Last Tuesday’s Globe lead editorial (“Mass. needs an Obamacare waiver for small-business health plans“) looked at an arcane issue that has turned into a big deal for some small business associations in Massachusetts.
If you just read the editorial, or coverage in the business press (sample: Massachusetts health care costs out of control as ObamaCare provision hits small business, from Boston Business Journal), one would think that some horrible provision of the ACA is leading to increased health costs in Massachusetts. What’s going on here? Aren’t we the blueprint for Obamacare?
But it’s not so simple. In this particular area, there are winners and losers, and, like always, it’s the losers that are making the most noise.
This stuff can be complicated, so here’s an analogy, followed by the explanation.
Imagine an airline that sets a basic fare cost for flights from Boston to New York. So everyone pays that amount, right? Of course not, this is an airline we’re talking about. In this example, imagine all the frequent fliers get a nice discount. They pay less. And everyone else? In addition to the base fare, the non-frequent fliers have to pay a “transit surcharge” imposed on top of the ticket price. They can’t get out of it. So what would you think of the FAA prohibiting both the discount and the surcharge? Fair?
Here’s what the health insurance issue is all about.
In Massachusetts, a provision of chapter 58, authorized a “group size rate adjustment” to small group (up to 50 workers) and individual premium rates. The provision was put in to mollify some small business groups who feared their premiums would go up when individuals were merged into the small group market.
Insurance premium prices start with the base rate – the average cost for the average person with the benefits in the plan. Then they are adjusted, based on age, geography and other factors. The law specifies the factors and the amounts. The way the group size adjustment works is that insurers, at their discretion, can provide discounts for larger small groups, and charge add-on surcharges for smaller small groups and individuals. The largest discount allowed is 5% off the base rate. The largest surcharge allowed is 10% added to the base rate.
So now, individuals and smaller small groups pay more than they should, and larger small groups pay less than they should. We’ve been told that the dividing line varies, but is around groups of 10 subscribers. Individuals and groups below 10 pay the surcharge, and groups above 10 pay get the discount.
The group size adjustment is not related to the actual cost of servicing smaller groups. The insurers don’t have to justify their discounts or surcharges – DOI lets than do whatever they want as long as the discounts are no more than 5% and the surcharges are no more than 10%.
So here comes the ACA, which prohibits these kinds of adjustments in states, starting in 2014. When you forbid the group size adjustment, everyone starts with the base rate. This ACA provision produces winners and losers. Smaller small groups and individuals are the winners, and larger small groups are the losers, compared to before. So naturally, the losers are complaining.
The state has been trying to get out of the federal rule, and has asked the federal government for a waiver, or for the ability to phase out the group size adjustment rather than eliminate it (you can read the state’s letter here (pdf)). So far the answer from the feds is no, the law is the law. But it’s still being pursued.
The worst outcome would be to divide up individuals and small groups. Insurance works best when the pool being insured is as large as possible. Slicing and dicing would create more losers, including low and moderate income people who in 2014 will be getting premium assistance through the individual market.
The ACA rule just gets rid of artificial discounts and artificial surcharges. Everyone will pay premiums based on the average cost of everyone in the pool. It’s a one-time adjustment. The gain of those who are losing their surcharge should roughly match the pain of those losing their discount. The total amount collected in premiums for individuals and small groups will not change because of the implementation of the ACA rule.
The real victory is to keep people healthy, and reduce the cost of medical care when people get sick. That, in the end, is what determines the affordability of health coverage.The state is moving on many fronts to reduce health costs, including more prevention, oversight over providers, more efficient payment systems, and malpractice reforms. Small group base rates are going up on average just 2.7% this April, which is the key renewal month for most small firms. The Health Policy Commission, EOHHS, CHIA and all the stakeholders in health cost containment need to focus on the real prize.