This is why Obamacare is canceling some people’s insurance plans

October 29, 2013

So these insurance cancellation notices. I hear a lot about them. What's the deal?

Let's start with the very basics here. About 15 million people purchase health insurance policies on the individual market. That's about 5 percent of the population. When they do so, they typically purchase a 12-month contract with an insurance company. And when that contract runs out, both the individual and the insurance plan have an escape hatch. The individual can decide to no longer purchase the plan -- and the insurance company can decide to no longer offer the plan.

Most individuals don't stay in the individual market very long: One study, published in the journal Health Affairsfound that 17 percent of individual market subscribers purchased the same plan for two straight years or longer.

There are some restrictions on how insurance companies can terminate products. HIPAA, a health law passed in the 1990s, does require that insurance companies offer subscribers the opportunity to renew their policy, so long as they continue to pay monthly premiums. If they want to discontinue a subscriber's policy, the insurance plan must provide 90 days notice and "the option to purchase any other individual health insurance coverage currently being offered by the issuer for individuals in that market."

And these are the notices that insurance plans are sending out right now, to hundreds of thousands of subscribers: notices saying that they do not plan to offer the policy anymore, and information about what policies will be available.

So why is this happening right now? 

Some -- or maybe even most -- of the plans offered on the individual insurance market right now don't meet certain requirements in the health-care law. They may not offer preventive care without co-payment, for example, or leave out coverage of maternity care, one of the health-care law's 10 essential benefits.

Some of these plans have stuck around for a little bit. The health law allowed plans that existed back in March 2010, when it became a law, to keep selling coverage. These are known as "grandfathered plans:" They don't meet the health law's requirements, but as long as they don't change much, insurers can keep offering them.

Insurance companies typically do like to change their insurance plans, making changes to cost-sharing or the benefits they offer. That means that grandfathered plans have disappeared. We don't have great data about how quickly this is happening in the individual market, but we do see it in this Kaiser Family Foundation survey of the employer market.

grandfathered plans

These cancellations are, essentially, a lot of grandfathered plans exiting the insurance marketplace. From an insurance company's vantage point, grandfathered plans are a bit of a dead end: They can't enroll new subscribers and are really constrained in their ability to tweak the benefit package or cost-sharing structure. There's not a whole lot of business sense, for a managed care company, in maintaining a health plan that doesn't meet the health law's new requirements.

How many people are going to get cancellation notices? 

It's hard to put an exact number on this, given that insurance plans are the ones who decide whether or not to continue offering an insurance product. Experts have estimated that somewhere between half and three-quarters of those who currently buy their own policies will not have the option to renew coverage, which works out to around 7 to 12 million people.

What does this have to do with Obamacare?

Pretty much everything: Since the health-care law required insurance companies to change their plans, this is a direct result of the Affordable Care Act.

What do they look like?

Michelle Malkin posted a copy of her notice last month, which you can take a look at here. In general, these are pretty much the dull, bureaucratic forms that you would imagine an insurance plan sending out. The federal government did draft some sample language for them to use, although it doesn't really address the fact that the insurance plan isn't being renewed.


How did nobody see this coming?

President Obama has repeatedly said, since the health law passed, that if people like their insurance they could keep it. Which is a weird promise to make when one of the key goals of the health-care law is to change individual market insurance coverage.

There are lots of insurance policies, especially on the individual market, that are really bare bones. Some argue they shouldn't even be called insurance coverage, because their coverage is too sparse to insure against financial ruin. One report from the Obama administration, issued in 2011, found that 62 percent of individual market plans don't offer maternity care. Eighteen percent do not cover mental health benefits and 9 percent do not pay for prescription drugs.

The health-care law requires insurance plans to cover all of those things, and then some.

This includes spending at least 80 percent of subscriber premiums on medical care (leaving 20 percent for administration and profits), covering 10 benefit categories and providing preventive care without any co-payment.

That means insurance companies cannot, under the Affordable Care Act, keep selling the plans that they used to sell -- the ones that don't cover prescription drugs and maternity care. And that means that some people who liked purchasing coverage without maternity care and prescription drugs won't be able to keep those plans.

The cancellation notices are a feature of the Affordable Care Act, not a bug. The idea was to make insurance coverage more robust -- and that means cancelling policies that offer less thorough coverage.

Who thought that was a good idea?

The drafters of the Affordable Care Act! The whole idea of the insurance expansion isn't to get Americans to purchase anything called "insurance." It's to get them to purchase a specific kind of insurance, a plan that is relatively comprehensive and helps protect against financial ruin. If Americans were going to be required to buy a product, the reasoning goes, it should be one that can actually do some good.

Of course, not everyone agrees with this; some contend that shoppers should be able to continue buying less robust insurance policies and have the option of taking on more financial risk.

Does a cancellation mean I'm going uninsured?

Nope -- as mentioned earlier, insurance plans are required by law to tell you about other options they offer if they discontinue their policy. That's what the sample language from the administration, above, essentially does. Individuals with discontinued policies will have the option to purchase through the new insurance marketplaces (well, if they start working a little better) or they can do so outside the new marketplaces, pretty much like they have in years past.

Will insurance cost more?

This will vary a lot from person to person. Some people who are buying a bare-bones plan right now will likely see higher premiums under Obamacare. They'd be getting more benefits -- but paying more in premiums.

Some people will get financial help buying that more robust insurance; people who earn less than 400 percent of the federal poverty line (about $45,000 for an individual) can use a tax subsidy to purchase their plan. For more on premiums under the Affordable Care Act, you should read this great piece from Ezra.

I've just read 1,000 words on insurance renewal notices. What do I get?

More knowledge about insurance renewal notices! And here, we'll toss in a quokka eating a snack just for good measure.

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Jim Tankersley · October 29, 2013