Laid-off Workers Don't Need a Special Nongroup Open Enrollment Period

President Trump has been heavily criticized by his political opponents and medical insurers for refusing to allow people without medical coverage to purchase a plan mid-year in the nongroup market. His refusal has been condemned for putting millions (and perhaps tens of millions) of Americans at financial and medical risk as they lose their jobs and access to employer-sponsored coverage as a result of state and local governments’ responses to the pandemic.

But their arguments are strewn with misinformation and fail to recognize the immediate and long-term damage t hat the president would cause if he opened these markets to mid-year enrollment.

Let’s look at whose coverage is affected by a layoff and the negative consequences to the nongroup market if people have an opportunity to enroll in nongroup coverage mid-year because of increased medical risk during the novel coronavirus pandemic.

Which Laid-off Workers Are Affected?

1.     Enrolled in employer-sponsored coverage.

Some employers are continuing to pay their portion of premiums for furloughed workers. These people will continue to pay the same amount for group coverage as they did prior to the furlough. Many who qualify for unemployment benefits will experience an increase in income, making their share of the premium more affordable.

Workers who lose their jobs and were covered on their employer’s plan have a qualifying event to purchase coverage in the nongroup market, including public marketplaces run by states or facilitated by the federal government. They can apply for advance-premium tax credits (also called premium subsidies), which are available to individuals and families who earn less than 400% of the federal poverty level (which ranges from $51,000 for an individual to $122,700 for a family of five).

In addition, most of these people are also eligible to continue their group coverage by exercising their COBRA rights. They are responsible for 100% of the premium, without the possibility of premium subsidies. That's a steep cost. But (prediction here) expect the fourth COVID-19 response bill, to be introduced later this month, to include taxpayer subsidies of COBRA premiums, as was done during the 2008 - 2009 recession.)

2.     Not enrolled in employer-sponsored coverage

These employees waived participation in an employer plan, either because they have access to other coverage (through a spouse, the Veterans Administration, Indian Health Services, or TRICARE, for example) or they consciously waived enrollment in the group plan without other coverage. They either didn’t need or didn’t want or couldn’t afford employer-sponsored and -subsidized coverage prior to the pandemic. Regardless of the reason, they chose not to enroll in the company plan. Their decision should be respected.

3.     Work for a company that doesn’t offer coverage

These workers who lose their jobs don’t lose their coverage as a result of a layoff or furlough. They either have other coverage (like a spouse, VA, IHS, or TRICARE) or they chose not to enroll in nongroup coverage during the last open-enrollment period last fall – even though more than four in five would qualify for premium subsidies. We should respect the decision that they made during open enrollment.

COBRA or Nongroup Coverage?

Terminated employees in scenario No. 1 above have the option of continuing their group plan under COBRA or purchasing nongroup coverage either through a public marketplace, a private marketplace, or directly from an insurer.

Which option is better? That depends each situation. Here are some considerations:

Services utilized during the plan year. People who’ve satisfied much or all of their deductible often do better financially by remaining on the group plan via COBRA. That way, they don’t need to satisfy a new deductible on a nongroup plan that runs only through the end of the calendar year.

Level of coverage. Employees choose between or among the handful of plans that their employers offer. But often they’d choose a different plan if given access to more options. The nongroup market offers a wider range of coverage options. They may find a plan whose combination of premiums and out-of-pocket financial responsibility fits their personal budgets better than their employer coverage.

But buyer beware! Nongroup plans often have much higher total cost-sharing than group coverage. Networks are often smaller and exclude major academic medical centers and large hospital systems and physician organizations who have the most leverage in negotiating with insurers. And prescription-drug plans may not cover certain drugs within a pharmaceutical class. These considerations are important, particularly when someone in the family has a chronic condition or is undergoing acute care for cancer, organ failure, behavioral-health issues, or other medical conditions.

Income. Income plays an important role in the choice of coverage. People with incomes below 400% of the federal poverty level (a figure adjusted for family size) can qualify for premium subsidies, which means that taxpayers pay a portion of their premium (just as their employer paid a large percentage of their group premium when they were active at work). These subsidies are available only when consumers shop in the public marketplaces run by states or facilitated by the federal government.

But buyer beware! Because the federal government is adding $600 to weekly unemployment benefits (the equivalent of an additional $15 per hour), many people who are laid off will make more money as they stay home and collect unemployment benefits than they earned when they worked. They can qualify for premium subsidies based on their earnings prior to their being laid off. But when they file their personal income taxes, they will record their income from all sources, including state and federal unemployment benefits. If this figure exceeds their projected annual earnings based on income at the time that they applied for the subsidy, they’ll have to repay a portion of their subsidy. That may leave them with an additional tax bill of $1,000 or more next April.

[Note: What we call premium subsidies are actually advance-premium tax credits. Now you know why. The tax credit (subsidy) is calculated in advance. A final reconciliation occurs as part of a federal income tax filing, however. The subsidy may be reduced, and thus tax liability increased, when the year’s actual income is calculated.]

