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How Buying Insurance Will Change Under Obamacare

When the Affordable Care Act’s (ACA) health insurance marketplaces (also known as “exchanges”) go online this October, millions of people are expected to apply for private insurance coverage.

Nobody expects the launch will be perfect, with no hitches and problems.  The law not only replaces a fragmented and confusing assortment of plan options in today’s individual insurance market, but it also integrates tax credits to help people pay their premiums, which requires an entirely new eligibility verification system. The scope of the task presents many administrative challenges for the new exchanges, existing government agencies, and insurers.

The good news is that there is time to work out the kinks. The first open enrollment period is six months (from October through next March). So, assuming early glitches are remedied promptly, people should have plenty of time to review their options, ask questions, and make decisions.

However, even when the early kinks are all smoothed out, the process will no doubt seem complicated and confusing to some. This may be particularly true of the premium tax credits — like many other things associated with the tax code – which will require documentation and verification to prevent fraud and involve complex rules about how to count income and family size.

The process of buying insurance itself will be much simpler, especially when compared with many other major purchases. Consider, for example, any number of common consumer transactions: buying a car, sorting out your options for cable TV and high speed internet service, or picking a cell phone plan. Modern life is not always simple.

Arguably, choosing a health insurance plan and applying for financial assistance (i.e., exchange tax credits or Medicaid) is more consequential than any of these other consumer decisions. However, it’s not necessarily going to be easy. Many insurance concepts (such as deductibles, out-of-pocket limits, and drug formularies and tiered copayments) are difficult for anyone to understand.

That said, much has been done to simplify the process under Obamacare:

  • People will be able to apply for advance premium tax credits in exchanges in a variety of ways, including online, by paper application, and over the phone through call centers. There is a standard paper application, which is three pages plus appendices for individuals and longer for families.
  • Plan choices will be arrayed online based on where you live. A standard, short summary of coverage will be provided for all plans.  This will explain covered benefits and cost sharing and provide illustrations of how coverage would work for common medical events, such as having a baby. This summary will make it easier for consumers to compare plans.  When looking online, consumers are expected to be able to sort and compare plans based on the standard coverage elements they care most about.
  • All insurers will be required to cover mostly the same benefits, including some services that are often excluded or limited today for people buying their own insurance (e.g., maternity care, mental health, and prescription drugs).
  • Coverage will be standardized into tiers (from bronze to platinum). Deductibles and copays will typically vary from plan to plan, but all plans in a given tier will provide the same overall level of protection to consumers.

But, probably the single biggest step to make buying insurance simpler than today is the prohibition of what’s known as “medical underwriting.”

Now, in all but a handful of states, insurers request detailed information about your medical history when you seek to buy insurance on your own. If you have a pre-existing health condition, an insurer will generally either refuse to sell you coverage or charge you a higher premium.

Not surprisingly, this makes insurance inaccessible for people with serious medical conditions, such as cancer, heart disease, or HIV/AIDS. In addition, as a study we did shows, even people with relatively minor ailments — like hay fever or a knee injury that was previously repaired surgically — can face challenges. This study was done more than a decade ago, but there’s no reason to believe that the findings are not still current today.

As the table below shows, 18% of applicants are denied coverage in the current individual insurance market (not accounting for those with pre-existing conditions who do not try to apply). This varies significantly across states, from 0% in a handful of states that already require insurers to accept all who apply to 30% or more in other states.

Medical underwriting not only makes insurance less accessible for people with pre-existing health conditions. It also makes applying for insurance much more complicated for everyone. Consider, for example, the standard insurance applications in Illinois and Wisconsin. (These particular applications are easily accessible online, but they are not at all out of the ordinary.)

The medical history and lifestyle questions go on for 5 pages in Wisconsin and 6 pages in Illinois, including questions such as:

  • Over the last five years whether you have been diagnosed with or treated for any of several dozen medical conditions. These range from ear infections, strep throat, hay fever, and eczema to cancer, hepatitis, diabetes, and bi-polar disorder.
  • The dates and details of treatment for any medical conditions, including lab results (e.g., cholesterol levels) and the name of the treating physician.
  • Whether you’ve received (or been recommended for) treatment for drug or alcohol abuse.
  • Whether you participate in dangerous or extreme activities like motor racing, bunjee jumping, or scuba diving.

Medical underwriting creates several challenges for consumers.

Most obviously, it means that people with pre-existing conditions can’t get insurance or face higher premiums. A recent Kaiser Family Foundation poll found that 49% of Americans under age 65 say that they or a family member has a pre-existing medical condition. Among this group, 25% say that they or someone in their household has been denied coverage or faced a premium surcharge because of a pre-existing condition.

It also makes the process of applying for individual insurance today difficult and time-consuming for many. And, because a consumer has no way of knowing what premium an insurer will charge until the application process is completed, it is quite hard to comparison shop. Benefits also vary across insurers in complex ways that make it tough to compare what value one plan offers versus another.

This all changes starting October 1. With no medical underwriting, largely uniform benefits, and standardized tiers of coverage, consumers should have a much easier time applying for insurance and comparing prices. Consumers will have to make tradeoffs between the level of the premium, the degree of patient cost-sharing, and the breadth of a plan’s provider network, but they will have access to information to help make those decisions.

And, consumers will have the benefit of trained assisters to help them make these comparisons and answer their questions.  The ACA requires the establishment of Navigators and other similar programs and provides resources to pay and train assisters. Consumer assistance will be available in all states, though the funding and scale will vary significantly, with greater resources generally available in states operating their own exchanges. (State-operated exchanges have had access to substantial federal grant dollars, while limited administrative funding has been available for the federal marketplace.)

The ACA will make dramatic changes in health insurance – most especially in the individual market for people who have to buy coverage on their own.  Though the changes will make coverage more accessible and uniform, they will also be complicated to absorb, particularly in the first year when everybody is mastering this big learning curve. However, amidst this change and the inevitable confusion and glitches it will bring initially, it’s worth remembering what’s required to apply for insurance today in the pre-ACA market.

–Larry Levitt, Karen Pollitz, Gary Claxton, Anthony Damico

Average Denial Rates in the Current Individual Insurance Market
State Average Denial Rate
U.S. Average

18%

Alabama

26%

Alaska

19%

Arizona

11%

Arkansas

22%

California

22%

Colorado

19%

Connecticut

9%

Delaware

17%

District of Columbia

21%

Florida

17%

Georgia

20%

Hawaii

4%

Idaho

20%

Illinois

16%

Indiana

19%

Iowa

17%

Kansas

20%

Kentucky

33%

Louisiana

19%

Maine

0%

Maryland

30%

Massachusetts

0%

Michigan

22%

Minnesota

16%

Mississippi

26%

Missouri

26%

Montana

25%

Nebraska

26%

Nevada

22%

New Hampshire

16%

New Jersey

0%

New Mexico

26%

New York

0%

North Carolina

33%

North Dakota

27%

Ohio

33%

Oklahoma

23%

Oregon

32%

Pennsylvania

14%

Rhode Island

11%

South Carolina

27%

South Dakota

14%

Tennessee

28%

Texas

19%

Utah

14%

Vermont

0%

Virginia

16%

Washington

7%

West Virginia

7%

Wisconsin

19%

Wyoming

20%

Source: Kaiser Family Foundation analysis of data from healthcare.gov, accessed via API version 2.0 in March of 2013. We sampled every available plan from two metropolitan counties, two micropolitan counties, and two rural areas within every state using sampling probabilities proportional to the populations of those geographic areas. Denial rates were computed as simple averages from all sampled plans from those six geographies within each state.