Obamacare Is a Problem For Much More Than the 5%

Millions of Americans are losing their health insurance policies because of the Affordable Care Act. ACA supporters claim the cancelled plans were "subpar." But in fact, many or most cancelled plans simply did not fit the ACA's arbitrary cookie-cutter standards; the ACA forces insurers to offer sameness, not quality. To understand how, imagine a school where 59, 71, 82, and 90 are passing grades-but 66, 73, 85, and 98 are failing (subpar) grades. Ponder that for a moment, and ask yourself whether you can discern any logic. No? Welcome to the ACA School.

The millions losing their individual policies now will be joined in 2014 by tens of millions who will lose their employer-based policies for the same reason. And for many, the brand-new policies currently offered will be cancelled in 2015 or 2016 because the ACA's sameness standards are a moving target. An unknown number of Americans will now face a permanent cycle of annual or biennial cancellation and have to search for a new policy because of the ACA's bizarre grading system.

By now, many are familiar with a few of the ACA's "subpar" definitions. In the individual and small-group markets, for example, every ACA-compliant plan must cover officially defined essential health benefits or be deemed subpar: A 62-year-old woman's plan must cover prostate screenings; her son's plan must cover pap smears; and an elderly nun must be insured against pregnancy costs. But the ACA's mystery grading system is even more surreal.

It is in the realm of actuarial value (AV) requirements where the law demands pointless standardization. AV measures the extent to which a policy covers the average enrollee's medical expenses. On average, for example, a plan with an AV of 63 percent covers 63 percent of enrollees' medical costs.

All ACA-compliant plans must fit within four "metallic" bands. A platinum plan covers around 90 percent of an enrollee's costs, with a 2 percent tolerance in either direction. Thus, a platinum plan covers between 88 and 92 percent of costs. A less expensive gold plan covers between 78 and 82 percent of expenses. A silver plan's AV falls between 68 and 72 percent. Finally, bronze plans cover between 58 and 62 percent.

A plan offered in 2013 can have any AV, but come January 1, 2014, all plans must fall within those four narrow metallic bands. Therefore, a plan that covers 59 percent of medical expenses is okay, because it's within the bronze band. But a plan that covers 96 percent of expenses is unacceptable because its coverage is too generous; it is, by official rhetoric, subpar, substandard, bad insurance.

Imagine a school where 88 to 92 is an A, 78 to 82 is a B, 68 to 72 is a C, 58 to 62 is a D, and everything else is an F. So, 59, 71, 82, and 90 are passing grades. The student who gets a 23 fails, as one might expect. But so do pupils who get 66, 73, 85, or 98. This school is run by a domineering art teacher who provides exactly four crayons, and students dare not color outside the lines.

This same logic applies with the ACA. If you like your plan, you can keep your plan-provided that the AV is 59 (bronze), 71 (silver), 82 (gold), or 90 (platinum). But if your plan covers 66 percent of your expenses, or 73, 85, or even 98, you can't keep it. You are cancelled. It is bad, subpar insurance, and you go to detention hall (read: Healthcare.gov) indefinitely.

One of us (Pat) works with a small employer whose insurance policy has a 96.9 percent AV. The employer pays 100 percent of the employees' premiums. The ACA views this plan as subpar because it pays too high a percentage of the employees' medical costs. To be ACA-compliant, this group will must now provide fewer benefits. When employees get sick, the ACA insists that they face higher out-of-pocket costs.

Think of Pat's client as the student with the highest GPA in the class. Typically, this student would be valedictorian. At the ACA School, however, the art teacher/principal says sternly, "I'm deeply disappointed in your performance. Unless you want an F this semester, you had better answer more questions incorrectly and miss some deadlines. Consider this a warning."

If you think this is a problem just for the 5 percent of Americans (15 million plus) who get their insurance through the individual market, think again. Tens of millions of Americans who get their insurance through small-business plans are likely to experience similar waves of cancellations when their policies come up for renewal in late 2014 and in 2015. In 2016, the small-business rules will expand to include employers with up to 99 employees, meaning that all told, 40 to 50 million individuals (plus millions of family members) could be vulnerable.

And if you think this is a one-time problem, think again one more time. Let's say in late 2014, you lose your small business plan because its AV is 73-too high for silver and too low for gold. You switch to a compliant silver plan with an AV of 69. Before your plan comes up for renewal in 2015, however, many things beyond your control will change-ACA regulations will change the allowable deductibles and out-of-pocket maximums, and prices of medical goods and services will change, as they always do. So in 2015, your insurer does the calculation and finds that your year-old plan now has an AV of 67. The insurer will have little choice other than to cancel your new plan, and you'll have to hunt around for yet another one-and maybe a new doctor and hospital, too. As far as we can tell from the newly issued regulations, cancellation letters may become an annual event for tens of millions of people. If you like your policy, you can keep your policy-till next year. Period.

Why did Congress write the law this way? Answer that question for extra credit. But be careful. If you answer correctly, the higher grade might land you an F.