Before the affordable care act marketplace, private health insurance was relatively expensive and unaffordable. This was because medical underwriting in the individual and small-group markets charged higher premiums to people with chronic illnesses and pre-existing conditions, a practice known as adverse selection.
The ACA addressed adverse selection by introducing a legal mandate for everyone to buy insurance. This was designed to compel healthier people to purchase insurance and thereby balance the risk pool and lower premiums for everyone.
Adverse Selection
Before the affordable care act marketplace, adverse selection was a major concern for health insurers. They faced the risk of losing business to plans offering lower premiums, especially if these plans enrolled people who were likely to need more expensive care.
To mitigate this issue, the ACA established a number of policies that are intended to help stabilize and balance premiums. These include risk adjustment, reinsurance, and risk corridors.
The risk adjustment program transfers payments between plans on the basis of medical claims costs so that plans with higher-than-expected claims receive more compensation and those with lower-than-expected claims receive less.
Similarly, the risk corridors program prevents insurers from setting premiums too high by requiring them to pay into a fund if their claims fall below a predetermined target.
To encourage people to buy insurance when they are healthy, the ACA limits annual open enrollment periods to just several weeks. This is designed to discourage people from waiting until they are sick and thereby increasing average premiums.
High-Risk Pools
Before the ACA, people could be denied health insurance coverage based on their pre-existing medical conditions or charged higher premiums than healthy individuals. They also could face high deductibles and copayments or coinsurance if they needed expensive care during the year, which increased their out-of-pocket costs.
Insurers structured plans to be less attractive to high-risk individuals in order to protect themselves from these costs. They did this by establishing high cost-sharing requirements, annual and lifetime benefit limits, and exclusions of specific types of drugs from coverage.
The ACA addressed these practices by setting a limit on out-of-pocket spending, requiring insurers to offer at least one plan with more moderate cost-sharing and establishing benefit coverage standards. These policies limit the average out-of-pocket costs for people to about $7,000 per individual.
Essential Health Benefits
Before the affordable care act marketplace, private health insurance plans were often difficult to understand. They were often costly, and they didn’t cover some essential services.
In 2014, the Affordable Care Act required that all new individual and small-group health insurance policies, including those sold in the ACA’s marketplaces and off-exchange, must offer a set of minimum benefits called “Essential Health Benefits” or EHBs.
These benefits are designed to provide patients with coverage for a variety of medical and preventive services, without annual or lifetime dollar limits.
They include outpatient (ambulatory) services, such as doctor visits and same-day surgeries; emergency care, such as visits to the emergency room or urgent care center; mental health and substance use disorder services; and pediatric services, such as vision and dental.
Many of these services are preventive, so people have a lower risk of developing serious diseases. They also help patients manage chronic illnesses and control their health costs, which in turn helps them pay less for premiums.
Health Insurance Exchanges
The Affordable Care Act required that states set up exchanges where people who don’t have insurance can compare plans. Many states have chosen not to establish their own exchanges and joined the federal exchange.
The federal government provides some funding to help states plan and implement health insurance exchanges, but this money is limited. State exchanges must be open by 2014, so most states are working hard to develop the information technology capabilities needed to operate their exchanges.
One of the most important questions about state-run exchanges is how aggressive they will be in selecting qualifying health plans for participation. The amount of authority the exchange has to define standards and select qualifying plans is critical to the exchange’s ability to promote affordability, competition, and efficiency.
