Here's Why So Many Americans Are Getting Letters Saying Their Health Insurance Is Canceled

“If you like your health care plan, you can keep your health care plan.” This was one of President Obama’s key talking points when selling the Affordable Care Act, and it was never true — as many of the 14 million Americans currently covered by individually-purchased health plans are now learning.

As Kaiser Health News reports, individual market insurers are sending out rafts of cancellation notices, telling subscribers they have to change to new plans starting in 2014. Here’s why:

1. Some old plans don’t meet new requirements under the ACA. Starting in 2014, most health plans will have to cover 10 “essential health benefits,” from hospitalization to maternity care to dental care for children. Most will also have to limit out-of-pocket expenses to no more than $US6,350 for an individual plan or $US12,700 for a family plan. And they’ll have to meet a minimum “actuarial value,” generally meaning that across a standardized population, the insurer will have to expect to pay at least 60% of health care costs incurred by plan participants.

If your existing plan doesn’t meet these requirements, it’s likely that it’s getting canceled. And since the new plan you’re getting will offer more comprehensive coverage, it’s likely to be more expensive, especially if you’re young and healthy and don’t qualify for a premium subsidy.

2. Some existing plans have especially sick participant pools, so insurers want to end them. Kaiser notes that some insurers appear to be targeting existing “guaranteed issue” policies for cancellation. These are policies that were designed to serve participants with pre-existing conditions, who are likely to have had especially high health care costs. Assuming the exchange websites are working properly, these individuals are probably going to be better off exchange plans anyway.

What’s arguably more surprising is that so many existing plans in the individual market are not getting canceled. Starting in 2014, there will be two individual health insurance markets: One that operates through the Obamacare exchanges, and one operating outside of them. Most regulations on insurance (for example, insurers have to offer coverage at fixed prices regardless of pre-existing conditions) will apply to individual plans both on and off the exchanges. But the subsidies that the ACA provides to help individuals buy coverage will only be available for exchange plans.

If subsidies are only available inside the exchange, and the regulations are mostly the same, why would any insurers offer plans outside the exchange, and why would anybody buy outside? There are a few reasons:

1. Not everyone can get a subsidy anyway. You can only get a government subsidy to help with your insurance premium if you make less than 400% of the federal poverty line, which is $US45,960 for a single adult in 2013. If you don’t qualify for a subsidy, you may be indifferent about whether your plan is sold on the exchange or not. Larry Levitt, an insurance expert at the Kaiser Family Foundation, notes that some people who are already insured in the individual market might prefer to continue working with the same insurer or insurance agent, and therefore may want to skip the exchange.

2. Grandfathered plans can only be sold outside the exchanges. Plans that existed before March 2010 are exempt from some of the requirements under the ACA. For example, they do not have to offer free preventive care and they can impose annual limits on benefits. For these reasons, grandfathered plans may be cheaper than new plans, and participants currently on them may want to stay on them. They’ll have to buy outside the exchanges to do so.

3. You don’t need to deal with an exchange website to buy non-exchange plans. In the long run, once the exchange websites are working well, this shouldn’t be a big deal. But for now, one big point in favour of the non-exchange plans is that you don’t have to deal with to buy them.

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