The past decade for healthcare in the United States was one of transformation, disruption, and experimentation. Consumer-centric technologies were quickly adopted. Providers consolidated and sites of care shifted. Value-based models became a core focus for the industry. Advanced analytics and machine learning redefined the possible in health tech. Then, as we turned the corner into a new decade, COVID-19 shocked the world.
Against this dynamic landscape, the Affordable Care Act (ACA) has proven resilient, persevering through legal challenges, partisan rancor, and years of adverse market fundamentals. While the ACA’s first decade was characterized by unrelenting challenges, the commencing of the law’s second decade finds reason for collective optimism.
ACA market conditions are increasingly favorable for both consumers and insurers. Improvements in premium affordability, together with a broad expansion of federal subsidies and pro-exchange policies, have made exchange coverage more attractive to consumers. In alignment with the enhanced backdrop, insurers should seek opportunities to establish or grow their exchange footprint, encouraged by growing enrollment, sustained margin expansion, and renewed federal support for the ACA.
ACA Market Trends
Developments in ACA market dynamics and regulation combine to create significant tailwinds for the ACA market. We expect insurers to expand their ACA presence as they look to the 2022 plan year and beyond. As the market continues to develop, insurers will need to invest in new products and business capabilities to capture market share and expand geographically. Below, we outline the primary tailwinds and headwinds for the ACA market and their implications for exchange participants.
Improvements in premium affordability and exchange competition
ACA market fundamentals have shown marked improvement from the difficult years in the middle of the past decade, when premiums soared and insurer participation in many exchange markets seemed locked in a death spiral. There has been a decline in average premium rates for ACA benchmark plans over the past three years, and Figure 1 below illustrates the number of insurer options available in each US county in 2021, as compared to 2018 and 2015.
As these data demonstrate, the ACA marketplace in most states is growing more competitive, with exchange markets recovering from insurer exits in the mid-2010s. For plan year 2021, 30 insurers entered the individual market across 20 states, with 61 insurers expanding their coverage area within states where they already operated. Today, more than 75 percent of ACA enrollees have access to at least three insurer options, with less than 10 percent having access to only one insurer (compared to 26 percent with access to only one insurer in 2018).
Gross margins have followed a similar trend, with average per-member per-month (PMPM) gross margin growth of around 34 percent annually between the first quarter 2015 and first quarter 2020, expanding from roughly $36 PMPM to $156 PMPM. While much of this margin growth can be attributed to policy activity (such as the overcorrection in premiums following the halt on federal cost-sharing payments in 2018) and scale efficiencies, growing competition and falling prices have not yet come at the expense of profitability.
Implications: Consumers will have more ACA coverage options going forward, driving higher overall market uptake and downward pressure on premiums. We expect price to remain the primary discriminant in plan selection for ACA consumers, aided by the industry-wide trend towards high-deductible, low-cost coverage. Consequently, plans seeking to capture ACA market share should focus on delivering quality products with affordable premiums by making enterprise investments in ACA capabilities, including care management, regulatory affairs and compliance, product design, and strategic pricing.
The American Rescue Plan Act of 2021
The Biden Administration extended federal support aimed at combatting the health and economic impacts of the COVID-19 pandemic through the America Rescue Plan Act of 2021 (ARP). The new law:
- Extends ACA premium subsidies to individuals whose income is above 400 percent of the federal poverty level for the first time
- Enhances premium subsidies for individuals already eligible for premium tax credits
- Provides the maximum level of tax credits and cost-sharing reductions to individuals approved to receive unemployment benefits at any time during 2021 (if a silver plan is selected)
- Subsidizes COBRA continuation for laid-off workers until September 30, 2021
- Adds new incentives for states to expand Medicaid for the next two years
Implications: The ARP’s sweeping expansion of ACA coverage subsidies serves to make ACA coverage affordable for many working-class Americans for the first time. The ARP’s ACA provisions are a strong indicator of renewed federal support for the ACA, giving insurers confidence in the future of the model in the near-mid term. Insurers need to analyze the impact of these additional subsidies on plan selection (likely to push members, particularly families, older members, and members with complex care needs, toward silver or richer gold and platinum plans in markets where those options are priced competitively), as well as downstream effects on the overall makeup of their membership.
