Same Game, Different Names: Cream-Skimming in the Post-ACA Individual Health Insurance Market

Abstract

One of the Affordable Care Act’s (ACA) signature reforms was creating centralized Health Insurance Marketplaces to offer comprehensive coverage in the form of comprehensive insurance complying with the ACA’s coverage standards. Yet, even after the ACA’s implementation, millions of people were covered through noncompliant plans, primarily in the form of continued enrollment in “grandmothered” and “grandfathered” plans that predated ACA’s full implementation and were allowed under federal and state regulations. Newly proposed and enacted federal legislation may grow the noncompliant segment in future years, and the employment losses of 2020 may grow reliance on individual market coverage further. These factors make it important to understand how the noncompliant segment affects the compliant segment, including the Marketplaces. We show, first, that the noncompliant segment of the individual insurance market substantially outperformed the compliant segment, charging lower premiums but with vastly lower costs, suggesting that insurers have a strong incentive to enter the noncompliant segment. We show, next, that state’s decisions to allow grandmothered plans is associated with stronger financial performance of the noncompliant market, but weaker performance of the compliant segment, as noncompliant plans attract lower-cost enrollees. This finding indicates important linkages between the noncompliant and compliant segments and highlights the role state policy can play in the individual insurance market. Taken together, our results point to substantial cream-skimming, with noncompliant plans enrolling the healthiest enrollees, resulting in higher average claims cost in the compliant segment.