The appeal of the Affordable Care Act’s Health Insurance Marketplaces is to keep insurance affordable by spreading risk across a broad pool of diverse individuals. This means that healthy young adults must enroll in order to offset the insurance costs of older and sicker participants. Other strategies the ACA employes to keep premiums low is utilizing premium tax credits and maintaining the individual mandate.
The “Marketplace” is an online market that the Affordable Care Act (ACA) created for Americans to purchase health insurance. According to the law, insurers in the Marketplaces must offer coverage to all eligible buyers.
Theoretically, decreased levels of young, healthy adult enrollment could cause insurers to raise their premiums, which in turn, could toss a huge number of buyers right out of the market. In the most dire of situations, this would lead to an out of control spiral, in which the market collapses due to high premiums and diminishing enrollment. That’s why the ACA has made provisions to ensure that premiums stay low. Here’s how they do it.
How The ACA Maintains Price Stability
The good news is that the ACA has contingency mechanisms to flesh out the effects of lower-than-expected enrollment. These buffering provisions are designed to stabilize premiums and cushion against premium shocks and insurer losses from uncertainties about the diverse mix of enrollees.
Premium tax credits. Refundable tax credits are designed to help eligible individuals and families with low or moderate income (between 100 percent and 400 percent of the federal poverty level) afford health insurance purchased through the Health Insurance Marketplaces. The credit can be paid in advance to the enrollee’s insurance company so they can benefit from lower monthly premiums. Enrollees also have the option to claim the credits all at once through income tax return.
Individual Mandate. The ACA requires that most individuals obtain health insurance coverage or they will be fined. This is called the Individual Mandate. In 2015, the fine has increased from $95 per adult in 2014 and $47.50 per child, to $325 per person and $162.50 per child (up to $975 per family), or 2 percent of income, whichever is greater.
Age rating. This element allows insurers to fix premiums up to three times higher for older individuals than for younger ones. This allows for limiting the extent to which younger, healthier adults are subsidizing participation by older, more sickly adults. Premiums for young adults would be higher if all enrollees were charged a set price regardless of age.
Risk corridors. These are temporary, risk management programs intended to protect consumers by stabilizing premiums. Risk corridors are built into the health care law to limit the potential losses insurers could suffer.
Reinsurance. This provides temporary payments to insurance plans if they have an enrollee with unusually high costs.
Why It’s a Bad Idea to Eliminate Tax Credits
Eradicating premium tax credits for lower-income enrollees would disrupt the individual market. Premium tax credits are important for the Marketplace because without them, all enrollees would be required to pay the full cost of premiums. Research estimates that if this happens, premiums would rise nearly 45 percent and enrollment would fall by almost 70 percent.
This is driven by the fact that higher-risk individuals are likely to seek coverage regardless of whether or not they are eligible for tax credits, whereas, lower-risk individuals, frequently need incentive to enroll. When they do sign up, they improve the risk pool and help level off the price of premiums.
Effect of the Individual Mandate
If the mandate were eliminated, the overall number of enrolled people in the market would drop by nearly 20 percent, from 19.8 to 15.8. The number of young adults enrolled would jump from 5.4 million to 3.9 million, and premiums would soar by around 7 percent. The drastic decline in enrollment in this model suggests that the individual mandate is crucial for the ACA to achieve price stability in its markets.
The ACA has structures in place to help provide stability throughout changes in the enrollee age mix. Specifically, premium tax credits, which boost participation and safeguard against financial upheaval from rising premiums. These elements play an important part in stabilizing the individual market. Without these safeguards in place, the RAND analysis estimates significant premium increases and drastic declines in Marketplace enrollment.
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