Insurance market reforms and revenue provisions of the Affordable Care Act intended to support expansion of healthcare coverage to theuninsured could have unintended consequences.

At a Glance

  • There are concerns that guaranteed issue and community rating provisions within the Affordable Care Act (ACA) could trigger a “death spiral”—a phenomenon in which community rating compressed rates make it more expensive for the relatively young and healthy to obtain coverage.
  • A recent analysis by Milliman suggests these concerns may be overblown, but some form of significant disruption remains a distinct possibility, given a relatively weak mandate and meager subsidies for those with incomes starting around 250 percent of the federal poverty limit.
  • Whatever the outcome, these ACA provisions will make it necessary for hospitals and health systems to take significant steps to control costs.

Some commentators believe the insurance reforms advanced by the Affordable Care Act (ACA) could significantly disrupt the individual and small-group insurance markets. What are the risks, and what can we glean from previous experiences in other states that have attempted similar changes?To expand coverage, the ACA makes unprecedented changes to the rules governing insurance plans not subject to the Employee Retirement Income Security ACT (ERISA). Payers and ideological critics of the ACA have rightly highlighted the unintended consequences experienced by states that attempted to implement some of the ACA changes on a more limited scale. Health systems should monitor the outcomes for states that have implemented reforms most analogous to the ACA. Understanding how coverage expansion has affected budgets and cost control efforts at the state level can provide clues to federal cost control efforts in the coming years.

The ACA’s Insurance Market Reforms

The ACA contains a number of provisions designed to expand access to coverage for the uninsured. Some provisions and related regulatory activities—such as the insurer tax, health insurance exchange funding tax, and temporary reinsurance assessment—are designed to help make insurance affordable for lower-income individuals, to ensure that health insurance marketplaces are funded, and to ensure that a plan sold within a marketplace is not harmed by adverse beneficiary selection.

Other provisions are intended to make comprehensive coverage available to those who have been excluded due to preexisting conditions or priced out of the market due to health status, or to protect those who purchased policies that exclude services for relatively common medical needs. Examples include provisions that guarantee access to health insurance (guaranteed issue), end coverage rescissions, standardize the community rating from an average of 5:1 to 3:1, and establish a minimum essential health benefits package.

Potential Unintended Consequences

Critics contend that the revenue provisions to support expansion, combined with insurance market reforms, could have severe unintended consequences. Such concerns are grounded in the experiences of states that implemented limited insurance market reforms and in predictions that the ACA’s revenue provisions supporting coverage expansion will be passed to consumers as higher rates.

Exhibit 1


Eight states have attempted to implement some combination of guaranteed issue and/or anarrower community rating. A study of these efforts performed by the actuarial consulting firm Milliman found that premiums generally increased, insurance providers exited the market, and enrollment in the individual insurance markets in these states tended to decrease.a At its most extreme, a phenomenon called an insurance market “death spiral” occurred as community rating compressed rates made it more expensive for the relatively young and healthy to obtain coverage. Because of guaranteed issue, those who didn’t have an immediate need for coverage exited the insurance market, leaving fewer lives over which to spread the risk and incurred claims cost.

Critics’ concerns about guaranteed issue and community ratings provisions within the ACA triggering a “death spiral” are exacerbated by predictions of increases in health insurance premiums. Although older individuals and those with one or more chronic diseases may see rates fall, some insurance industry executives and investment analysts who watch the sector predict that rates will rise 20 to 30 percent, on average, as shown in the exhibit above, with those who are young and relatively healthy facing rates that could double due to the revenue provisions and expandedbenefits package.

Supporters of the law downplay these concerns. They point out that the ACA couples the insurance market reforms and revenue provisions with subsidies—available to individuals whose incomes are up to 400 percent of the federal poverty level (FPL)—that tie premium payments to an eligible individual’s income level, thereby absorbing much of the “rate shock.” Further, the law includes penalties that should compel individuals to purchase insurance. This approach has been used in only one market—Massachusetts, where 98 percent of eligible residents have health insurance.

Exhibit 2


Comparison with Massachusetts

Although Massachusetts provides the best available example of what could happen, its validity for comparative purpose is limited because the Bay State’s overhaul does not exactly match the major provisions of the ACA for revenue, insurance market reform, and penalties/subsidies.

Revenue. Like the ACA, Massachusetts’ healthcare reform approach funds its exchange operations (the Massachusetts Connector) through an assessment on premiums for health insurance products sold through the marketplace. Unlike the ACA, Massachusetts’ approach does not levy a tax on insurers to fund coverage expansion, nor does it include an assessment to fund reinsurance for plans sold in the marketplace.

