Monday, April 28, 2014

Plan cancelled! Understanding The Full Ramifications of "If You LikeYour Current Plan"

I've written extensively on the broken promise of "if you like your plan you can keep it" yet over and over again it keeps surfacing throughout media outlets. The most recent edition comes to us from a study done by Benjamin Sommers at Health Affairs. In his findings he shares that churn, turnover in the insurance market, is so high that policy cancellations "aren't out of the norm" for people who purchase individual health insurance.

There is no doubt that turnover occurs in this segment of the market. Most of these people are in between jobs and use individual products as a bridge back to employer coverage. Based on Sommers' data in 2012 there were 10.8 million people in the individual insurance market. 6.2 million leave this form of insurance annually. So we all need to calm down about the insurance cancellations as it only impacts 4.6 million people. That's his logic and, as many liberal media outlets are reporting, is the whole argument.

But. It's. Not.

Those of us who understand insurance markets know that this is much more widespread than what is being reported. The individual market isn't alone. It also hits small employer sponsored insurance plans which represent more than 23 million people. Every small employer will lose their current plan (unless grandfathered) over the next two years. This is guaranteed because of the strict requirements under Obamacare. These requirements include a provision called Actuarial Value (AV). AV is the amount of the average claims an insurance plan must pay under a policy. If a plan falls outside of one of the four narrow bands it must be eliminated.

Which brings us to another key problem - less choice. Government believes they know what is better for you than you do. By restricting the AV bands (Bronze, Silver, Gold, Platinum) they are eliminating a large number of insurance choices. What was available in 2013 is no longer the case in 2014. This chart explains how choice is restricted and where plans are being cancelled.

In 2013 employers and individuals could purchase insurance from insurers that had any AV. Every dot represents an insurance plan. You will see very good plans to very poor plans. Now that 2014 is here insurers must conform to the four narrow bands of AV. What this does is eliminate all of the red insurance plans. For many small employers they are having very comprehensive plans cancelled and are being forced to either better or lesser plans.
This is how Obamacare works. Insurance companies are forced to cancel plans outside of the four metallic bands which eliminates consumer choice. It also hinders an insurance company's ability to price products at various levels and suppresses creative plan designs.

The results are less plans, less variation in plan design, less variation in premiums, and less innovation in plan administration. Worse yet, the formula used to determine the four metallic bands will change every year. So, even if you like your new Obamacare plan don't count on keeping it.
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