• Off-exchange catastrophic options

    I was wondering recently whether more catastrophic (higher deductible) plans could be offered off-exchange. By email Nicholas Bagley, University of Michigan Assistant Professor of Law, answered that question and many more.

    The ACA requires insurers in the individual and small-group markets to offer the “essential health benefits package.” In §1302(a), the ACA defines that “package” to mean an insurance plan that (1) covers essential health benefits; (2) limits cost-sharing as outlined in §1302(c); and (3) pays for, as an actuarial matter, at least 60% of its enrollees’ medical costs (the “bronze level”). These requirements apply to all plans sold in the individual market, even if they’re not sold on the exchanges. (The only exception is for catastrophic plans sold to a subset of those under the age of 30. Those sorts of plans don’t have to adhere to the bronze-level requirement.)

    What are the cost-sharing obligations outlined in §1302(c)? There are two of them. First, the total amount of annual cost-sharing is capped at $5,000 (subject to future adjustments to reflect premium growth). Second, deductibles are capped—but only for small-group plans. The ACA doesn’t limit deductibles for plans sold on the individual market. HHS regulations confirm as much. See 45 C.F.R. §156.130(b) (providing for an “[a]nnual limitation on deductibles for plans in the small group market”). Apart from covering preventive services without cost-sharing, and subject to the cap on annual cost-sharing, insurers in the individual market are free in principle to sell high-deductible catastrophic health plans.

    Any such catastrophic plan, however, must also provide bronze-level coverage—meaning that it must pay for, on average, at least six out of ten dollars of the medical costs that its enrollees incur. This requirement will necessarily limit the size of the deductible. If the deductible is set too high, enrollees as a group will spend too much out of pocket for their medical care and the plan will no longer offer bronze-level coverage. It’s hard to say exactly what that limit will be, and it will vary from state to state. But the need to adhere to the bronze-level requirement means that catastrophic plans won’t be much cheaper than conventional bronze plans. That said, it’s plausible that catastrophic plans could be somewhat cheaper if the high deductible discouraged their enrollees from incurring medical expenses.

    Here’s the surprise, at least to me: if you do buy a catastrophic plan on the individual market, you don’t have to pay the penalty. Under the ACA, you satisfy the mandate if you purchase “[c]overage under a health plan offered in the individual market within a State.” Section 1501, §5000A(f)(1)(C). Which is to say, any individual health plan, including one with a high deductible.

    On the one hand, it really is true that the ACA limits (some say “stifles”) the market for catastrophic plans. On the other hand, the opportunity for a few thousand dollars of deductible is possible. For those wanting to self-insure more than that, they’re out of luck. My guess is that that’s a fairly small proportion of the population.

    It’s perfectly reasonable to hold the opinion that more people should be encouraged, maybe even compelled, to purchase plans with higher deductibles than the ACA permits. Changing the law to accomplish that requires far less than repealing it. Moreover, it’s unlikely that very many with political power would want to impose an instantaneous shift to very high deductible plans. A gradual transition is more reasonable. You might argue that is, more or less, what we’re seeing. It’s happening for employer-sponsored plans and the Cadillac tax will further encourage it. And many on- and off-exchange plans will or could have deductibles larger than most insured Americans face.

    Medicaid enrollees can’t afford high deductibles, though income transfers (even dedicated to health care use through HSAs) could address that. Again, repeal isn’t necessary for that. Just reform.

    Medicare is another story, both politically and structurally.

    @afrakt

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    • Theoretical:
      What percent of folks who might have catastrophic plans on individual market would potentially spend >9.5% of income on health expenses and simultaneous blow through 60% of actuarial value?

      Given young, select demographic, I would imagine small?

      I only raise because it might be a fifty dollar question for a five cent problem.

      Brad

    • You guys did an post on this issue. March 2, 2012

      You had a chart of health care spending by group. The bottom 50% of spenders spent under $300/year on health care (ie costs of health care, not insurance). The shape of the curve was very steep. The most expensive 5% accounted for almost 50% of all spending.

      So, high deductible plans are unlikely to work. It’s going to be very hard to get people who spend $236/year on health to reduce their spending. The top 5% has blown through any deductible long ago.

      Because so many of the costs are skewed to the highest spenders and the lowest spenders spend so little, raising the deductible doesn’t reduce the cost of a policy that much. The only way a high deductible will significantly reduce the cost of a policy is if it separates the healthy from the not-so-healthy, which is exactly what the no-pre-existing conditions is trying to prevent.

      • I can’t help but wonder if marketing a plan as “high deductible” or “catastrophic” wouldn’t—at least in the beginning—do just that: induce a healthier beneficiary population, because that’s who typically enrolls in such plans. Not something I consider a desirable outcome, but seems like a possibility worth keeping in mind.

        The actuarial-value requirement would likely curtail such an effect in the long run, though (healthier population = fewer out-of-pocket costs = necessarily lower deductible = more attractive to less-healthy individuals).

