NAIC DRAFT REPORT: “Implementation of the Affordable Care Act in the U.S. Territories”

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Guam – The National Associaiton of Insurance Cariers has distributed the following DRAFT report to its members on the impact of Obamacare on the Territories.

Implementation of the Affordable Care Act in the U.S. Territories: Market Reforms without Individual Mandate, Sufficient Subsidies Could Destabilize Markets without Intervention

Executive Summary
While most of the focus in implementing the Affordable Care Act (ACA) has been on the costs and benefits that will accrue to residents of the 50 states and the District of Columbia, significant questions remain about how implementation of the ACA will affect consumers and insurance markets in the U.S. territories of American Samoa, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands. Though the statute itself is unclear, the Department of Health and Human Services (HHS) has determined that the ACA’s market reforms will apply to health insurance coverage sold in the territories, while the individual and employer mandates will not. If a territory elects to implement health insurance exchanges, they will receive a limited allotment of subsidy funding that only covers a fraction of needed funds. As a result, the threat of adverse selection driving up premiums is much higher than it is in the states. HHS could help alleviate this threat by reconsidering its determination that the market reforms apply to the territories or by phasing these reforms in over a period of several years. Congress could also address this problem by either clarifying that the reforms do not apply in the territories or by equalizing the treatment of the territories by applying the individual and employer mandates to the territories and providing sufficient subsidy funds. the territories may also address the issue themselves by adopting the mandate at a territorial level and funding subsidies themselves. This option will be politically difficult, however, and could strain the territories’ resources. 

Legal Treatment of the Territories under the ACA
The ACA is built upon a framework that has been compared to a three-legged stool. Market reforms, which include guaranteed issue, adjusted community rating, prohibitions on preexisting condition exclusions and other consumer protections are intended to address problems that have been identified in the individual insurance market. In order for these provisions to work without driving up premiums, however, one must ensure that people do not wait until they become sick to purchase insurance. To achieve this goal, Congress included a requirement that most individuals obtain health coverage or pay a tax-penalty (the “individual mandate”) and that larger employers provide coverage to their employees or pay a tax penalty (the “employer mandate”). In addition, the statute provided for open and special enrollment periods for coverage in the exchange, which HHS later extended to coverage sold outside the exchange.. The third leg of the stool provides premium and cost-sharing subsidies to help low- and middle-income individuals afford coverage. In the territories, two legs of this stool will be weakened, as the individual and employer mandates will not apply, and the funds available for subsidies will not be sufficient to cover all eligible individuals. As a result, the risk of adverse selection in the territories will be significantly higher than it is in the states.

Market Reforms
A great deal of confusion has arisen over the applicability of the ACA’s market reforms in the territories. This confusion stems from two conflicting definitions of the term “state.” Because health insurance is defined in federal law as being offered “in a state” and being “subject to state law which regulates insurance,” whether coverage sold in the territories is subject to the reforms in the ACA hinges upon whether territories are considered states.

Title I of the Affordable Care Act (ACA), which includes the provisions applying to private health insurance, defines a “state” so as to exclude the territories:

“In this Title, the term “State” means each of the 50 States and the District of Columbia.”

Many of the most significant provisions in that title, however, take the form of amendments to the Public Health Service Act (PHSA), which itself defines the term “state” to include the territories:

“The term ‘‘State’’ means each of the several States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands.”

How these conflicting definitions ought to be reconciled has been a subject of debate. Some have argued that the PHSA definition, ought to apply to all ACA amendments to that statute, while others have argued that ACA amendments to the PHSA that use the term “state” ought to utilize the PHSA definition. The first option would exempt health insurance sold in the territories from many provisions of the law, such as guaranteed issue and adjusted community rating. The second would require coverage sold in the territories to meet all requirements of the ACA-amended PHSA. In response to an inquiry from the territories’ Delegates to Congress, the Congressional Research Service (CRS) undertook an analysis of this issue. In its reply, the CRS advised the Delegates that “while it is possible that a court could find that, based on the definition in PPACA, a ‘state’ for purposes of the new PHSA provisions excludes the territories, reasonable arguments could also be made that the definition of ‘state’ in PPACA would not apply to these new PHSA provisions.”

The uncertainty caused by these two plausible interpretations of the interaction between the ACA and PHSA definitions required HHS to lay out its interpretation of how the market reforms added to the PHSA would apply to the territories, which will be discussed below.

