United Hospital Fund Report Examines Mergers of Individual and Small Group Insurance Markets and of Health Benefit Exchanges

Release Date: 09.15.2011
Contact: rdeluna@uhfnyc.org
Contact Phone: 212 494 0733

While the Affordable Care Act lays out prescriptive minimum standards for state health benefit exchanges, it also gives states significant discretion on key policy issues. A new report from the United Hospital Fund focuses on two such discretionary decisions for New York involving mergers: first, combining individual and small business health benefit exchanges, and second, merging the individual and Small Group markets.

According to the report Two into One: Merging Markets and Exchanges under the Affordable Care Act, maintaining separate health benefit exchanges for individuals and Small Groups would ensure a single-minded focus on the different needs of individual and small business customers.  At the same time, creating two exchanges would increase costs, create redundancies, confuse customers, and slow the evolution of the exchange.

Merging the individual and Small Group markets would require health plans to base premiums on the claims experience and administrative expenses of both types of purchasers and offer the same products in both markets.  On this far more complex issue, the report highlights federal rule-making yet to come, as well as a series of key and intertwined state policy decisions—the future of the Healthy NY and Family Health Plus Employer Buy-In programs, existing risk adjustment mechanisms, the option for states to establish a Basic Health Program to serve lower-income enrollees—that could affect enrollment. In addition, decisions individuals and businesses make when confronted with the complex regimen of market reforms, incentives, and penalties under the Affordable Care Act will also shape the markets, according to the report.

“One constant partner in this analysis was uncertainty,” said Peter Newell, director of the Fund’s Health Insurance Project and co-author. “We tried to rationalize these unknowns by modeling several scenarios reflecting different estimates on the two key elements of an actuarial review of a market merger—the size of enrollment and the health status or morbidity of those insured in the new market.”

The report distills the dynamics of a market merger into three components, each testing variations in population size and health status:

1. The merger of the existing individual insurance market (an estimated 142,000 members) with low and high estimates of new membership (438,000 and 691,000 individuals, respectively) entering the market due to Affordable Care Act subsidies and individual responsibility provisions;
2. The merger of this new individual market (i.e., the combination of existing and new enrollees) with the existing Small Group market (1.6 million members); and
3. The merger of the newly combined market for individuals and Small Group participants with nearly one million workers and dependents estimated to be covered through employers with 51-100 employees.

The report estimates the changes in the premiums that health plans would charge to enrollees under the different merger scenarios. When current individual enrollees are merged with new individual membership, for example, the report estimates premium reductions in a range of 13 to 41 percent.  Under a second and separate scenario, merging this new individual market with the Small Group market would result in greater premium reductions for individuals, but would likely increase premiums somewhat for Small Groups, and this rise could result in small businesses dropping coverage for their workers, increasing cost-sharing, or reducing benefits. 

The report also notes that the estimated premium changes do not reflect health plan adjustments for medical inflation, cost-sharing, and other components, and they could vary based on the health plan or the product.  Given the uncertain policy environment and market dynamics, the reports notes, the timing of a merger is also an important issue for policymakers to consider.

“As health reform implementation begins to move from the construction phase toward the ‘open for business’ phase in 2014, the Fund will continue to explore the complex and intertwined decisions involved, pointing out both pitfalls and strategies for getting it right,” said Fund President Jim Tallon.

Two into One: Merging Markets and Exchanges under the Affordable Care Act was written by Peter Newell, director of the Fund’s Health Insurance Project, and Bela Gorman, FSA, MAAA, of Gorman Actuarial, LLC.

Support for Two into One: Merging Markets and Exchanges under the Affordable Care Act was provided by the New York State Health Foundation. Available on the Fund’s website, the report is the third in a series of four that focus on New York’s health benefit exchange. The first was Building the Infrastructure for a New York Health Benefit Exchange: Key Decisions for State Policymakers, which examined the initial set of governance and organizational choices for states in designing their exchanges. The second was Coordinating Medicaid and the Exchange in New York, which focused on the successful integration of New York’s public insurance programs with subsidized and unsubsidized coverage to be made available through the new health benefit exchange. Both are also available from the Fund’s website. The final report in this series will discuss policy options on the role the exchange will play in setting guidelines for products available through the exchanges and choosing the health plans that are authorized to offer coverage.

About the United Hospital Fund: The United Hospital Fund is a health services research and philanthropic organization whose primary mission is to shape positive change in health care for the people of New York.

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