The Inflation Reduction Act (IRA) of 2022 contains several provisions that could have a material impact on the US health insurance industry over the short and intermediate terms, according to AM Best analysts.
This is particularly because it relates to the extension of Affordable Care Act (ACA) subsidies (until 2026), as well as the stability and potential growth of the ACA market.
The Inflation Reduction Act was passed by the Senate on August 7 and the House of Representatives on August 12, and is expected to be signed by President Joe Biden this week.
According to the announcement, higher subsidies were introduced in 2020 to alleviate the economic impact of COVID-19 and allow more consumers to keep or sign up for ACA policies.
As of January 2022, a record 14.5 million were enrolled in an exchange plan, up 21% from 2021. Analysts noted that higher subsidies play a significant role in supporting the ACA market throughout the country.
The industry estimated that two to three million people would drop their ACA policies if the subsidies were not extended, as they had been set to expire in 2023, creating considerable uncertainty. In addition, healthier members might drop the policy, which would result in adverse selection, because sicker individuals would stay, even though they would have to pay higher rates.
Analysts said that such development could have led to overall deterioration of the risk pool, higher loss ratios, and financial pressure. But with the extension of the expanded subsidies, health carriers are likely to keep most of the members who joined the ACA exchanges more recently.
In addition, higher subsidies further solidify the role of the federal government as a leading payer for the health insurance industry. Also, the growth of the segment further increases the legislative and regulatory risk for the industry. Still, government business remains a reliable source of revenue and earnings for health insurers, said AM Best.
“Health carriers have expanded their presence in the ACA markets the past few years,” said Doniella Pliss, director, AM Best. “The segment’s financial performance has improved substantially following the deep losses of earlier years, as carriers learned to design and manage ACA products, regulators allowed needed rate increases and subsidies and cost-sharing reductions made products affordable for consumers.”
AM Best also noted that with out-of-pocket spending for Medicare Part D recipients being capped at $2,000, as of 2025, insurers s carriers would have to re-design the benefits for these plans.
AM Best said: Only a portion of the reduction in out-of-pocket costs would be covered by higher government payments—the rest would fall on insurers. Plan re-design could lead to changes in covered and preferred drugs, as well as higher monthly premiums for some products.
“Overall, the profit margins of Part D plans are already somewhat thin, so carriers may face difficulty keeping the segment profitable, especially during the initial implementation of the new rule.”