Exchanges and Subsidies
In contrast, there is little debate regarding the application of Title I provisions that fall outside of the PHSA amendments. The ACA gives the territories the opportunity to establish exchanges, but does not require that they be established. If a territory does elect to establish an exchange, such an exchange must meet the same exchange establishment, consumer choice, and financial integrity standards contained in part 2 of the subtitle dealing with exchanges as the states. 

These provisions, by referencing qualified health plan standards and market reform provisions, would also apply those requirements to qualified health plans sold in exchanges established in the territories. The ACA also provides a pool of $1 billion, which may be expended over six years (2014-2019), to be split among the territories. These funds may be used to fund premium and cost-sharing subsidies for eligible individuals to enroll in qualified health plans through an exchange. In territories whose tax code mirror the federal Internal Revenue Code, these subsidies must conform to the requirements outlined in the ACA and subsequent regulations. In territories with non-mirrored tax codes, they may determine the best way to distribute the subsidies among individuals purchasing qualified health plans on their exchanges. In either case, however, there may not be an eligibility gap between the territory’s Medicaid program and subsidized
coverage on the exchange.

If the territory elects not to establish an exchange these funds may be used to fund the territory’s Medicaid program.  Certain other exchange-related provisions, such as those creating Consumer Operated and Oriented Plans, the Basic Health Plan program, and the Multi-State Plan program will not apply to the territories because they fall outside of part 2 of the exchanges subtitle. In addition, the territories were not eligible to participate in the Preexisting Condition Health Insurance Plan, which provided coverage to individuals with preexisting conditions in the states beginning shortly after enactment of the ACA, 

Risk Mitigation Provisions
The ACA contains a number of provisions designed to mitigate the risk of adverse selection that is likely to accompany the implementation of market reforms, such as guaranteed issue and adjusted community rating, that require greater pooling of risk. These provisions include the individual and employer mandates, a transitional reinsurance program, a temporary risk corridor program, and a risk adjustment mechanism. Individuals residing in the territories are specifically exempted from the individual mandate.  The employer mandate would also not apply in the territories.

The reinsurance and risk adjustment programs also do not appear in part 2 of the exchanges subtitle, and would therefore not be required of territories. However, because the risk corridors program does not reference states, but applies directly to qualified health plans that are sold on exchanges, it would apply in the territories that elect to establish exchanges, even though it also appears outside of part 2.

HHS Interpretation
A December 2012 letter from HHS Secretary Kathleen Sebelius to the territorial Governors, clarified HHS’ interpretation of how the territories would be treated under the ACA.  In that letter, she informed the territories that HHS had decided to apply all of the provisions in the ACA that amend the PHSA to health insurance sold in the territories, including guaranteed issue, adjusted community rating, prohibitions on pre-existing condition exclusions, and other market reforms. The letter also provided the allocations for the funding appropriated under section 1323 of the ACA, to be used for QHP subsidies or for a territory’s Medicaid program. These amounts are listed in Table 1 below.  

In addition, the letter clarified that if a territory established an exchange, it could also establish reinsurance and risk corridor programs, meeting all requirements for these programs set by HHS, though the federal government would not step in to establish and operate them if the territory did not.

Unfortunately, the Secretary’s letter provided the territories with less than three months to determine whether they would implement either of these programs, setting a deadline of March 1 for them to notify HHS of their intent to do so. This was several months prior to the October 21, 2013 deadline to notify HHS if the territories would implement an Exchange. The letter did note, however, that territories retain the authority to establish their own reinsurance and risk adjustment programs, under territorial law. These territorial reinsurance and risk adjustment programs would not be required to meet federal requirements.

Current Market Conditions in the Territories
Most of the territories today have uninsurance rates that are significantly higher than those in the states. (See Table 2, below) The lone exception is Puerto Rico, which has covered many of its residents under a territorial coverage program called Mi Salud (see p. 6). The remaining four territories have rates of uninsurance that are 15-44 points higher than the U.S. average. While Guam and the U.S. Virgin Islands have a roughly comparable percentage of their populations enrolled in private coverage as the states, the other territories have significantly lower rates of private coverage. In American Samoa today, just 11% of the population has private health insurance coverage, including individual, small group, large group, and self-insured group coverage.


         Uninsured                               59.2%               33.7%                21.1%                 7.6%                   30.8%            15.5%

Source: U.S. Census Bureau, 2010 Demographic Profile Data

Territorial Responses to the ACA
The five territories, spread across the globe, have very different health insurance markets and as a result have responded to passage of the ACA in different ways.