If the fees under the ACA are passed on to individuals purchasing health insurance in the marketplaces, as insurance industry analysts and executives predict, the cost of coverage could increase by 6 percent. Although individuals receiving subsidies will be sheltered to some degree from these and other cost increases, they will ultimately drive up subsidy expenditures, and the resulting increased overall cost of expansion will put additional pressure on the federal budget and, ultimately, taxpayers.

Although Massachusetts has not experienced a significant rate shock, concerns about the affordability of care have driven multiple legislative attempts to control costs.

Insurance market reforms. Both coverage expansion plans include guaranteed issue, a mandated benefits package, and community rating. Insurance executives estimate that the ACA’s essential health benefit mandate could increase the cost of insurance by 7 percent or more.b By contrast, the most recent analysis of the impact of Massachusetts’ mandated benefit package estimates it has increased costs by 1 to 4 percent.c Estimatingthe actual cost impact on a given marketplace is difficult. It will depend on the state’s choice of benchmark plan (or decision to default to the federal benchmark) and any additional state-mandated benefits beyond the federal requirements.

Massachusetts’ community rating, at 2:1, is narrower than the ACA’s 3:1. In theory, younger, healthier individuals should have seen premiums spike, but this effect has not been widely reported or attributed to the community rating provision. Much of the pressure was probably absorbed by increased subsidies (with the costs picked up by the state budget) for those under 300 percent of FPL or by the widespread willingness of those younger than 26 to purchase catastrophic policies similar to what is envisioned in the ACA for those under 30.

Subsidies and penalties. Although the ACA provides subsidies to individuals living at 133 to 400 percent of FPL, which represents a greater segment of the population than receives subsidies in Massachusetts (i.e., individuals living at 150 to 300 percent of FPL). But the ACA’s subsidiesare not as generous. For an individual living at 300 percent of FPL, the out-of-pocket premium contribution is capped at 4.23 percent of income in Massachusetts. Under the ACA, individuals living at 255 percent of FPL would be exposed to that level of out-of-pocket premium expenditure.

All things being equal, the penalty under ACA would need to be significantly greater than in Massachusetts to compel coverage purchase if the decision were based on solely on the individual out-of-pocket cost of coverage versus the penalty.

The ACA’s penalties are nominal in 2014 and 2015 compared with those exacted by Massachusetts. Starting in 2016, the ACA’s penalties increase significantly, particularly for the lower end of the income spectrum.

In March 2012, Milliman performed an analysis to gauge the strength of the individual mandate, comparing the penalties with the out-of-pocket cost of insurance after subsidies for individuals and families of various ages and income levels.d

Milliman’s analysis provides interesting insight into how the combination of penalties and subsidies might influence individual behavior related to insurance purchase.

For example, for households below 200 percent of FPL (about 27 percent of the uninsured), the penalty is greater than the out-of-pocket cost of purchasing coverage.e Meanwhile, for households between 200 and 250 percent of FPL (about23 percent of the uninsured), the penalty does not exceed the out-of-pocket cost of purchasing insurance, but is still significant enough to compel participation.

As individuals approach 300 percent of FPL, the penalty amount becomes smaller compared with the out-of-pocket cost of insurance, weakening the influence of the mandate as a purchase driver among these individuals and households, particularly the young. Surprisingly, at 400 percent of FPL or greater, the affordability exemption may impact a significant number of households, as is seen particularly in the over-50 segment. Given the relatively high healthcare needs of this population, qualifying for the affordability exemption may not diminish participation in exchange plans.

Milliman’s analysis also suggests enrollment in catastrophic plans may be greater than anticipated. Although the plans were envisioned primarily as a coverage mechanism for individuals under 30, they will likely include a significant mix of older, relatively affluent households whose income level qualifies them for the affordability exemption and are looking for a lower-cost alternative to subsidized plans offered on the health insurance marketplaces. 

Implications for the Future of Reform

Given the impact of the mandate and subsidies after 2015 for those under 250 percent FPL (a significant portion of the uninsured), concerns about a full-scale insurance market death spiral may be overblown. However, some form of significant disruption in one or more of the exchanges remains a distinct possibility, given the combination of a relatively weak mandate and meager subsidies for those with incomes starting around 250 percent of FPL. The likelihood of disruption also increases if there is significant upward pressure on premiums (due to rate shock related to the ACA’s provisions or an increase in utilization of healthcare services). Increases in premiums would not only push more individuals and families over the threshold for the affordability exemption, but also increase outlays for subsidies, putting further pressure on the federal budget. As a baseline, the Congressional Budget Office projects federal healthcare spending will grow from 23 percent of the budget in 2012 to 32 percent in 2020.

