Keeping it simple: health plan benefit standardization and regulatory choice under the Affordable Care Act.

• Author: Oechsner, Troy J.

1. INTRODUCTION

   The recently enacted Patient Protection and Affordable Care Act ("Affordable Care Act" or "ACA") (1) provides federal and state regulators with an opportunity to address inefficiencies in the health insurance market. Health insurance markets in many areas of the country have a confusing array of benefit choices that make it difficult for consumers to effectively comparison-shop. This lack of transparency contributes to inefficiency in the market.

   Rationales exist in support of encouraging a multitude of benefit choices. First, it allows consumers greater choice in finding a health insurance product that fits their needs. Second, it encourages health insurers to innovate new products and benefit designs. Third, the health insurance market, like other markets, works best when it is not overregulated.

   Conversely, several rationales support standardizing benefit choices. First, as noted above, when consumers are faced with a confusing array of products, they may not be able to comparison-shop. As a result, the market does not efficiently arrive at correct pricing. Second, consumers tend to underestimate their own risk of illness and whether their insurance will cover needed medical services. This can result in tragedy for individual consumers, as well as costs to society, when the uninsured and underinsured cannot pay for medical care they receive. Third, a wide array of confusing benefit choices contributes to inflated administrative costs. For example, consumers, providers, and insurers dispute claims due to confusion over covered services. These inefficiencies in the health insurance market are among the many cost drivers resulting in increasing premiums.

   Health insurance premium increases impact many people. For the majority of Americans who have coverage through an employer, high rate increases have resulted in decreased benefits. As employers struggle to pay premium rate increases, many have opted for health plans that provide less actual coverage. Employees see fewer benefits covered, with employers reducing or cutting drug, physical therapy, and other benefits. Employers are also shifting more costs to employees, with higher deductibles, co-payments, and coinsurance. And lower annual and lifetime maximum benefit caps have limited the amount of coverage on the backend. Consumers worry, for good reason, that their coverage will not be sufficient when they need it most. For those without health insurance, premium rate increases have contributed to making many of them uninsured. Rate increases put affordable, quality coverage further out of reach for the uninsured.

   The consequences of being uninsured or underinsured are well documented. Those lacking coverage decline or delay care, resulting in worse health outcomes. And medical debt continues to be a leading reason for personal bankruptcy. (2)

   The Affordable Care Act seeks to increase the quality and affordability of health insurance by layering together a number of core components, as described in Section V. Benefit structures are a key to the success of the commercial market reforms in the Affordable Care Act. The benefits in a health insurance contract determine which particular medical services will be covered, and to what degree. All states regulate health insurance policies to some extent, most often setting some minimum benefits for certain types of policies sold. However, most states have not standardized benefit choices, and there has been no basic set of national minimum standards. States have weighed competing arguments for benefit flexibility and choice, on one hand, and benefit standardization and uniformity on the other hand. With some notable exceptions, markets in most states reflect compromises that have resulted in a wide variety of benefit choices that are often confusing. These compromises have contributed to market inefficiencies and consumer underinsurance.

   The Affordable Care Act reflects a distinct move towards greater standardization. The Act sets out a framework for federal and state regulators to standardize benefits, as well as forms and procedures for administrative functions, such as referrals and explanations of benefits. Within this statutory framework, regulators face a number of options for how to proceed.

   This article focuses on some of those options created by the ACA for federal and state regulators, and examines the policy rationales and practical implications of those options. Section II discusses the competing policy rationales underlying the debate between choice and standardization in health plan benefits, and reviews certain elements of basic economic market theory that prompt state and federal efforts at health insurance market reforms. Section III provides an overview of certain provisions of the Affordable Care Act relevant to benefit standardization, and discusses some of the competing arguments regarding options facing federal and state regulators charged with implementing the Affordable Care Act.

2. INFORMATION, RISK PERCEPTION, AND INEFFICIENCY IN THE HEALTH INSURANCE MARKET

   A competitive market requires that both buyer and seller have information about the product for sale. (3) Information must be truthful and accurate to be useful. (4) Ideally, each party to a transaction also has complete (as opposed to partial) information. Information is itself a product--sometimes costly to gather, but potentially valuable. (5)

   In a competitive market, pricing reflects product quality and value to each party. Information enables buyers and sellers to learn enough about the product that they can arrive at an efficient price. (6) Consumers expect a correlation between price and quality. Better quality goods should cost more than poorer quality goods. Because consumers rely on information to ascertain product quality, the presence or absence of information directly affects the most fundamental elements of market efficiency. (7)

   1. Asymmetric Information

   Sometimes an informational imbalance exists between buyers and sellers. An informational imbalance or "asymmetry" occurs when one party has more or better information than the other. (8) When this happens, the party with more information can artificially secure a better price than if the less-informed party was fully informed. A market plagued by informational asymmetry is susceptible to failure because of its persistent inability to arrive at fair and competitive pricing based on full and accurate information. (9)

   Asymmetric information pervades the exchange between insurance companies and insurance consumers. (10) One prominent economist initially observed the informational disparity between medical consumers and medical practitioners, but his observations readily apply to the health insurance market. (11) The informational asymmetry between consumers and health insurers is due in part to the professional and institutional expertise of the insurer. (12) Insurers have detailed knowledge of the value of the benefits they offer, and how those benefits compare to their competitors. Today, much of this information is either not provided or is inaccessible to the average insurance consumer. (13)

   In order to be autonomous market actors, consumers require health plan information that is "publicly available, understandable, and relevant to the decision making process." (14) In many markets other than health insurance, disclosure around quality occurs voluntarily. (15) Fortunately, buyers and sellers in these other markets cooperate with one another for a variety of self-serving or altruistic reasons and, as a result, markets function relatively well. (16) In the health insurance market, however, important information about products is often not fully disclosed, or is confusing. As a result, consumers are unable to effectively compare health insurance products. And consumers may not buy the products they would have purchased if they had access to better information. (17)

   The inability of consumers to compare plans skews the pricing of health plans: prices therefore do not reflect true consumer preference, demand, or willingness to pay because consumers do not understand what they are buying. (18) As a result, the current health insurance marketplace does not function as efficiently as it could.

   1. Health Plan Information Is Difficult For Consumers To Understand

      Consumers (19) often misunderstand health plan information. A recent study used principles of educational psychology to evaluate whether average enrollees can identify and comprehend important health plan details. (20) Important plan information contained in Summary Plan Descriptions is often written at a reading level that makes it incomprehensible to the average enrollee. (21) Specifically, information regarding eligibility, benefits, and participant rights and responsibilities tends to be written at a first year college literacy level which is higher than the recommended reading level required for technical information. (22) One study concluded "the primary communication tool used to provide important information to workers who participate in their employer's health care plan often may be unreadable to them." (23) For regulators concerned with equal access to health plan information, it is essential to recognize this comprehension disparity and the corresponding need for simplification of plan information.

      Accounts of the experience of shopping for health insurance document consumers' persistent inability to recognize much less understand information important to meaningfully evaluate health insurance products. (24) For the average consumer, distinguishing among and between health insurance products in the market based on quality or any feature other than price has been nearly impossible to this point. (25) When making health plan choices, many consumers only have a plan summary available to assist them. (26) Consumers are often without information regarding a plan's provider network or...