Declining Actuarial Value during Special Enrollment Periods

I was talking with a fellow ACA nerd late last week and we were discussing Special Enrollment Periods (SEP) where people can sign up for ACA plans outside of the November 1 to December 15 Open Enrollment Period. SEPs occur because there is a major life changing event. The most common is a loss of other insurance coverage due to job loss. That was the most common case pre-COVID and readily the most common case during COVID.

Insurers aren’t huge fans of special enrollment periods as they are usually a source of adverse selection. The people who sign up during an SEP tend to be sicker/more expensive than average. Part of this is because an SEP is a complex administrative task so the most motivated folks are more likely to sign up. Additionally, an SEP makes an invisible component of a compensation bundle (the employer share of insurance premiums) become extremely visible. CMS has responded to these concerns by adding in some risk adjustment factors for partial year enrollment that sends some extra funds to insurers in a state that are heavy on partial year enrollees.

However, one thing that we have not seen any research on is the basic fact that the actuarial value of plans decrease as time goes on in the ear. All ACA plans are built on a whole year utilization profile. The deductible, co-pays, cost-sharing and maximum out of pocket expenses are built on the assumption that someone will be using services during a twelve month span.  There is no adjustment in the deductible, or out of pocket maximums if someone signs up for a policy that begins in February or December.  Monthly premiums won’t change by the month of sign-up  either.

Effectively, the actuarial value of an ACA policy declines throughout the year.  A Gold plan with a $2,000 deductible and a $4,500 maximum out of pocket limit in January will be expected to cover 80% of the groups’ medical costs from premiums.  The other 20% will be covered by deductible and other cost sharing.  Some of the deductible component will be paid for by people visiting an urgent care for a sinus infection that produces green snot in January.  More of the cost-sharing component of expenses will be attributed to someone receiving a $10,000 per month cancer treatment for the rest of the year.

If someone signs up during a SEP in May for a June 1st start date , they are still paying full monthly premium (minus any subsidy) for a policy with a $2,000 deductible and a $4,500 maximum out of pocket.  But instead of having 12 months to hit their out of pocket limits, individuals only have seven months to hit their out of pocket limits.  A higher percentage of their expected spending over the course of the insurance contract will be borne by out of pocket spending of one form or another.  This means the effective actuarial value decreases.  A Gold plan might effectively be a Silver plan while a Bronze plan becomes a Copper plan.  Mechanically the degradation of the effective actuarial value increases as time goes on.  A Gold plan purchased for only the month of December is effective a Bronze or a Copper plan but the buyer is paying the full Gold premium for that month.

This is likely to be one cause of adverse selection in special enrollment periods — the value proposition for relatively healthy people gets worse as the year goes on.