If the PPACA (Patient Protection and Affordable Healthcare Act) lives true to its objectives, Insurance coverage would have reached to 94% levels by 2018, leaving behind an estimated 23 mn uninsured - mostly illegal immigrants, younger population or people under the poverty line. While this would truly be a giant leap in terms of health insurance coverage, I am not really sure if those percentages would really translate into healthcare access as such. Anyways - that and the issue of health-care cost containment, would be another discussion altogether.

Meanwhile the PPACA, I am sure would be a matter of concern to insurance companies. There are definitely provisions in the bill - which, for all the good intentions behind them, would still add to the complexities of a business, already so convoluted and ridden with an enormous amount of regulation. While it is difficult to determine precisely the nature of impact on the insurance industry - due to lack of clarity of the details of the implementation, we can definitely deduce the impact at a high level. Below - I will be analyzing some of the provisions of the bill, which have a big impact on the Insurance industry.

The formation of  Health-care exchanges over the long run - are expected to homogenize the products, develop competition in a market place, where the industry concentration is really high (most states have one or two dominant players) and over the long run, keep premium costs low. Although there is a good chance of this happening, I am some how inclined to believe that the effects may not be as drastic as expected. Personally I believe, that the dominant players in the market place would turn into price setters for the smaller players.

Another big threat to private insurance companies - would be having to compete with a state sponsored public health option - which, in intent, is supposed to be the insurer of last resort.Details are unclear on how this will ultimately be implemented, but is definitely bound to have an impact.

Also another aspect is that of reduced payments for medicare advantage (Health and Education Reconciliation Act) - based on a MedPAC study, the CBO has proposed to change the MA payment metholodology - linking it to FFS payment rates. This is expected to result in a cost savings of $140 Bn. For insurance companies, carrying MA plans - the impact would be directly in terms of lower payments from Medicare. Without the exact implementation numbers, it may be difficult to guess to what extent this will impact medicare carriers, but definitely there is a downward impact. There will definitely be an increase in MCR for this line of Business, vis a vis, the other lines of businesses. Also - this may be a loss making proposition for the carriers, given that there is limited flexibility for them to pass the increased costs on to the consumers through premium hikes.

Another big impact to health insurance, could come from Medicaid expansion - able bodied individuals with incomes at or below 133% of poverty line, would now be eligible for coverage.This is expected to add coverage to an additional 32 million people. Medicaid contractors in general, would definitely see an increase in enrolments for their medicaid business. It remains to be seen, what would the precise impact of this regulation on the insurance business be. 

Most of the provisions directly affecting the insurance companies - are mostly aimed at individual or small group business - obviously where the coverage gaps are the maximum. But these provisions may have the undesirable effect of driving private insurance companies away from these markets altogether - since these provisions may make the individual markets more expensive - and will definitely get reflected in premium inflation - it will definitely be higher than direct health care cost inflation, in order to accomodate the new provisions.

The PPACA, fixes the medical cost ratio - at 85% for large business and 80% for small / individual businesses. Simply put, this means, insurance companies will have to use 85%(or 80%) of the healthcare premiums directly on paying back medical claims. This puts up a limit on how much insurance companies can spend on administrative costs, sales / marketing, agent commissions, law suits, other expenses while also having to make a profit. This has the potential one of the most significant provisions, in terms of impact to the payer operations. While the intention behind the provision would definitely be to drive efficiencies in payer operations, the problem would be that this provision would might actually end up driving up premium costs. Simply put, if an insurance company - theoretically can not achieve the level of efficiencies required to pay for all the expenses and to make a profit with the given percentage on the current premium incomes - all they would need to do is increase the premiums, in order to increase the absolute dollar available - as the MCR remains pegged at 80/85. Again - there is much uncertainty regarding how this provision is to be implemented. If these ratios are applied at an aggregate company wide level - companies will still have a margin of errors - across LOBs or states / regions. But things may change, if these ratios are implemented state-wise. In some of the highly regulated states - like NJ or NY - the impact may be lesser, but the impact may be higher for some of the less regulated states like Georgia etc., But overall, insurance companies could be tempted to tweak premiums upwards, to maintain or increase the absolute dollars available to cover expenses if MCR ends up more than 80/85. All said, the most likely impact - increase in premiums. Particularly for the individual and small group businesses - due to the higher expected MCRs for these groups.

Also missing is - anything to incentivise (from this perspective) faster and more serious adaption of wellness programs, disease management programs or care management programs - aiming at cost containment. It is not clear on where the expenses for cost control and quality initiatives (Care Management, Wellness Management) appear in the MCR- whether they are part of the 20% or the 80%. If they are part of the 80%, it will definitely be a disincentive for insurance companies to even invest in these initiatives.Right now, it remains to be seen - as to how the HHS will issue regulations based on the legislation.

The act also includes a provision ensuring insurance companies will not be able to decline coverage based on pre existing conditions. Again, simply put, the expectation of additional medical costs - related to coverage of people with pre-existing conditions will be factored into premiums, pushing premium costs upwards. While the intention of this provision, is definitely to extend coverage to the set of population, which could find it the hardest to get coverage - it is also incongruent, on a few grounds. First, there is the risk of adverse selection - people may not opt for coverage during their healthier years and opt in - when they get ill. Second, this will clearly increase the burden of higher premium costs for the healthier population in the pool. Worse still, all the healthy population need to figure out is that, they really dont need to be paying the premiums (and can get away by paying a penalty - which will be a fraction of the premium cost), when they are healthy - they could always opt for coverage when they get sick- thus forming a vicious cycle of premium cost inflation and an increasingly unhealthy risk pool. Again, this would be for the individual business - due to the smaller risk pool. This may drive the insurance companies away from this line of business altogether.

There is also a provision - to enforce first dollar coverage for a list of services considered preventive services or screening. The direct impact of this provision will again - be an increase in premium rates, to cover for loss of member responsibility amounts. But there is another impact which payers may need to think about - increased likelihood of healthcare fraud. This is an opportunity for inappropriately filing claims under preventive services or screening services - to avoid paying any member liability amounts. This will again drive up cost of claims and premium rates, in addition to the direct impact.

There are other provisions related to elimination of annual and lifetime benefit limits.Again - the direct impact of these provisions - would be premium cost increases. Also - with the elimination of the annual benefit maximums and lifetime benefit maximums, there is definitely the risk of over utilization of services and may additionally add to premium cost increases. Also the provision - to ensure insurance companies dont rescind policies when the member falls sick - this appears sound in principle and may not be a critical issue, but may marginally add to premium costs.

There is also the provision to extend coverage to dependents - under their parents' policies till the age of 26. This again will add to the premium costs, but not likely proportionately - since these dependents are likely to be healthy and not add as much to the medical costs.

Overall - the PPACA and HERA - will definitely add to the challenges insurance companies face - both in the short, as well as the long terms. It may be tempting in the near future for private players to opt out of the individual markets, given the risks involved with the implementation of this bill. Additionally - this bill, will most likely push up premium rates and thus, health insurance costs overall. It is also not possible to exclude the scenario of a movement towards a single payer system, in the distant future. But for the foreseeable future, we may be looking at increasing consolidation - since the smaller payers may not be able to hold out- in a highly regulated market place, and of course, once the public option is available - it may act as a price setter (a dominant firm oligopoly?) and (may?) influence the market place.