The Affordable Care Act (ACA) has an “empty shelf” problem: consumers can use their premium subsidies only on the public health insurance exchanges, but insurers are not required to offer any plans on these exchanges. This looming, but still mainly hypothetical, problem has become all too real in Tennessee, where 16 counties have no insurer participating in the exchanges in 2018.  Many areas in other states are at risk, with just one participating insurer.

Tennessee Senators Lamar Alexander and Bob Corker have introduced the bill Health Care Options Act of 2017  (HCOA) that would allow consumers living in an area with no insurers on the public exchange to use their ACA premium tax credit in the off-exchange individual market. For more on the HCOA, read Tim Jost’s analysis.

We asked some experts to reflect on the implications of this policy proposal.  

Mark Pauly questioned why subsidies could only be used on the public exchanges in the first place:

It was never very clear why subsidies were limited to plans offered on state exchanges since off-exchange individual insurers had to comply with the same rules as did exchange plans—community rating, minimum medical loss ratios, essential benefits, and the like, and since both insurance brokerage firms and websites like e-healthinsurance.com offered the same vehicles for choice as were available on exchanges. Some of the more aggressive states like California wanted subsidies to go only to plans they could regulate more heavily, but states that opted for the federal exchange presumably did not care.  The exclusion was primarily intended to direct subsidies to encourage plans to list on exchanges, but in many states that has failed.

Scott Harrington called the HCOA a “temporary, common sense proposal,” but worried about its potential impact on the long-term viability of the public exchanges:

There might be concern that allowing premium and cost-sharing subsidies to be used for off-exchange coverage in the long run would reduce incentives for insurer participation on the exchanges and undermine exchange funding.

Kathy Hempstead noted that the policy change had “some intuitive appeal,” but echoed concerns it could make things worse in the long run, especially for the unsubsidized population in the individual market:

[C]arriers who are currently participating only off the exchange may not be willing to sell their plan to customers with tax credits, and therefore would exit the market in anticipation of this change.  To the extent to which this policy change encourages carrier exit, this would effectively remove options from the individual market, the opposite of what is intended.  Another possibility is that these off-exchange carriers would ask for and receive significant rate increases to price for this risk. Both scenarios would make the unsubsidized population worse off.

Mark Pauly called the proposal a “temporary patch,” and speculated on how the off-exchange insurers might react:

The insurers offering products off exchanges may view this switch as a serious challenge, precisely because they have not targeted the kinds of lower income people who get subsidies, and who are 80-90% of the people on exchanges now.  Projecting what gross premiums to charge will depend on information about the risk characteristics of this population (which they do not know) and will have to be reconciled with the premiums charged to their non-subsidized customers who may have very different demands and patterns of use of care.  There is a real danger, given the small size of the exchange population, that many off-exchange plans will pass on this opportunity. 

Michael Morrissey said the HCOA is “well intentioned,” but stressed that it does not address the underlying market dynamics that insurers face on the public exchanges:

My concern is that it [the HCOA] doesn’t address the underlying problem: insurers are continuing to pull out of the exchanges because they are continuing to attract a substantially less healthy mix of enrollees. From our fieldwork, it appears that many insurers have remained in the off-exchange segment of the individual market after they have withdrawn from the exchanges themselves. This appears to have been done in an effort to hedge their bets, maintaining a small presence and incurring small losses off-market, to allow them to quickly re-enter the exchanges if the economic or political environment improved.

However, providing subsidies to those folks closed out of the exchanges will move these disproportionately less healthy people into the off-exchange market segment.  This will generate the sorts of losses off the exchange that the insurers have just experienced inside the exchange.  The likely outcome will be a rush by insurers to withdraw from the off-exchange market as well – probably before the next open enrollment period.

Kathy Hempstead offered some alternatives that might reduce the likelihood of a rating area with no on-exchange carrier:

Certain state regulations, such as requiring statewide sales of at least one sale as a condition of market participation, can reduce the probability of a bare area. Another potential avenue is to reconsider/reduce the number of rating areas. This will probably result in increased rates, but may reduce the likelihood of a void.  Another important strategy for state regulators is moral suasion with existing state carriers. This is probably the first practical step when facing an actual void.  

In the event that these approaches fail and there is a potential bare area, policymakers will likely consider whether there is an existing group plan that individual market participants can join. Potential candidate plans include state or federal employee plans, Medicaid MCOs, or Medicare Advantage plans. There are complications with all, including comparability of benefits and pricing, but these problems are surmountable.  Another option would be for the state or federal government to create some opportunity to encourage new market entrants, perhaps through a challenge or some kind of RFP that would provide successful bidders with access to capital or other kinds of assistance. New entrants may or may not utilize some kind of disruptive model involving telecommunications and travel to out of state providers.