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The Trouble With Grandmothered Health Plans and Bidding Low

Even if you liked your health insurance plan, the Affordable Care Act might have been better off if President Obama hadn’t let you keep it.

It’s rate-filing time for insurers, and Washington is gripped by anxiety about rising premiums. Although this is the fourth go-around of exchange premium proposals and announcements, new markets have yet to stabilize. It’s widely expected that premiums will rise in some regions in 2017.

This might be partially explained by a set of occurrences that the ACA writers didn’t anticipate. One is the establishment by the administration of ‘grandmothered plans,’ or transitional plans that were bought between the passage of Obamacare and its implementation.

Another is the initial premium rates set by health plans in 2015, which were about 15 percent lower than the Congressional Budget Office expected. (The administration reminded people of this fact in a blog post released Tuesday). Insurers bid low in the beginning, and are still feeling the pinch.

Put together, these two things may have had consequences that continue to ripple through the insurance marketplace today.

“I think we’d be looking at a very different picture right now if premiums had come in as expected rather than 15 percent below what CBO projected,” said Larry Levitt, a senior vice president at the Kaiser Family Foundation. “But it’s easy to say that now looking through the rear view mirror.”

And as for grandmothered plans, Levitt said they “have definitely [kept] healthy people out of the ACA risk pool.” That makes covering people under Obamacare exchanges more expensive.

Obamacare allowed some ‘grandfathered plans,’ or plans established prior to the ACA. In general they weren’t required to cover the same range of benefits as post-ACA plans. But then Obamacare hit a couple of serious setbacks. The administration’s launch of healthcare.gov in October 2013 was a technical disaster. The president was also under attack for his “If you like your healthcare plan, you can keep it” promise. People were getting notices about cancelled plans, and the administration responded.

In November of that year, the Department for Health and Human Services announced that transitional plans would not, in fact, be cancelled. If state insurance commissioners allowed it, people could keep plans they bought in advance of October 2013. Originally, this waiver was for one year. It has since been extended several times.

These transitional plans, bought between the passage of Obamacare and its implementation, were deemed “grandmothered” plans. Different states have allowed the transitional plans to last for different amounts of time. The administration announced earlier this year that all transitional plans must end by the end of 2017.

The existence of grandmothered plans was a challenge for insurers in 2013 because they had already set their rates for 2014 using their best guesses as to what the new marketplace would look like. Their assumption was that people with grandmothered plans — which generally offered skimpier, non-ACA compliant coverage — would be healthier on average than other individual market enrollees.

When those people were allowed to keep their plans, that meant that a large chunk of the population that was supposed to help insurers keep afloat in the individual market would not be purchasing new policies.

“The uncertainty with who would enroll in the initial year of the exchanges was compounded by the decision to move forward with transitional policies — a regulatory change that happened after plans had already developed their rates and premiums for 2014,” said Clare Krusing, a spokeswoman for America’s Health Insurance Plans. “Allowing people to stay out of the ACA market meant that the assumptions about maintaining a balance between young and healthy in the risk pool completely changed.”

In 2014, about 70 percent of carriers on the individual market sustained losses. Overall, the market operated at a 4.8 percent loss, according to the McKinsey Center for U.S. Health System Reform.

The stability of a health insurance market is dependent on insurers’ ability to set premium rates in accordance to the health of the market’s enrollees. Insurers have to find the rate at which the cost of all beneficiaries’ claims are covered, or else they lose money.

That’s not the only reason for insurers’ woes, however. Even before the administration announced grandmothered plans, insurers had priced well below what CBO had predicted they would.

“I find it difficult to believe the grandmothered plans are having a big effect on the risk pool,” said Caroline Pearson, senior vice president at Avalere Health. “To me, the bigger problem is the enrollment has been small.”

“My take is that it’s actually an affordability problem,” Pearson added. “I really feel like you’ve got people who are on very limited incomes, and even with the subsidies, they simply cannot afford to pay the premiums and out of pocket costs of these plans.”

Once insurers have sustained losses, it can be hard to recover. The exchange markets are, by design, competitive. Insurers have an incentive to prices low. Subsidies are tied to the second-lowest cost silver plan, which a sizable amount of enrollees end up choosing.

Once an insurer prices too low, raising premiums seems to be the obvious solution if they lose money. Yet in a marketplace where consumers tend to shop around and switch plans, raising premiums almost guarantees an insurer will lose a good amount of enrollees. The problem is further complicated by the fact that new individual market enrollees are sicker than anyone originally anticipated.

Insurers may have initially priced too low, or they may have been wounded by grandmothered plans. At the end of the day, the result is the same: Exchanges are not yet a safe place for insurers.

Some don’t have very much sympathy.

“The combination of lower than expected initial exchange premiums and the grandmothering of plans certainly led to some bouts of turmoil for insurers in the early years of the ACA marketplaces,” said Loren Adler, a research associate at the Brookings Institution. “Much of the pain now being felt by some insurers has been self-inflicted.”

For example, Adler said, insurers made lower premium offers in hopes of locking in market share, “underestimating the subsequent degree of churn in the market.”

Several transitional plans have already ended, and the rest will end at the end of next year. Experts say that there probably aren’t many grandmothered plans left, meaning the influx of more healthy people onto exchanges now probably won’t be very impressive or have much of an impact.