The 2021 Special Enrollment Period
The Centers for Medicare & Medicaid Services (CMS) has extended access to a Special Enrollment Period (SEP) for states on the federal exchange until August 15, 2021 (with state-based exchange states enacting their own SEPs). Since the SEP began on February 15, 2021, more than a million Americans have enrolled in marketplace coverage through the federal exchange. Extending marketplace enrollment through the SEP provides individuals and families experiencing difficult economic circumstances due to the COVID-19 pandemic (or who are newly eligible for enhanced federal subsidies) access to coverage. The SEP also allows current enrollees to change plans in response to subsidy enhancements or health status.
Implications: The Special Enrollment Period serves to cement the ACA as a primary coverage destination for Americans struggling in the wake of the COVID-19 public health emergency. Consumers enrolling during the SEP are likely to remain on ACA coverage (if they do not regain access to employer-sponsored insurance), though insurers will need to manage the impact of adverse selection and understand consumer switching behavior as they plan their ACA business beyond 2021.
Rollback of select Trump administration ACA policies
In addition to its broader effort to repeal and replace the ACA, the Trump administration enacted a series of policies that had the effect of diminishing federal support for the ACA exchanges. These included:
- Repealing the ACA’s individual mandate (as part of the Tax Cuts and Jobs Act of 2017)
- Ending federal cost-sharing reduction funding (beginning in October 2017). The practice of “silver-loading” was adopted by many plans as a strategy to secure financial assistance for their members through increased advance premium tax credit allocation
- Shortening the annual open enrollment period by 50 percent, to 45 days (beginning in the fall of 2017)
- Reducing open enrollment outreach and enrollment assistance spending by 90 percent (beginning in the fall of 2017)
- Loosening federal regulations governing short-term and association health plans
Implications: While the Trump administration sought to weaken the ACA as a coverage framework, most policies enacted via executive action have been rolled back by the Biden administration. With larger healthcare reform efforts (such as Medicare for All) unlikely to move forward in the near term, insurers can have confidence in the administration’s support of the ACA for the foreseeable future. This serves to de-risk financial investments in ACA market entry and business infrastructure development.
Business uncertainty driven by COVID-19
ACA business planning is complicated by the nation’s recovery from the COVID-19 public health emergency. Pricing remains a key strategic challenge. Insurers saw historic profits and low medical loss ratios (MLR) in 2021 due largely to deferred care, with most plan rate changes for 2021 showing only moderate adjustments stemming from the pandemic. The Kaiser Family Foundation estimates that only 43 percent of insurers factored in the effects of COVID-19 in their 2021 rate filings, but 2021 performance and uncertainty around consumers’ care-seeking behavior in 2022 and beyond may require more significant changes.
Implications: While the new administration drives market confidence in the ACA’s future, the healthcare industry is grappling with managing the return to “normalcy” in the broader economy. Insurers seeking to compete in the ACA space need to understand and model the impact of a range of potential MLR scenarios and adjust their care management and medical management approaches to manage costs and fulfill members’ changing health needs.
Future legal challenges to the ACA
The Senate’s confirmation of Amy Coney Barrett to the US Supreme Court in late 2020 served to renew concern that the Court might overturn the ACA in the contentious California v. Texas lawsuit. This suit, brought by a consortium of conservative state Attorneys General, contended that the ACA is unconstitutional, given that the individual mandate was effectively stripped from the law in the Tax Cuts and Jobs Act of 2017.
The case was heard by the US Supreme Court in November of 2020. In a 7-2 decision written by Justice Stephen G. Breyer, the Court ruled that the plaintiffs lacked standing to challenge the law, finding that the states (and two individuals) that had joined the lawsuit did not show a “past or future injury” related to enforcement of the individual mandate.
Implications: The Court’s decision in California v. Texas ends the most recent of three major attempts to overturn the ACA (following National Federation of Independent Business v. Sibelius in 2012 and King v. Burwell in 2015). With the ACA now firmly established as settled law, future attempts to dismantle or weaken the legislation are unlikely to succeed, giving consumers and insurers confidence in the framework’s durability in the years to come.
The ACA’s Role in Post-COVID America
While risks remain, the ACA market is well-positioned for growth in the near-mid term. As the American economy reinvents itself in the long aftermath of the pandemic, consumers and insurers alike must consider the future of insurance together with the future of work. As premium rates continue to fall and federal support expands, ACA coverage will become more attractive for the broad range of consumers with contingent or otherwise fluid employment relationships, offering flexibility as the social contract of work continues to evolve. The ACA has stood the test of time, and its second act offers tremendous opportunities for insurers that can qualify, resource, and pursue future exchange business.