The ACA’s Basic Health Program Option: Federal Requirements and State Trade-Offs

The Patient Protection and Affordable Care Act (ACA) gives states the option to implement a Basic Health Program (BHP) that covers low-income residents through state-contracting plans outside the health insurance marketplace, rather than qualified health plans (QHPs). In March 2014, the Centers for Medicare & Medicaid Services (CMS) issued final regulations on the requirements for a BHP and the methodology for calculating federal payments to states. States can choose to implement BHP beginning in 2015.

BHP Requirements

In a state implementing this option, BHP is available to consumers with incomes up to 200% of the federal poverty level (FPL) who would otherwise qualify for subsidies in the marketplace. Most are adults with incomes between 133 and 200% FPL, but some are lower-income consumers ineligible for federal Medicaid funding because of immigration status. In addition to meeting income requirements, BHP-eligible consumers must be state residents, age 64 or younger, U.S. citizens or lawfully present immigrants, and ineligible for other minimum essential coverage, including Medicaid, CHIP, and affordable insurance offered by an employer. Although any state can implement BHP, only those that also expand Medicaid are likely to do so.

BHP must be at least as comprehensive and affordable as subsidized coverage in the marketplace. BHP consumers are enrolled in “standard health plans” that cover the ten Essential Health Benefits required of QHPs in the marketplace. At state option, such plans may cover additional benefits as well. BHP premiums and out-of-pocket cost-sharing may not exceed what would have been charged by the benchmark plan (second-lowest cost silver plan) in the marketplace, taking into account premium tax credits (PTCs) and cost-sharing reductions (CSRs) for which consumers would have qualified. Standard health plans may be sponsored by state-contracting HMOs, insurers, Medicaid or CHIP managed care organizations, provider networks, or other qualified entities.

States can choose between Medicaid rules and rules that apply in the marketplace for most aspects of BHP. The flexibility to choose between these existing administrative structures applies to such BHP features as the rules for verifying and redetermining eligibility, effective dates of eligibility, criteria for plan network adequacy, grace periods for late payment of premiums, and enrollment opportunities—either continuous enrollment (as under Medicaid) or open and special enrollment periods (as in the marketplace). This flexibility simplifies state administration and facilitates continuity of coverage for consumers.

Federal Funding of State BHPs

The federal government pays 95% of what BHP enrollees would have received in marketplace subsidies. The federal payment for each enrollee includes two components: one reflecting the PTC and another reflecting the CSR the enrollee would have received in the marketplace. The same amount is paid for all enrollees within each federal payment cell, which is defined based on county of residence, age range, income range, household size, and type of BHP coverage (single, couple, etc.). These per capita amounts are set prospectively for each year. When BHP is first implemented, the state’s initial payments are based on projected enrollment into each payment cell. After the program starts, payments are adjusted to reflect actual enrollment within each cell. The final payment methodology for 2015 was published in March 2014; in subsequent years, final payment methodologies will be published each February prior to the beginning of the BHP program year.

Why states have considered BHP

States considering BHP seek to achieve multiple goals, including providing more affordable coverage and reducing “churning” between Medicaid and marketplace plans. Many of the states actively debating BHP envision providing coverage similar to that offered through existing Medicaid or Children’s Health Insurance Programs. If structured in this manner, BHP would give consumers more affordable coverage than what is offered in marketplaces, even with federal subsidies. The result would likely be higher levels of enrollment and greater access to care for the lowest-income group of subsidy-eligible consumers. Recent research suggests that the perceived unaffordability of coverage is a major obstacle to enrollment among the remaining uninsured. In addition, some states that had previously expanded coverage through a Medicaid waiver or through state-funded coverage would achieve savings by shifting those beneficiaries into a federally-funded BHP without reducing benefits or increasing costs for affected consumers. Finally, serving all residents with incomes up to 200% FPL through the same Medicaid-based health plans, with cost-sharing amounts changing but other coverage remaining constant as income rises and falls, would likely reduce the amount of “churning” (that is, involuntary movement between plans in response to income fluctuation). Churning would be further reduced under the final regulations’ option to provide BHP enrollees with 12-month, continuous eligibility.

