A Closer Look At Insurance Cancellations Under The Affordable Care Act

Last fall opponents of the Affordable Care Act made noise way out of proportion to its actual meaning when insurance companies sent out cancellation letters to policy holders whose policies were not compliant with the law. A combination of the initial failings of healthcare.gov and exaggerated reports on cancellations led to much of the negative publicity about the Affordable Care Act which still has many Democrats reluctant to run on the party’s accomplishments. President Obama subsequently allowed these policies to be grandfathered in even if not meeting the initial qualifications for being grandfathered, but questions persist regarding winners and losers under Obamacare. A study in the current issue of Health Affairs provides some information on those whose policies were canceled.

The study’s key finding was that there is normally a high degree of turnover in policies on the individual market, and most of the people who received cancellation letters would have changed insurance even if there were no changes under the Affordable Care Act:

The Congressional Research Service has estimated that 10.8 million people had nongroup coverage in 2012.6 According to my estimates for the sample population, this suggests that 6.2 million Americans typically leave nongroup coverage each year. Presumably some of them do so voluntarily, because they qualify for Medicaid or start a new job with employer-sponsored coverage. Others lose coverage through inability to afford increased premiums, loss of income, or changes in health status that affect eligibility for nongroup insurance.

In this context, reports that recent cancellations of coverage may affect as many as 4.7 million adults (though precise estimates are lacking)6 are likely capturing a great deal of the normal turnover in this market. The findings presented here also suggest that overall coverage rates in the United States are unlikely to fall as a result of these cancellations: Most people who left nongroup coverage in this study acquired other insurance within twelve months, even before the ACA offered increased coverage via the Medicaid expansion and tax credits for Marketplace insurance.

Of course, the ACA’s regulations are presumably leading some people to lose nongroup coverage that they would prefer to keep. The results of this study indicate that certain subsets of people—in particular, those who are older than thirty-five, white, or self-employed—with nongroup insurance are likely to retain that coverage for three years or more. For some people who were covered by nongrandfathered plans, cancellations related to the ACA represent an unwanted change in coverage options that may be quite disruptive.

However, the ACA creates a range of new coverage alternatives via Medicaid and the Marketplaces. In addition, most insurance companies that are issuing cancellations are making efforts to enroll into alternative plans those customers receiving cancellation notices.19 Notably, 65 percent of the sample in this study had incomes below 400 percent of poverty. This suggests that many, if not most, of those who received cancellation notifications are now likely to be eligible for subsidized coverage that may be less expensive than their previous insurance.

This study’s findings are also relevant to the issue of premium “sticker shock”—which occurs when a person has to pay significantly more than in the past to remain covered by a plan—in the nongroup market. Some policy makers have expressed concern that the market reforms in the ACA are leading to significantly higher premiums for many healthy young adults (particularly men)20 and may lead people to drop their current coverage.

In this context, it is notable how rapid coverage turnover was among adults ages 19–35 in this study. Even before the ACA was implemented, nearly 80 percent of these adults experienced a change in coverage within two years. Undoubtedly, some adults in this age range with nongroup coverage will experience premium increases due to the ACA. However, most of them will qualify for lower premiums due to tax credits,21 and many of them will experience even larger declines in total out-of-pocket spending because of reduced cost-sharing requirements. Thus, true “sticker shock” is the exception rather than the rule for younger adults in this rapidly changing market.

While the study did find that most people would have changed insurance polices regardless of requirements under the Affordable Care Act, and the majority of people changing policies wound up paying lower premiums, there was a significant subset of older, white, self-employed individuals who received cancellation notices who otherwise might have kept the same insurance plan. Of this group, sixty-five percent qualified for subsidies.

The thirty-five percent of this group who wound up paying higher premiums might be consider “losers” because of the change, but it is not that simple. As I pointed out last month, one group of actual winners under Obamacare are the satisfied unsubsidized. Many people in this group, including myself, were offered alternative less expensive plans from our insurance companies but chose to purchase more expensive plans because of the added benefits of compliance with the regulations under the Affordable Care Act. These benefits include a cap on out of pocket expenses, coverage of preventative services with no copay or deductible, and, most importantly, being non-cancelable if there is a change in medical condition.

Policies sold in the past on the individual market were often less expensive as they were primarily sold to healthy individuals who the insurance companies did not anticipate having high medical expenses. A policy which must be sold to anyone, regardless of health status, is obviously going to cost more. Policies on the individual market often were severely limited in their coverage, with subscribers often unaware of the limitations unless they developed medical problems and found that their older plans did not cover them as well as they anticipated. For many people, it is to their benefit to replace older policies sold on the individual market with new policies which are compliant with the Affordable Care Act.