Assuming the Affordable Care Act (ACA) stays on track through the aftermath of the election, it will offer numerous new benefits, such as guaranteed coverage for all adults starting in 2014. Some companies may want to stop providing health coverage and instead give workers money to buy their own. One of the more popular ideas being discussed is to give workers a lump sum, a voucher or defined contribution, and then let them use that money to buy their own individual health plan through the state health insurance exchange. One upshot is that workers could shop for plans that best suit their needs in terms of doctors and benefits, rather than relying on what their employers pick. They also get to take their policies with them if they leave their jobs. This model “gets a boost now”, said David Lansky, chief executive of the Pacific Business Group on Health.

The defined-contribution model is like a 401(k) plan in which employers put a fixed amount of tax-deferred dollars into employees’ retirement accounts and leave it to the workers to manage the money. In the case of health benefits, employers gain more control over their spending and avoid the hassle of picking plans for their workforce.

Small business employers should be eager for a new way of doing things as medical costs and insurance premiums keep climbing. Businesses with less than 50 employees have nothing to loose - no penalties or “taxes” - for not maintaining a group health plan. Some smaller firms, especially in technology, may want to keep benefits in-house to compete for the best talent. But companies in retail, hospitality and other service sectors with lots of lower-wage workers will be at the front of the line to sign-up for defined contribution plans.

Larger companies tend to be fairly conservative are unlikely to give up their paternal healthcare role in the near term, but faced with escalating healthcare costs, some employers will look at unconventional options. Extend Health, a California-based company, has already helped 40 companies in the Fortune 500 make this switch on retiree health plans, and it said many of those clients are interested in doing the same for current workers. Aon Hewitt, a major benefits consultant, is launching a private health exchange this fall aimed at employers with more than 5,000 workers.

More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014

A paper published in Health Affairs today, uses data supplied by health insurance companies to determine the financial protection they provided in 2010 in the individual and small- and large-group markets, and then compares that protection against the new 2014 standards.

The Affordable Care Act (ACA) creates state-based health insurance exchanges (HIX) that will begin acting as a marketplace for health insurance plans and consumers in 2014. More than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under ACA rules for the exchanges in 2014. These people were enrolled in plans with an actuarial value below 60 percent, which means that the plans covered less than that proportion of the enrollees’ health expenses.

Many of today’s individual health plans are below the “bronze” level, the lowest level of plan that can be sold through exchanges. In contrast, most group plans in 2010 had an actuarial benefit of 80-89 percent and would qualify as highly rated “gold” plans in the exchanges. To sell to ten million new buyers on the exchanges, insurers will need to redesign benefit packages. Combined with a ban on medical underwriting, the individual insurance market in a post-health reform world will sharply contrast with the market of past decades.

Key Findings

• The average actuarial value of group plans in 2010 was 83 percent, compared with an average of 60 percent for individual plans.
• Most people (65%) enrolled in group plans were in either the gold or platinum tier; about 28 percent were in the silver tier and 6 percent were in the bronze tier. Fewer than 1 percent were in plans with an actuarial value of less than 60 percent—dubbed “tin” plans by the authors.
• In the individual market, 51 percent of enrollment was in tin plans. Another third of enrollees were in bronze plans, 14 percent were in silver plans, and 2 percent were in gold plans. In the individual market, there were no platinum plans.
• Average out-of-pocket spending per household in the group plans was $1,765. In the individual plans, average household out-of-pocket spending was $4,127. The highest spenders in tin-tier individual insurance plans—including very sick people who incur huge medical bills—had more than $27,000 in annual out-of-pocket spending.

The Department of Health and Human Services (HHS) has issued a preliminary version of the regulation aimed at controlling "unreasonable" rate increases at the national level.

The draft regulation requires carriers to publicly disclose any individual or small group health insurance rate increases higher than 10 percent. The regulation is still open to comment and subject to change. Double-digit increases will trigger a review by state or federal regulators to determine if they're justified. States will get the first shot at scrutinizing the rate hikes. If HHS determines a state lacks the ability to do a thorough actuarial review of premium increases, federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

This 10 percent threshold can be adjusted on a state-by-state basis over time. After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state's cost trends.

Significantly, neither the regulation nor the Affordable Care Act gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted unless a state regulator prevents it. Most states already review rate increase proposals and some can deny rate increases on individual and small group medical insurance coverage.

How it Works

The mechanics of the rate review are described in the proposed regulation. If they want a rate increase over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer's web site. The HHS will consider whether:

• The rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard.
• One or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
• The choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.

The timing of the rate increase is determined by state law, so HHS' review cannot delay implementation of the rate change. What it will do, however, is require disclosure of a great deal of information, bringing an unprecedented amount of transparency to the rate setting process. The new regulation provides a strong incentive for insurers to do a thorough review of their justifications before asking for big rate increases.