Why are insurance companies dropping plans under Obamacare?

Many have asked me this question,  I will do my best to break it down for you.

First, a very simple answer:  Insurance companies are dropping people and cancelling plans because the plans have been made illegal by the Obamacare regulations and they have no other choice.   This is the most simple explanation.

Think about it.  Insurance companies are in the business of enrolling as many people as possible in their plans, charging them monthly premiums.  The premiums are driven by the market.  In general, insurance company rates are lowest when there is lots of competition from other insurance companies.  Insurance companies are NOT in the business of wholesale cancelling people’s coverage, especially when those people are regular paying customers.

In my my 12 years in this business, I have never observed the cancellation of a health insurance policy for any reason other than failure to pay premiums on time.  This just does not happen.

Enter Obamacare.

The law is 2700 pages long and the governing regulations now exceed 20,000 pages.  Within those regulations are stringent insurance requirements that all major medical plans must reside within certain parameters.    Under Obamacare, insurance plans must fit within one of four ranges:  Bronze, Silver, Gold, and Platinum.  The metal categories, as they are described, are defined in the regulations based upon the actuarial value of the value that they provide.

After 1/1/2014, all plans must fit within one of the defined metal categories, or they are illegal.   The one exception to this would be if a plan had “Grandfathered status.”

Grandfather Status:

This is where President Obama’s “if you like your plan, you can keep your plan” pledge comes in.  This was one of his most consistent promises throughout the healthcare debate.   When many heard the phrase, they assumed that the President was telling them that nothing in Obamacare would cause them to have to abandon their current plans.  Further it seemed correct to assume that the President was promising that employers would still pay for the vast majority of premiums, and insurance companies would be able to keep offering all of the plans that they normally were offering.

Well, not so much.

In July 2010, HHS released guidelines that would address the “If you like your plan….” promise.

To say the Grandfather rules took a narrow interpretation of the President’s promise would be a huge understatement.

The regulators interpreted the President’s Promise of “if you like your plan” to mean:  If you were covered by a major medical plan on the exact day that the law was signed into law (March 23, 2010).   Then they took the “you can keep your plan” phrase, and interpreted that to mean:  You can keep your plan as long as it remains EXACTLY the same, except for some very narrowly defined changes.   The exceptions allowed a person, or insurance company to make VERY minor defined changes to deductibles, copays, and employer contributions.   If any of these limits were exceeded, then Grandfather status would be forfeited.

Likewise, insurance companies could keep their plans on the books as long as they did not change them very much.  If they changed them beyond the narrow Grandfather limits, then they would be fully subject to all of the Obamacare mandates.

What Happened if Someone Purchased Coverage after 10/23/2010?

If people, or businesses purchased coverage after the law went into effect, they may have been able to purchase a plan that did not meet the Obamacare standards.  These plans would have been regulated by their state.  Even though they could exist for a while, they would become illegal on 1/1/2014, and would require cancellation.

No-one who purchased coverage after 10/23/13 is able to maintain a Grandfathered plan.

How were health insurance plans regulated prior to the passage of Obamacare?

Small group insurance plans and individual policies are regulated by states.  Although states vary in the way that they regulate plans and insurance companies, the vast majority of states have stringent requirements for major medical plans to be marketed in their state.  To say that these plans are “substandard” would be an overstatement.

Now back to the original question:  Why have insurance companies dropped people from insurance plans under Obamacare?

The vast majority of plans, which are being cancelled by insurance companies, has been due to the fact that the plan designs are no longer legal under Obamacare.  The cancelled plan either lost it’s Grandfather status by choice of the enrollee, the business owner, or the insurance company.   Without Grandfather status, the insurance company is forced to cancel the plan.

What are the options of someone whose plan was terminated?

In most cases, the insurance company would have provided alternative plans which met the metal plan categories.   The person could select one of those plans and pay full price.  In a similar vein, the person could choose an alternative insurance company.  Another alternative would be to purchase through the federal or state Marketplace (not currently working).   Finally, the person could choose not to purchase insurance.  Starting on 1/1/2014, failure to purchase an insurance plan for oneself and family results in a penalty tax.

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One thought on “Why are insurance companies dropping plans under Obamacare?

  1. Currently I have an individual plan through Medical Mutual with a straight $1,500 deductible after which insurance pays 100%. This plan cost $406 per month (age 56). In order to match my current premium, the closest match on the healthcare.gov exchange site would result in a $6,000 deductible. Big deal if my current plan doesn’t cover the cost of one physical or “screening tests” (it is covered subject to my deductible) I do not mind paying for those items because I believe in personal responsibility. I was able to “extended” my current plan for an extra year thus avoiding OBAMACARE for now. Big question what happens to medical charges if everyone is insured? Hospital and physicians will no longer have to charge higher fees to cover the cost of carrying for the uninsured thus bringing down the cost of healthcare. Also since everyone will be insured hospitals would not have to treat folks in the community via the emergency room thus taking away one of the requirements for being tax exempt under 501 (c) (3). That would mean taxing their real estate resulting in a windfall for the school systems. That will never happen.

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