American Samoa
In March 2012, then Governor Togiola Tulafono informed HHS that, after evaluating the current territory’s existing healthcare system in the Territory, his administration had concluded that establishing a health insurance exchange would not be appropriate at this time. Instead, Governor Tulafono elected to use American Samoa’s allocation of funding for a Medicaid expansion.

Since that letter, American Samoa held gubernatorial elections, and the new governor, Lolo Matalasi Moliga has decided to reconsider the decision not to establish an exchange. No final determination has been made as to whether an exchange will be established in Amercian Samoa.

Commonwealth of the Northern Mariana Islands (CNMI)
The passage of the Affordable Care Act (ACA) came at a time of tremendous fiscal stress in the Commonwealth of the Northern Mariana Islands (CNMI). The passage and subsequent planning for the ACA coincided with CNMI government austerity measures which impacted the CNMI’s Division of Insurance to adequately train and prepare for the full implementation of the ACA. Given the restricted resource and expertise in the jurisdiction’s remote location, the CNMI relied heavily on federal guidance and national organizations to include the National Association of Insurance Commissioners (NAIC) and the National Governors Association (NGA). While the CNMI was not fully prepared to decide on the participation of an Health Insurance Exchange, it did actively participate in both the Rate Review grants and the Consumer Advocacy Program grants.

While the CNMI’s existing insurance regulatory and statutory environment requires significant changes to ensure the full adherence to the ACA, the CNMI Office of the Insurance Commissioners has begun the process of introducing appropriate draft statute for introduction into the CNMI Legislature. As such, the
CNMI has aggressively leverage resources to ensure full comprehension of the policy infrastructure that is required for market reform and consumer protection measures afforded by the ACA. The largest area of concern is the impact that the ACA will have on the public option and the trickle down effect that expanded coverage and eligibility requirements have on the small group and individual marketplaces in the CNMI.

Guam
Upon enactment of the ACA, Guam fully implemented the law’s immediate market reforms that took effect prior to 2014 and required all health insurance contracts and policy forms to be in compliance with them prior to approval by the Commissioner. The territory also took the steps needed to ensure that it had an effective rate review program in place. Any requests for rate increase filings by health plan issuers are reviewed and all requests for ten percent or more above over current rates will receive additional review by contracted actuaries.

The Department of Revenue and Taxation, which oversees the insurance industry in Guam, has looked into the feasibility and sustainability of establishing an exchange in the territory. Based on 2010 Census data, the study included an estimate of Advance Premium Tax Credit eligibility and subsidy levels in Guam. It was estimated that a yearly subsidy of $74 million for APTC will be needed to implement an exchange, far in excess of the $24 million, six-year, allocation that Guam is slated to receive under the ACA. At this time Guam has not yet made a final decision to opt in or opt out of establishing a state based exchange.

Puerto Rico
Puerto Rico was probably in the best position to respond to the ACA. Due to a local-funded health coverage program, known as Mi Salud, providing coverage for approximately 1.4 million individuals whose incomes exceeded the threshold for eligibility in its Medicaid program, Puerto Rico, had an uninsured rate of 7.6% in 2010, well below that of most states. The lower level of uninsured residents in Puerto Rico could reduce the risk of adverse selection as the level of pent-up demand in the population from delayed medical care will likely be lower.

In July, 2013, the Legislative Assembly adopted legislation giving its Insurance Department authority to enforce the ACA’s market reforms, including guaranteed issue and open and special enrollment periods for individual plan, to its health insurance code. Additionally, the Puerto Rico ’s Department of Health
continues to study the possibility of establishing an exchange itself or partnering with a state that has established one. 

U.S. Virgin Islands
Following passage of the ACA, the U.S.V.I. created a 14-member Health Reform Implementation Task Force to provide guidance and recommendations to Governor de Jongh regarding initiatives to implement health reform and to improve quality and access health care. The task force sought and received funding from HHS to undertake a study to examine the feasibility of establishing a health insurance exchange, to conduct an analysis of its private health insurance market, and to identify gaps in information technology systems that will be needed to support ACA implementation activities. The Task Force concluded that “the disjointed application of the [ACA]’s provisions to the territories and its insufficient allocation of federal funds significantly limits the VI’s opportunity to expand health care coverage to VI uninsured residents through the ACA.” It therefore recommended that the governor utilize the funding provided under the law to expand Medicaid instead of establishing an Exchange.