People with incomes above 400% of the federal poverty level (this figure adjusted for family size) don’t qualify for subsidies. They can purchase coverage through a public marketplace, a private marketplace, or directly from an insurer.

Premium. The cost of the policy itself is an important consideration – particularly when the average employer-sponsored family plan premium exceeds $20,000 annually. Fitting an additional $1,500 to $2,200 of monthly expenses into the family budget isn’t easy. Families who qualify for premium subsidies in the nongroup market may benefit from choosing this approach rather than continuing the group plan via COBRA.

But nongroup plans are priced based on family size and the ages of the family members. A laid-off worker who’s 61 years old and covers a 55-year-old spouse will pay a lot more than a 30-year-old couple for the same coverage. Thus, the nongroup plan is often a better option for younger people.

Group plans are rated based on age as well, although employers almost always charge all employees – regardless of their or covered family members’ ages – the same premium for a tier of coverage (self-only, two-person, and family, for example). So, older employees may find a lower premium by choosing COBRA continuation.

The Risk in Opening Public Marketplaces

Insurance provides protection against unknown risk. We buy homeowners insurance, for example, to protect us against the cost of the loss of our primary residence. Imagine losing your home to a fire or flood without insurance. You’d still be responsible for your mortgage payment AND you’d have to buy or rent a new place to live. Few people can afford to pay double for housing. Instead, they purchase a homeowner’s policy for a $1,000 to $2,500 annual premium to replace their home if it’s damaged or destroyed.

The concept of unknown risk is violated, however, when homeowners who didn’t buy insurance suddenly want to purchase coverage when wildfires are raging several miles from their homes and a shifting wind is pointing the flames in a path toward their homes. They no longer face an unknown risk.

Insurance companies that allow homeowners to enroll as the wildfire flames are within sight of the back deck suffer from adverse selection. People who determine that they’re at imminent risk of a loss will purchase coverage, whereas others who still have unknown risk wont. As a result, future claims costs increase. Those higher premiums become less attractive to people with unknown risk, and they respond by purchasing coverage from a competitor (that didn’t allow last-minute enrollment) or go without coverage. This list may include people who rebuild their homes from this wildfire, since they know that they can purchase coverage as the wildfires approach again.

The practice of allowing people facing imminent, known risk to enroll in coverage increases claims, thereby increasing premiums for everyone. Companies that don’t allow enrollment when risks are high are balancing their pool of customers among the 95% who don’t file a claim in a given year and the 5% who do (mostly for small property damage, not severe or total loss). That’s a stable insurance pool.

Let’s apply this concept to medical insurance. Anyone can enroll in nongroup coverage each fall, with an effective date of coverage of Jan. 1. Insurers aren’t allowed to assess their risk (as sellers of all other forms of insurance are) because they must accept every applicant with no review of medical histories or behavior. This system tends to increase enrollment by people who know their elevated risks (such as a chronic condition, a poor family history, or bad health habits), thus increasing premiums that discourage healthier people from enrolling.

But everyone who doesn’t have other coverage has the option to shop each fall and assess the risk (likelihood of incurring high claims) versus reward (receiving more in reimbursement than the net premium cost). That decision is then binding for the next 12 months. A person who’s otherwise healthy and doesn’t buy coverage can’t enroll when she’s diagnosed with cancer. Similarly, the diabetic can’t demand a premium rebate when he manages his condition effectively with little medical intervention.

But that healthy woman who’s allowed to purchase coverage when she’s diagnosed with cancer doesn’t want insurance per se. She wants to hire someone to pay her known claims. That’s the antithesis of insurance.

Dubious Accomplishments

If President Trump opens the federal-facilitated marketplaces to new enrollees without a qualifying event, he will accomplish the following:

• Increase adverse selection in the nongroup population. The new enrollees will be disproportionately older, sicker, and poorer than the current pool – exactly the people whose claims will force total claims – and thus future premiums – higher.
• Further increase the federal debt, although the last vestiges of the federal government’s living within its means have vanished with the response to the pandemic. Nevertheless, more than four in five current nongroup enrollees today qualify for advance-premium tax credits. The figure will be higher for off-anniversary enrollees.
• Reduce the risk of not purchasing nongroup coverage during the annual open-enrollment period. People who don’t anticipate incurring claims during the next year will be less likely to enroll during open enrollment. Yet those people, many of whom will in fact utilize medical services only sparingly, are the key to strengthening the nongroup market by paying premiums and offsetting the high claims incurred by others.

Bottom Line

People without insurance will receive appropriate care for the novel coronavirus, even if they lack insurance. Billions of dollars appropriated in the massive Coronavirus Aid, Relief, and Economic Security (CARES) Act are directed to this care. And federal law requires hospitals to provide life-saving treatment to all patients who present at the emergency department, regardless of their ability to pay.

Thus, the president’s refusal to create a special enrollment period isn’t a life-or-death decision for COVID-19 patients.

But opening the nongroup market to mid-year enrollments will have serious financial and behavioral consequences that will result in the continued deterioration of the nongroup market and the federal budget.