BHP would also avoid the need for consumers to reconcile advance premium tax credits on federal income tax returns. Since BHP enrollees do not receive tax credits, they would not face the risk of losing tax refunds or owing tax debts if they turn out to receive excess subsidies during the year.

State cost issues

States evaluating whether to implement BHP must compare expected federal funding to projected costs, factoring in potential offsetting savings, to determine BHP’s financial feasibility. States need to compare federal BHP funding, which will reflect marketplace benchmark premiums, to state BHP costs in assessing the amount (if any) that states need to contribute.

Enrollment patterns influenced by state policy choices will affect the relationship between federal funding levels and state costs. For example, states that encourage enrollment of the lowest-income BHP-eligible consumers by greatly lowering or eliminating their premium charges may see average federal funding per beneficiary increase, since the lowest-income consumers qualify for the highest QHP subsidies.

Potential state budget savings could also affect BHP’s fiscal impact. In addition to shifting enrollees in state-funded programs to federally-funded BHP, some states might achieve savings by using BHP’s negotiating leverage to lower plan and provider bids for both BHP and Medicaid and by structuring BHP benefits to substitute for state-funded services—for example, certain mental health and substance abuse treatment—that fall outside QHPs’ commercial coverage.

States must also decide how to finance BHP administrative costs, which cannot be directly paid with federal BHP funds. However, states can fund these expenses by surcharging BHP plans and using federal BHP funds to cover the resulting premium escalation, just as many marketplaces fund administrative costs by surcharging QHPs and using PTCs to cover much of the consequent premium increase.

States concerned about BHP costs exceeding federal funding can lower BHP costs or “hedge” financial risks. A state can lower BHP costs by increasing consumer out-of-pocket cost-sharing, limiting benefits, or raising premiums (so long as BHP coverage remains at least as generous and affordable as QHP plans). States can also adjust plan payments and associated provider reimbursement levels to reduce BHP costs. BHP plan and provider payments are likely to be set at least somewhat below QHP levels, but cutting payments even further will reduce the state’s costs, albeit by potentially narrowing the provider networks available to beneficiaries.

States can also adopt strategies that hedge financial risks, rather than lower costs. They can share risks with health plans by holding back a small proportion of payments until the end of the year. Once uncertainties are resolved, those “hold-backs” can be disbursed. States can also retain a small percentage of federal payments as reserves, to help pay future years’ BHP costs if unforeseen contingencies materialize and federal BHP funds fall unexpectedly short of covering state BHP costs.

BHP and the marketplace size

Although implementing BHP will reduce the size of a state’s marketplace, smaller marketplaces are likely to remain stable in most states. Implementing BHP will lead to a smaller marketplace as consumers with incomes under 200% FPL move out of the marketplace and into the BHP. However, the ACA’s insurance market reforms will promote stability in marketplaces with fewer enrollees. Those reforms base marketplace premiums on the risk level of the individual market as a whole, not solely on the risk level of enrollees within the marketplace or plan. This requirement, along with other premium stabilization mechanisms, should prevent spikes in premiums that might otherwise occur, as illustrated by a very small but stable marketplace in Massachusetts, operating under rules like the ACA’s. Massachusetts’ Commonwealth Choice exchange, which serves only unsubsidized residents above 300% FPL, has remained stable since its 2007 launch, even though fewer than one-half of 1% of non-elderly residents enrolled during Commonwealth Choice’s first three years.

However, a smaller marketplace could reduce competition and would need alternative sources of revenue. Fewer covered lives could make the marketplace less attractive to carriers. In response, carriers might reduce the number of plan options offered to consumers or avoid the marketplace. Moreover, many states are planning to fund marketplaces through assessments on participating plans. In those states, the administrative costs that are fixed—that is, those that are unchanged even if fewer people enroll—would be spread across a smaller base if fewer consumers receive marketplace coverage. However, BHP could help pay marketplace administrative costs that benefit BHP, such as for eligibility determination, compensating for lost QHP assessments.

