Question

How does the Affordable Care Act affect insurers?

Answer 1

With three main amendments, the Affordable Care Act (ACA) created a dramatically different system for individual health insurance: banning insurers from recognizing the health status or risk of subscribers; offering significant incentives for millions to buy individual policies, many for the first time in their lives; and establishing an "exchange" framework that promotes comparison. However, the ACA restricts the amount of premiums that insurers may spend on income or administrative expenses and allows state or federal regulators to determine the basis for rate increases.

Most insurers are willing to offer competitive rates in this newly subsidized market to take advantage of the anticipated substantial growth in membership and premium revenues— and that actually happened, as further recorded below. For the first year, however, setting initial rates under the newly reformed and greatly expanded individual market was particularly challenging, as insurers lacked actuarial expertise under the market conditions of the ACA. Accordingly, actuaries had to make different judgment-based decisions and a certain amount of guesswork.9 However, after insurers had submitted their prices,

Reinsurance premiums are expected to decline in subsequent years, as reinsurance is a temporary program designed to acclimatize insurers into the new market climate. When insurers create more appropriate actuarial information to base forecasts of ratings, they may have less need to rely on reinsurance to buffer unpredictable projections.

All well-functioning markets have winners and losers, so it should not be shocking that, particularly during the first year, many health insurers have struggled to thrive in the new market of the ACA. When insurers gain more experience with these new conditions, their actuarial reliability can be expected to improve and large financial performance gaps should decrease. In addition, further market growth can be expected when previously insured individuals migrate out of grandfathered or transitional policies and into ACA-compliant coverage.

Improved financial performance, however, will require higher premiums, especially as the reinsurance portion of the ACA phases out from 2017. This reinsurance has played a key role in assisting the transformation of insurers. Because it took longer than expected initially, lawmakers must consider extending the reinsurance system of the ACA until the new market has matured.