of this, our predicted premium increases in the individual and small-employer markets are greater than CBO's. Some key points of disagreement include: 1) the estimated medical costs of the uninsured compared to the current individual market, and 2) the degree to which young, healthy people will opt out of buying insurance ("adverse selection").

Additionally, we believe our access to actual insurance policy data and analysis across different geographic rating groups allows us to more accurately evaluate the impact of reform. We describe our approach and key differences from CBO in greater detail in this report. We also conducted sensitivity analysis across these key variables to show a range of potential impact.

[1] Jason Grau is an Associate Partner in the Health & Life Sciences practice of Oliver Wyman; Kurt Giesa is a Director in the Oliver Wyman Actuarial Consulting practice