    • A couple of comments and questions.
      I did not know there was a difference between catastrophic plans in the group market and those in the individual market.
      Thanks for the insight.
      Where in the ACA does it say that catastrophic plans in the individual market must meet the bronze level?
      As you stated for group plans, carastrophic plans not only do not have to meet the bronze level; they are intended to pay less than the bronze level.
      The annual amount of cost sharing of $5,000. Is that per person, so a “family” would be limited to $10,000?
      Does this work like on group plans, such that the essential benefit coverage need not be covered until after the deductible is met?
      Don Levit

    • Cost-sharing is defined in section 1302(c)(3) to include “deductibles, coinsurance, copayments, or similar charges” but to exclude “premiums, balance billing amounts for non-network providers, or spending for non-covered services”. It’s a definition in which the exclusions could swallow the inclusions. I mention this because it’s confusing to most people when we refer to a dollar limit on cost-sharing but then define cost-sharing to exclude many items.

    • I don’t think Mr. Bagley has some of his facts straight.

      1. The annual limitation on cost sharing is $6350 in 2014. It is tied to the maximum out of pocket the IRS sets for HSA-qualified plans. The $5000 limit probably refers to the original limit that was established many years ago, prior to indexing.
      2. Catastrophic plans do not have to satisfy the bronze level of coverage. He seems to contradict himself in the email.
      3. The benefit parameters for the catastrophic plan are pretty well defined in the text of the ACA (sec. 1302(e)). The deductible will be $6350, but you get three office visits pre-deductible.

      Catastrophic plans will be cheaper than Bronze plans because HHS is allowing carriers to price reflecting the favorable risk pool that will select catastrophic (all the other metal tiers need to be priced as a single risk pool). You can check the rates published by Covered California for an example.

      • Thanks for the comments, Mike.

        I take your point on (1); I missed the indexing. That suggests plans will have more flexibility to impose high deductibles.

        On (2) and (3), I think we’ve just got confusion on terms. As you say, 1302(e) establishes rules for what the ACA calls a “catastrophic plan” sold to certain under-30s. Those plans don’t, as you note, have to adhere to the bronze level of coverage.

        But 1302(e) is about one type of catastrophic plan marketed to one slice of the market. What about the rest of the market? What rules govern the size of the deductible available to a 45-year-old buying insurance on the individual market? If that 45-year-old buys a health plan with a very high deductible, she’s bought a catastrophic plan, even if it’s not a catastrophic plan as 1302(e) defines it. In generic terms, “high-deductible health plan” is just another way of saying “catastrophic plan.”

        So what’s the answer? Can private insurers sell high-deductible/catastrophic plans in the individual market? The answer to that question, as the email says, is a qualified yes: they can, although adhering to the bronze-level requirement will limit the size of the deductible they can impose.

        • Hi Nick,

          Thank you for the reply. I agree that this was largely just a confusion on terms. However, since “catastrophic plan” has a very specific meaning within the context of the ACA, I would recommend using a different term to refer to high deductible plans. I think that pretty much all Bronze plans will be high deductible. It’s pretty much unavoidable, given that they need to achieve a 60% actuarial value, while still maintaining a maximum out of pocket max of $6,350. The only real lever you have to meet that 60% actuarial value is deductible.

    • Hmmmm. Expanding benefits, constraining deductibles, and forcing insurers to spend 60% of premiums on policies that already have higher administrative costs relative to premiums all seem to move the probability-needle strongly towards higher premiums for post-ACA “catastrophic” plans..

      If the ACA makes it impossible to administer and price catastrophic plans at a sufficient discount relative to conventional “bronze” plans available in the exchange, then that will effectively kill them off,

    • Catastrophic plans also have separate risk pools.
      SAO wrote:
      Because so many of the costs are skewed to the highest spenders and the lowest spenders spend so little, raising the deductible doesn’t reduce the cost of a policy that much.
      The only way a deductible will significantly reduce the cost of a policy is if it separates the healthy from the not so healthy, which is exactly what the no pre-existing conditions is trying to prevent.
      I would agree with all your statements, in general.
      The idea of being able to separate the healthy from the not so healthy has some validity, but the higher deductibles, such as $25,000-$50,000, indirectly does this by reducing premiums 60-80%.
      We know the law does not allow deductibles higher than $2,000 for an individual and $4,000 for a family (at least in the group markets. The author suggests they have no limit in the individual market).
      Here is how we plan to get a waiver from HHS on our patented plan for “higher deductibles.”
      The paid-up benefits rider will, hopefully, be considered an “excepted benefit.” This classification means the rider need not be ACA compliant, including not having to meet the MLR requirements.
      The deductibles are priced to raise tp coincide with the balance of the paid-up rider, but the actual coverage is first dollar. By refusing lower first dollar claims, our participants, can in effect, save 60-80% off of a tradituional premium when their paid-up rider reaches $25,000 or $50,000.
      Don Levit

    • ‘Catastrophic’ plans will not only be available to people under age 30, they will also be available to people of any age for whom the cheapest non-catastrophic plan option after subsidies would cost more than 8% of their income. There’s a nice flowchart at