Although insurance markets in Massachusetts are stable thus far, the state has experienced a similar phenomenon. Healthcare costs in 2013 are projected to consume 41 percent of the state budget (up from 29 percent in 2005).f Last August, after considering a multitude of ideas for controlling cost, the Massachusetts state legislature passed a global cost-control package that anchors cost growth to gross state product (GSP, the state equivalent of GDP), among other strategies to constrain healthcare expenditures.g Although the enforcement mechanism is admittedly weak, the threat of reintroducing provisions that were stripped out of the law before passage—including a luxury tax on high-cost hospitals, forcing component providers of a health system to negotiate independently with payers—will likely keep Massachusetts hospitals focused on the task at hand.

The implications for health systems are evident. If excess cost growth imperils coverage expansion and/or threatens to bust the federal budget, it is not a question of whether Congress will intervene to mute cost growth, but how strongly it will do so. Healthcare delivery systems have a limited window of opportunity to collaborate with patients, employers, and other providers within their community to reduce cost growth or risk significant federal intervention.

Chad Mulvany is a technical director in HFMA’s Washington, D.C., office, and a member of HFMA’s Virginia-Washington, D.C., Chapter (


a. Wachenheim, L., and Leida, H., The Impact of Guaranteed Issue and Community Rating Reforms on States’ Individual Insurance Markets, Milliman, Inc., prepared for America’s Health Insurance Plans, March 2012.

b. Reichard, J., “Wall Street Analysts Predict Rate Shock in Exchanges and Ripple Effects on Hospitals,” CQ Healthbeat News, Dec. 19, 2012.

c. Compass Health Analytics, Inc., State-Mandated Health Insurance Benefits and Health Insurance Costs in Massachusetts, prepared for Center for Health Information and Analysis, Commonwealth of Massachusetts, January 2013.

d. Houchens, P. R., Measuring the Strength of the Individual Mandate, Milliman research report, March 2012.

e. In 2012, an individual earning $22,340 was at 200 percent of FPL.

f. See Governor’s Budget FY2013, Health Care Spending.

g. Steinbrook, R., “Controlling Health Care Costs in Massachusetts with a Global Spending Target,” JAMA, Sept. 26, 2012. 


Case Study: Partners HealthCare

Partners HealthCare, a multihospital delivery system anchored by two academic medical centers located in Boston, offers an example of how providers are approaching the need for significant cost control.

Before passage of the Massachusetts cost control law, Partners acutely understood the pressure to control cost growth in its markets. The system therefore agreed to lower its annual increase in costs for its three major health plan customers from 6 percent per year to 3 percent. This commitment required Partners to undertake efforts to contain costs amounting to hundreds of millions of dollars. 

Achieving this level of cost reduction goes beyond traditional containment strategies. Partners’ cost-containment plan is predicated on improving how care is delivered. The goal is to redesign care delivery, with emphasis on providing care in the most appropriate setting and at the most appropriate level from both a cost and quality perspective. 

Business intelligence systems are playing a significant role in this transformation. Partners continues to rely heavily on its data-mining capabilities to identify clinical services and procedures whose outcomes show high degrees of variability in cost or quality. Once priority medical conditions have been identified through rigorous analysis, multidisciplinary teams perform additional rigorous analyses to defining process standards for these conditions. Partners’ leaders are finalizing approaches to institute protocols and standards at the point of care, along with processes for reviewing medical appropriateness of care delivery. 

Because accomplishing these objectives requires a shift in behavior, particularly for physicians, Partners also is reconsidering incentives. For example, one of Partners’ most significant opportunities to reduce cost and improve quality lay in reducing preventable admissions and readmissions for individuals with one or more chronic diseases. To seize this opportunity, Partners needed to restructure the compensation plan for its primary care physicians to align the incentives of these providers with its organizational goals. In addition to bonuses for quality measures, the incentive structure includes a 2 percent bonus based on the risk-adjusted panel size to reward physicians who attend to patients with more complex conditions.

Action Steps for Providers: Case Examples

For examples of provider actions to improve quality and improve cost, please see HFMA’s most recent Value Project report, The Value Journey: Organizational Road Maps for Value-Driven Health Care, at

Publication Date: Monday, April 01, 2013

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