In response to the implementation of the ACA’s immediate reforms (prohibitions on lifetime limits, restrictions on annual limits, prohibitions on preexisting condition exclusions for children, etc.) the sole insurer providing coverage in the U.S.V.I.’s individual insurance market ceased issuing new policies in the
territory, leaving residents of the territory unable to purchase individual health insurance for any price.

The lack of insurers actively marketing coverage in the individual market will make an exchange impossible to establish in the U.S.V.I. unless new insurers enter the market, and leaves a large gap in coverage in the territory.

Likely Effects of Full Implementation of Market Reforms in the Territories
The market reforms that the ACA adds to the PHSA, such as guaranteed-issue, adjusted community rating, and the prohibition on preexisting condition exclusions, restrict or eliminate the ability of insurers to engage in practices that exclude individuals with health care conditions from risk pools or to
charge them more for coverage. While these practices have made it impossible or very expensive for many individuals to purchase coverage, they have also kept premiums low for the young and those in good health. When premiums for these individuals rise, they are more likely than those with serious health conditions to forego coverage, causing the experience of risk pools to deteriorate over time. As one would expect, states that have eliminated medical underwriting and health status rating in the past have seen large increases in premiums, reductions in the number of insurers participating in their markets, and reductions in the number of people able to afford coverage. 

In order to avoid these unintended consequences, the ACA put in place numerous provisions that encourage the young and healthy to remain in the marketplace and to maintain the health of the risk pools. These provisions include the individual mandate, generous subsidies for low-and middle-income individuals purchasing coverage through exchanges, transitional reinsurance and risk corridor programs, and a permanent risk adjustment program and are critically important to the success of the ACA’s efforts to extend coverage to millions of Americans.

The critical importance of the individual mandate, in particular, was a key part of the administration’s argument before the U.S. Supreme Court that the individual mandate was an appropriate exercise of Congress’ powers under the Constitution’s commerce clause:

“Congress found that the minimum coverage provision was “essential” to the success of the measures it adopted to end insurance discrimination against those with pre-existing conditions. Those insurance reforms are unquestionably within Congress’s powers under the Commerce Clause. The soundness of Congress’s judgment about what was required for its insurance reforms to succeed is supported by the experience of States that tried—and failed—to effectively end such practices without an insurance requirement. Indeed, no party to this case has suggested that the guaranteed-issue and community-rating requirements could function effectively without the minimum coverage provision.”

In fact, individual market premiums in New York state, one of the states hardest hit by adverse selection that accompanied the kinds of reforms in the ACA, are expected to decrease by as much as 50% when the individual mandate and subsidies take effect in 2014.

While these provisions will help mitigate adverse selection in the states, none of them are likely to be implemented in the territories, leaving their markets vulnerable. As was noted above, the individual and employer mandates do not apply in the territories, and while the territories may establish Exchanges
and use their funding allocation provided under section 1323 to provide subsidies, funding levels are insufficient to meet the expected need. Over the six-year period for which funds have been appropriated, the U.S. Virgin Islands has estimated that an exchange would provide $251.5 million in subsidies, more than ten times their allocation. Guam has estimated that it will need $74.6 million to provide subsidies to its eligible population through an exchange in 2014 alone, more than three times its allocated funding for the entire six years from 2014-2019. 

In addition to funding the majority of exchange subsidies themselves, the territories would also be required to cover the costs of developing and establishing a exchange out of their own funds, as the territories were not eligible for the $1 million planning grants that states used to fund their exchange planning and analysis activities . They were, however, eligible for level 1 exchange establishment grants. These grants funds, however, must be repaid if the territory does not establish an exchange.

Furthermore, while most states have elected to allow the federal government to operate the transitional reinsurance and risk adjustment programs on their behalf in 2014, the territories would have to operate these programs themselves, adding to the burden of establishing an exchange. As a result, many territories may be better served by using their allocated funds to provide coverage to additional residents through their Medicaid programs.

Implementing the market reforms without any of the mitigating provisions described above places individual and small group markets at severe risk for adverse selection that could undermine the intent of the ACA—making coverage more expensive for consumers who depend upon it. Compounding the risk of adverse selection that would be present in any of the states without the ACA’s mitigating provisions are the lower incomes found in the territories. Recent work suggests that lower-income individuals have a significantly higher sensitivity to health insurance premiums than those with higher incomes.

Because median family incomes in the territories range from 36%-82% of the U.S. median family income, it is likely that territorial residents will be more likely to forego coverage as premiums increase than residents of the states.  