BHP and marketplace risk levels and premiums

Implementing BHP could potentially alter the risk level of enrollees in the individual market; however, a state-based risk adjustment system that includes BHP plans could both prevent this change and lead to modest individual market premium reductions. If BHP enrollees have different average costs than other marketplace enrollees, moving them into BHP would change the risk level of the individual market, hence the premiums charged by marketplace plans. At income levels low enough for subsidies, premium payments are determined primarily by household income, with tax credits absorbing overall changes to premium levels. If premiums rise or fall, the consumers most affected are those with incomes too high to qualify for subsidies.

A state can address those concerns by administering a risk-adjustment system that combines BHP plans with individual market carriers, thereby including BHP consumers in the individual market’s risk pool. If such a state’s BHP makes coverage more affordable, it will attract some healthier consumers than would have enrolled into the marketplace. The risk adjustment system will share those better risks with the individual market. The result would likely be modest reductions to individual market risk levels and marketplace premiums.

Minnesota’s 2014 experience with a BHP-like option

Minnesota did not provide marketplace coverage to residents with incomes at or below 200% FPL in 2014 because it was planning to implement BHP in 2015. Instead, these consumers were covered through a reconfigured version of the state’s Medicaid waiver program, MinnesotaCare (MNCare). Removing all residents under 200% FPL from the state’s marketplace did not appear to create any of the problems described above:

• QHP enrollment was robust, albeit reduced because of MNCare. By the end of open enrollment, 47,902 consumers joined QHPs, and 37,985 signed up for MNCare. As of July 2014, enrollment totals reached 52,233 in QHPs and 54,154 in MNCare.
• Five participating carriers offered consumers numerous marketplace options, and benchmark premiums were the lowest in the country. Thirty-three QHPs were offered in the median county in the state, including ten silver, ten bronze, eight gold, two platinum, and three catastrophic plans. In addition, benchmark QHP premiums in Minnesota were at least 17% lower than in any other state. For 2015, although the low-cost carrier that covered the most QHP members has withdrawn from the Minnesota marketplace, another carrier has taken its place. The total number of QHP options rose from 78 to 84, and state officials project urban benchmark premiums will remain the country’s lowest.
• The marketplace reports that it can cover its administrative costs, despite a smaller base of QHP enrollment on which to levy premium surcharges. MNCare pays its proportionate share of marketplace costs related to eligibility and enrollment, replacing at least some of the lost premium surcharge revenue. The marketplace’s capacity for self-support is also enhanced by the projected 69% decline in administrative costs in 2015 as work transitions from building infrastructure towards ongoing operations.

Alternative approaches to improving affordability

States may consider alternatives to BHP, which include state-funded subsidies to supplement PTCs and CSRs in the marketplace and, in the future, more comprehensive approaches through state innovation waivers. Starting in 2017, broad state innovation waivers may allow states to develop methods bolder than BHP for making coverage affordable to low-income consumers. These waivers allow far-reaching (albeit budget-neutral to the federal government) restructuring of the ACA’s fundamental architecture. In the meantime, the most plausible alternative to BHP for states interested in improving affordability involves supplementing PTCs and CSRs. That approach imposes state costs, even if the federal government continues to provide Medicaid matching funds for state-furnished PTC supplements. Moreover, such supplementation will not shield consumers from income-tax reconciliation, and it may not let states achieve some of BHP’s potential cost savings. On the other hand, a state that supplements PTCs and CSRs does not shrink its marketplace, is not at risk for costs other than those involving supplemental subsidies in the marketplace, and can help residents with incomes above 200% FPL. A state committed to improving affordability needs to carefully consider the many trade-offs inherent in these various alternative approaches.

Conclusion

BHP offers the prospect of improved affordability for low-income residents, fiscal gains for some states, and reduced churning. However, it also poses financial risks for states and has implications for state marketplaces. In the coming years, some states may investigate a range of approaches to improving affordability of coverage for their low-income residents. Which approach is best—BHP, state supplementation of marketplace subsidies, or bolder alternatives permitted under state reform waivers that begin in 2017—will depend greatly on the unique circumstances facing each individual state.