Federal Regulation Of Private Insurance: What's The Deal?

Private health insurance is a mechanism for people to finance their healthcare services and medications, protecting them from extreme financial costs. Private health insurance is currently used by a little over half of the US population and is highly regulated at both the state and federal level.

The regulation of private health insurance has evolved into a complicated system of overlapping state and federal standards. The federal government has played an increasingly significant role in regulating private health insurance over the past 50 years. The Affordable Care Act (ACA) of 2010, for example, ushered in many new requirements for federal regulation. However, states have traditionally been the primary regulators of health insurance, and state health insurance protections continue to play a major role in addressing consumer concerns, from access to coverage to affordability and adequacy.

The federal government's role in regulating private health insurance arises from its role in taxation and regulating employer-employee relationships. In contrast, state regulation of health insurance stems from its historic role as the regulator of insurance.

While the federal government does not regulate insurance companies directly, it does regulate self-insured employer-sponsored coverage, which is largely exempt from state law. The federal government also regulates private health insurance offered through government-run insurance programs such as Medicare Advantage and Medicaid managed care arrangements.

The regulatory landscape for private health insurance is complex and constantly evolving, with new legislation and court decisions shaping the industry. As such, it is essential for consumers to stay informed about their health insurance options and the applicable regulations.

Federal Insurance Office (FIO)

The Federal Insurance Office (FIO) was established under Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is housed within the U.S. Department of the Treasury and is led by a director appointed by the Secretary of the Treasury. Notably, the FIO is not a regulatory agency, and its authorities do not supersede the robust state insurance regulatory regime.

The FIO has the authority to monitor all aspects of the insurance sector, including identifying issues that could contribute to a systemic crisis in the insurance industry or the U.S. financial system. It also monitors access to affordable non-health insurance products for traditionally underserved communities and consumers. Additionally, the FIO represents the U.S. on international insurance matters, serves as an advisory member of the Financial Stability Oversight Council, and assists with the administration of the Terrorism Risk Insurance Program.

The FIO advises the Secretary of the Treasury on significant domestic and international insurance matters. It has the power to collect data and information on the insurance industry and can require insurers or their affiliates to submit data. The FIO is also responsible for issuing reports to the U.S. Congress.

The FIO plays a crucial role in coordinating federal efforts and developing federal policy on international insurance matters. It ensures that the interests of the U.S. market and consumers are advanced through constructive working relationships with key federal agencies.

Federal subsidies and regulations

The subsidies not only reduce the portion of the premium paid by enrollees but also influence the total premium amount. By encouraging healthier individuals to enroll, both subsidies help lower insurers' average spending on enrollees' healthcare, thereby reducing premiums. However, the tax exclusion also incentivizes employers and employees to opt for more comprehensive coverage, which raises total premiums. On balance, the tax exclusion is estimated to increase average premiums for employment-based coverage by 10-15%.

Various federal taxes and fees also impact premiums. For instance, a new excise tax on employment-based plans with high premiums will take effect in 2020, offsetting the incentive to obtain more extensive coverage provided by the federal tax exclusion. As a result, employers and employees are expected to choose less expensive coverage options, leading to a reduction in average premiums. Conversely, federal taxes and fees imposed on insurers are usually passed on to all purchasers, resulting in higher average premiums.

The ACA significantly expanded the scope of federal regulations, particularly in the non-group market. One notable regulation is the individual mandate, which requires most individuals to obtain health insurance or pay a penalty. This mandate helps reduce premiums by encouraging healthier people to obtain coverage. Additionally, the ACA imposes an employer mandate, requiring larger employers to offer coverage that meets certain standards to their full-time workers or face a penalty. While this regulation is not expected to significantly change average premiums, it discourages employers from dropping coverage, preventing some workers from shifting to non-group coverage.

Other ACA regulations apply only to newly sold policies in the non-group and small-group markets. Insurers must now accept all applicants during open enrollment periods, cannot vary premiums based on health status, and must cover specified categories of healthcare services. While these regulations noticeably increase premiums in the non-group market, they have more limited effects in other markets. Overall, due to the relatively small size of the non-group market, the premium increases stemming from ACA regulations are projected to have a minor impact on the overall average of private health insurance premiums.