As adverse selection pushes premiums higher, insurance issuers currently serving the individual and small group markets are likely to withdraw, making coverage unavailable at any price. This has already occurred in the U.S. Virgin Islands, where both issuers selling coverage in the individual market stopped
selling new coverage when it became clear that it would have to comply with the market reforms without the benefit of the individual mandate or subsidies to protect the market against adverse selection. As a result, consumers in the U.S. Virgin Islands’ individual market will not benefit from the majority of of the ACA’s reforms, which apply to non-grandfathered policies, as there will be no coverage for the reforms to apply to. Without some action to prevent a cycle of adverse selection in the territories, implementation of the ACA’s market reforms is likely to lead to a result that is the opposite of what the ACA intended—higher premiums, less competition, and more Americans without health insurance coverage.

Possible Actions to Mitigate Adverse Selection in the Territories

Reconsideration or Delay of PHSA Amendment Applicability
The first option at the administration’s disposal would be a reconsideration of its determination that all of the ACA’s market reforms will apply in the territories. As the previously discussed Congressional Research Service memo noted, the interpretation that the ACA’s PHSA amendments do not apply in the territories is a plausible one. Furthermore, it is the only interpretation that is consistent with the often-stated position taken by the ACA’s congressional sponsors and the administration that these reforms are not possible without the individual mandate and the subsidies.

If the administration determines that a reconsideration of its position is not possible, a second option is a delay or phase-in of these provisions in the territories. This could be structured as a three-year delay of applicability for the guaranteed issue provision, followed by a phase-in of the ACA’s rating rules over a
five-year period. This sort of a phase-in would allow the markets to gradually adjust to the imposition of the market reforms and would be consistent with other actions the administration has taken to delay the effective dates of provisions where immediate application would not be technically feasible, such as the employer mandate, exchange quality, and employee choice provisions.

Congressional Actions
Should the administration decide that it lacks the statutory authority to adopt either of these alternatives, it may be necessary for Congress to provide relief for the territories. Both of the above remedies could also be accomplished by legislative means. In addition, Congress could take other steps to ensure that implementation of the market reforms in the territories does not result in adverse selection by leveling the playing field between the states and territories. This could be accomplished by revising the ACA’s definition of “state” to mirror the definition in the PHSA, thereby including the territories, and by revising section 1323, which provides the limited funding for territories to fund exchange subsidies or Medicaid programs, to provide a level of subsidies that will help prevent adverse selection. While this approach would require additional federal funding at a time of strained budgets, it would also realize the ACA’s goal of expanded coverage and enhanced consumer protections, while limiting the potential for market disruption in a way that the current interpretation of the law does not.

Territorial Actions
Like the states, the territories have the ability to take over primary responsibility for enforcement of provisions of the ACA, including the market reforms that were added to the PHSA. This will allow them to more effectively tailor implementation to the needs of their consumers and marketplaces. One important option that the territories will have at their disposal to prevent adverse selection will be the creation of individual market open enrollment periods, whether or not they elect to establish exchanges. This option is specifically permitted by the final Market Rules regulations issued by HHS in February, 2013.

Puerto Rico has already adopted legislation establishing open enrollment periods for its individual market, even though it has not yet made a determination as to whether or not to establish an exchange. This action will help control adverse selection by limiting the ability of individuals to defer the purchase of health insurance until they need extensive health care services.

In the event that neither Congress nor the administration takes action to prevent adverse selection in territorial insurance markets, the territories themselves may need to step in to provide what stability they can to their insurance markets by adding the missing provisions of the ACA. These provisions include, most importantly, the individual mandate and exchanges with subsidies at a level that will be sufficient to ensure a balanced individual market risk pool that includes sufficient numbers of younger, healthier individuals to keep premiums from increasing dramatically. These provisions could be politically difficult, however, given the cost to the territories of funding subsidies and the divisiveness of the individual mandate in the states. Adding the level of needed exchange subsidies left unfunded by the ACA in the U.S. Virgin Islands would add $226 million to a general fund budget of $617 million, an increase of 37 percent.

In addition to adding a mandate and subsidies at the territorial level, territories could also implement a territorial reinsurance program that would subsidize coverage for individuals in the individual market with higher than average health costs. That program, however, would have to be funded with assessments on insurers in the territories’ individual, small group and large group markets. Similarly, territories with exchanges could establish a territorial risk adjustment program to equalize risk between carriers, which would make payments to carriers with higher than average risk funded by assessments on carriers with lower than average actuarial risk.