Individual health insurance will soon become more expensive for most consumers.
On Thursday, President Donald Trump announced two executive orders on healthcare. The first directs his administration to come up with policies to create low-cost, low-regulation insurance plans. The second ends a series of payments known as cost sharing reduction subsidies. Both moves will throw the insurance marketplace into chaos and lead to higher costs for most, but not all, individual consumers.
Cost Sharing Reductions
The immediate impact will come from Trump's order to halt payments for cost sharing reductions.
The Affordable Care Act requires insurance companies to subsidize costs such as co-payments and deductibles for qualifying individuals on the exchanges. This comes out of the insurer's pocket, which then gets reimbursed by the government.
However, in 2014, the Republican-led House of Representatives filed a lawsuit against the Obama administration over payment of these subsidies. They argued that since the ACA does not contain an appropriation, any payments on cost sharing subsidies have to go through Congress. The Obama White House challenged this lawsuit. The Trump administration has decided to drop it.
According to the Kaiser Family Foundation, this would affect about 58% of everyone who gets insurance through Obamacare. The government paid about $7 billion in subsidies last year, all of which would be born now by the insurance companies.
Limited Coverage Expansion
Trump also ordered his administration to begin researching an expansion of low-cost insurance. His order specifically requests that agencies explore association health plans, a mechanism by which small groups and businesses pool together to buy insurance, and short-term insurance, stopgap plans currently available for no more than three months at a time.
Plans which offer short-term coverage are exempt from many of the Affordable Care Act's regulations. As a result, expanding the duration of these plans will allow the administration to enact a form of backdoor repeal. A full-year short term plan would offer a functional version of the so-called "catastrophic" plans that conservatives have long favored: low-cost, high deductible insurance designed to offer little protection except in extreme circumstances.
These plans typically appeal to young and healthy consumers who worry primarily about catastrophic injury.
It will take time, according to health policy experts, to know exactly what this executive order will entail.
"It's hard right now," said Jack Hoadley, a researcher with Georgetown's Health Policy institute. "This was a request to the various federal departments to try and develop these options out and put them into potential rule-making… Until we know more of the details it's going to be hard to know [the effect]."
"So, for example," he said. "The short term policies -- the Obama administration limited those to three months. Here we're potentially talking about full year coverage, but maybe the agency in charge of handling it will split the difference and come up with six months instead of 12 months. All these details are going to matter."
Effect on Consumers
Ending cost sharing reductions will have the most immediate impact on consumers.
Insurance companies are required by the ACA to provide these subsidies whether or not they get reimbursed by the government. Ending them will force insurers to raise premiums in order to compensate for billions of dollars in new expenses.
According to research from the Congressional Budget Office, this could cause premiums to go up by as much as 20 to 25% in most markets. Rate increases will be highest in states which have not expanded Medicaid. This will fall heaviest on consumers who don't qualify for insurance subsidies.
Insurance companies will also begin to pull out of markets that they think will get too risky or unstable, leaving about 5% of all individual markets with no insurance option at all. These premium increases will lead to increased premium subsidies from the federal government, leading to an increase in the deficit of roughly $194 billion by 2026.
These orders will also lead to higher out of pocket costs for consumers.
Americans spend more than $330 billion per year in out of pocket costs for healthcare. As insurance companies pull out of some markets and struggle with funding these costs on their own in others, an increasing number will try to pass those costs on to the consumer. Trump's second executive order will make that more likely.
Low-cost and catastrophic healthcare plans are defined, chiefly, by their high deductibles. Enrollees pay little in premiums, given the low odds that they'll need medical care, but face very high out of pocket costs when they actually do see a doctor.
Trump's order to expand short-term and association options is based on an administrative push to expand access to this type of low-cost, lightly regulated care. While signing the order, Trump said that it will give "millions of Americans with Obamacare relief" and will "cost the United States government virtually nothing."
"You'll get such low price for such great care," he said.
For young and healthy consumers, this will prove true.
Although details will have to wait until government agencies come back with specific proposals, policy experts generally know what to expect from low-cost plans. Healthier consumers will get a better deal. They will seek out insurance premiums that more accurately reflect their actual healthcare consumption, and as a result will find more affordable options.
Virtually all other consumers will see their premiums go up, in some cases by quite a lot.
"The whole point of trying to operate under the Affordable Care Act was basically to create one market," said Hoadley, "so everybody at all pools of risk would be pooled together. People who were healthy would pay maybe a little more than they had historically, but people who were sicker would pay less. Sometimes a lot less. What this would do is basically re-segment that market."
"You can see the logic. With all these young, healthy people you can say, 'well they're not using the healthcare system that much, so we want them to have lower premiums,'" he said. "But when you carve them out, [everyone else's] costs are higher and their potential costs are higher. And that's what an insurance company is worried about, not just their costs today but their potential costs."
Health insurance operates under a model of collective risk. The lower the collective risk of all insureds in a given plan, the lower the premiums the insurance company can charge. Low-cost plans distort that marketplace by carving all of the healthiest consumers out into a separate risk pool. This skews the profile of all other plans, making their population older and sicker and thus more expensive.
The result is a system under which premiums spiral upward, and likely one in which insurers vanish from many individual marketplaces.
In the short term the most pronounced market chaos will come from the order regarding cost sharing subsidies. Several states have announced that they will continue the lawsuit to force government payment. However projections suggest that insurance companies could face losses as high as 25% if this program ends. Companies have watched for this since Republicans took office in January, and many have already raised their premiums for 2018 to compensate. That process will continue.
Beyond 2018, introducing low-cost plans will destabilize the individual marketplace in significant but as-yet unknowable ways. Segmenting off the healthiest portion of the risk pool will skew the cost and risk profiles for most other insurance plans. As premiums rise, many people may find that the low-cost plans their only remaining viable option. As a result out-of-pocket expenses will also increase substantially.
"There's a pretty good chance," Hoadley said, "that this is going to really tear up the individual market in a pretty significant way."
States still retain the power to regulate their own insurance markets. The next step for consumers will be to watch what happens at their local level.