Federal taxes and fees

These subsidies not only reduce the portion of the total premium that enrollees must pay but also influence the total amount of the premium. Both subsidies encourage relatively healthy people to enrol, reducing insurers' average spending on enrollees' healthcare and, in turn, helping to lower premiums. However, the tax exclusion also incentivises employers to offer more extensive coverage and employees to select more comprehensive policies, which raises total premiums. On balance, the tax exclusion increases average premiums for employment-based coverage by 10% to 15%.

Various federal taxes and fees also influence premiums. For instance, a new excise tax on employment-based plans with relatively high premiums is scheduled to take effect in 2020. This tax will offset the incentive to obtain more extensive coverage provided by the federal tax exclusion. Consequently, employers and employees are expected to opt for less expensive coverage, resulting in a reduction in average premiums. Conversely, other federal taxes and fees imposed on insurers tend to increase average premiums, as insurers generally pass these costs on to all purchasers.

Federal regulations and the Affordable Care Act (ACA)

The Affordable Care Act (ACA) is a comprehensive health care reform law enacted in March 2010 with three primary goals:

• Make affordable health insurance available to more people: The ACA provides consumers with subsidies ("premium tax credits") that lower costs for households with incomes between 100% and 400% of the federal poverty level (FPL). Even those with incomes above 400% FPL may still qualify for the premium tax credit.
• Expand the Medicaid program to cover all adults with income below 138% of the FPL: However, not all states have expanded their Medicaid programs.
• Support innovative medical care delivery methods designed to lower the costs of health care generally.

The ACA has ushered in many new requirements for the federal regulation of private health coverage. Before the ACA, states had traditionally been the primary regulators of health insurance, and they continue to play a major role in this area. The federal government, however, has played an increasingly significant role over the past 50 years.

The ACA's private insurance market regulations were designed to address concerns about adverse selection, which occurs when a disproportionate number of high-risk individuals are insured, leading to high expenditures and a potential collapse of the market. To prevent this, the ACA introduced guaranteed issue and eliminated health underwriting for some coverage.

The ACA also established core market rules to expand coverage to most people in the US. These include:

• Requirements for premium stabilisation and other efforts to protect the risk pool
• Standards to prevent coverage gaps
• High costs in the form of both premiums and cost sharing have been addressed by federal reforms seeking to improve the stability and affordability of health insurance
• Federal requirements for minimum standards in benefit design and adequacy to ensure enrollees have comprehensive coverage
• Disclosure, reporting, and transparency requirements to make more information available to enrollees and federal agencies
• Claims and appeals processes to provide a fair system of review for consumer grievances about plan actions and claims denials

In addition to the ACA, other federal laws and regulations provide consumer protections in private health insurance. These include the Civil Rights Act, the Americans with Disabilities Act, antitrust laws, and privacy laws.

Federal regulations and private health insurance premiums

Private health insurance premiums are affected by various federal subsidies, taxes, fees, and regulations. The federal government subsidizes health insurance premiums in two main ways. Firstly, nearly all premiums for employment-based insurance are excluded from federal income and payroll taxes. Secondly, under the Affordable Care Act (ACA), the government offers tax credits to people who buy nongroup coverage through a health insurance exchange. The federal government also subsidizes most premiums directly or indirectly, which cost about $300 billion in fiscal year 2016.

The ACA imposes an individual mandate, requiring most people to obtain health insurance or pay a penalty. This reduces premiums by encouraging relatively healthy people to get coverage. The ACA also imposes an employer mandate, requiring larger employers to offer coverage that meets specified standards to their full-time workers. This discourages employers from dropping coverage.

The ACA's regulations increase premiums noticeably in the nongroup market, but this market represents a relatively small fraction of the total private insurance market. As a result, the premium increases stemming from the ACA's regulations are expected to have a relatively small effect on the overall average of private health insurance premiums.

The federal pension law, ERISA, passed in 1974, applies to insured and self-insured private employer-sponsored health coverage. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created new federal requirements and a basic framework for how state and federal law interact. Under this "federal fallback" structure, states may require that insurers in the group and individual markets implement federal requirements on health coverage. If a state fails to "substantially enforce" these requirements, the federal government will enforce them.

The regulatory framework for private health coverage has evolved into a complicated system of overlapping state and federal standards. States license entities that offer private health insurance and have a range of insurance standards, including financial requirements. However, the federal government has played an increasingly significant regulatory role over the past 50 years.

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