By Jimmy Petersen
A perfect storm has been brewing in the health insurance market for the past few years, and it is about to hit with full force.
President Barack Obama has made a valiant attempt to provide health care to every American, providing unlimited benefits and guaranteed acceptance for every man, woman and child. Unfortunately, the “minimum essential coverage” mandate of the Affordable Care Act is too rich for Americans to support.
Purchasing unlimited lifetime coverage is the equivalent of purchasing a sports car or a mansion, which most Americans cannot afford. The U.S. has the most expensive health care costs in the world, and we are offering unlimited benefits to America's sickest people. Although this sounds like a great benefit for society, it is entirely unsustainable. Without the ability to charge higher premiums for higher levels of maximum-benefit coverage, insurance companies are struggling to survive.
The general principle behind a successful insurance Company is the ability to pool healthy and sick individuals, collect premiums from all policyholders, and maintain profitability based on the likelihood that the healthy participants’ premiums will help offset the cost of the sick participants’ expenses. In order to ensure profitability and protect against the increasing pool of sick participants, many states previously offered programs for individuals with pre-existing conditions, but limited benefits to a lifetime maximum of $100,000 or less prior to the creation of the ACA. Now that the ACA has eliminated the ability for insurance carriers to protect from such significant losses, carriers are being forced to find alternative methods to increase profitability and sustainability by significantly increasing premiums.
For many Americans, the ACA has become or is becoming unaffordable. Health insurance premiums have been increasing each year with no end in sight. The early premium projections for 2017 are showing double-digit premium increases with premiums in some states increasing by 20-60 percent. The premium increases are being attributed to more sick individuals than anticipated, loss of clientele to short-term medical programs, lack of reimbursement by the government, and the end of the “health risk insurance corridor.”
The federal government initially developed the risk corridor program to reimburse insurance companies for excessive losses. Many insurance companies receive only a fraction of the payments they were expecting, leading to lawsuits against the government. This federal program will end at the conclusion of the year, which is what many speculate is the reason for these significant premium increases.
As a result of the premium increases on the exchange, many Americans have begun looking for alternatives to the program and have discovered a way to save up to half of their current premium costs by purchasing short-term health coverage outside of the exchange. Short-term medical (STM) plans do not meet the ACA’s “minimum essential coverage” requirements and individuals who rely solely on STM plans will face an IRS tax penalty. Although this penalty was intended to discourage participants from pursuing plans like these, for certain income brackets, paying the IRS tax penalty and the STM premium equates to about half the cost of a standard plan on the exchange, so it remains much more affordable, even with the penalty. The health insurance premiums within the exchange are increasing so rapidly that the tax penalty is looking more and more attractive to many consumers.
Due to the financial feasibility of the STM plans, many healthy individuals are converting their coverage to these plans. As a result, the STM plans are siphoning healthy people out of the exchange and sending back sick individuals. The STM plans do not cover pre-existing conditions, which is not concerning to healthy individuals, but is certainly not attractive to people who need ongoing care. Healthy individuals are willing to risk the chances of becoming sick on a STM plan because if a healthy person has a short-term plan and then develops a serious illness, like cancer, the temporary plan will cover them for the remainder of the year. Then, after the STM plan expires, that person may apply for coverage on the exchange during open enrollment and will be automatically accepted.
Currently, there is absolutely no risk to these individuals to remain on a less expensive plan while they are in good health, because they are able to resort to the more expensive exchange programs if they ever do become sick and need extensive care. As a result, the pool of healthy individuals within the exchange is become increasingly smaller, while the pool of sick individuals is becoming increasingly larger. This is creating the financial collapse of many existing insurance carriers and undermining the entire platform upon which health insurance was founded.
In order to help offset the increasing costs incurred by health insurance providers, a growing trend among health insurance companies is the dissolution of commission payments to insurance agents. Most insurance agents were financially affected by the initial implementation of the exchange plans, but now they are being tasked with providing professional advice for free. As a result, some insurance agents are unnecessarily moving their clients to exchange plans that are still paying commissions and some are encouraging healthy consumers to switch to short-term medical plans, further increasing the devastating financial impact for carriers within the exchange.
Short-term medical insurance was developed to cover individuals in between jobs, not as an alternative to the exchange. Sales of short-term medical are skyrocketing this year. The first two quarters of the year have surpassed the entire year’s 2015 production.
To help discourage consumers from participating in this growing trend, the U.S. Department of Health and Human Services plans to limit short-term plans to a maximum term of three months without renewals, instead of the 6- to 12-month plans currently permitted. This may help provide some relief to carriers within the exchange as it will force some healthy individuals back into exchange programs by making STM plan less attractive and available.
This help may come a little too late, as many insurance companies have already suffered such losses and are unwilling to continue participating in the exchange. Because of these significant financial losses, some states have been left with only a single carrier offering coverage via the exchange, eliminating competitive pricing. Insurance companies are hemorrhaging money and the only solution is the inevitable further increase in premiums, making the coverage increasingly unaffordable for many Americans.
With sharp premium increases year after year, fewer and fewer healthy individuals will be able to continue paying for exchange-based health insurance. This will leave only the individuals with pre-existing conditions to continue paying exorbitant monthly premiums. Insurance companies will need to continue raising their rates to offset losses, further discouraging healthy individuals from participating and further generating the financial infeasibility for carriers to continue participating in the exchange. Will our nation's top health insurance company’s become insolvent, or is there still time to save the sinking ship?
Jimmy Petersen is a disability income associate with Petersen International Underwriters, Valencia, Calif. Jimmie may be contacted at [email protected].
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