Marketplace Grace Periods Working as Intended
Restrictions Would Increase Number of Uninsured
REVISED October 14, 2016
by Tara Straw - Center on Budget and Policy Priorities
People who receive subsidies to help pay for coverage in health insurance
marketplaces have a three-month window, called a grace period, to pay overdue
premiums before insurers can terminate their coverage. Without this
opportunity to catch up on their share of the premiums, enrollees who miss a
payment would quickly become uninsured — and barred from reenrolling in private
coverage until the next open enrollment period or until they have a life event
that qualifies them for a gspecial enrollment period.h
Some insurers and health reform critics claim that enrollees are abusing the
grace period to get 12 months of coverage for nine months of premium
payments. There is, however, no evidence that this is the case.
Moreover, this view misunderstands how grace periods work. If a person has
not caught up on all overdue premiums by the end of the grace period,
coverage is terminated retroactively to the end of the first month of
the grace period. The enrollee must repay the advance premium tax credit
that the insurer received for the first month of the grace period, owes the
insurer the outstanding premium for that month, is responsible for the full cost
for any medical bills incurred in months two and three, and may owe the individual responsibility payment for the
second and third months and any subsequent months he or she was uninsured.
Itfs far from a free ride for an enrollee losing coverage for
non-payment.
Insurers recently have advocated to change the law to reduce the grace period
from three months to the time otherwise specified in each statefs health
insurance laws, which is generally 30 days or less. That short window
often would not allow adequate time for enrollees to resolve billing issues,
identify payment problems between their health plans and banks, or catch up on a
missed premium payment. Insurers are also calling for changes to
current federal regulations, which if adopted would prevent people from
reenrolling during open enrollment if they previously lost coverage for
nonpayment, until they paid any back premiums they owe.
Reducing the grace period to one month would create harsh consequences for
low- and moderate-income individuals and families who miss a payment or even
part of a payment for any of a series of reasons, such as a costly car repair so
the individual can continue to get to work or the need for a sudden large
payment for an essential home repair such as a major roof leak. It also
threatens to weaken the marketplace risk pool by increasing gchurnh as people
exit and reenter the market. Since often-healthy young people — who are
more likely to miss bill payments, in general — may be those most likely to lose
coverage, this could leave older or sicker people as a bigger share of the
marketplace risk pool. That would raise premiums and further discourage
healthy people from enrolling in marketplace plans.
How Grace Periods Work
Some insurers have claimed that enrollees in marketplace health insurance can
get 12 months of coverage for paying nine months of premiums. But these
claims reflect a serious misunderstanding of how the marketplace grace periods
work and enrolleesf financial obligations. The regulations governing the
three-month grace period do not allow three free months of coverage and are
actually quite favorable to insurers.[1]
Marketplace enrollees owe monthly insurance premiums by the due date
established by the insurer, often the first day of the month. State laws
have grace-period provisions that generally give consumers 30 days to catch up
on a late payment before insurers are allowed to discontinue coverage. But
the health reform law gives people who are eligible for and receive an advance
premium tax credit (APTC) for insurance purchased in state or federal
marketplaces a three-month grace period for nonpayment.
Enrollees enter the grace period after their first missed payment. The
insurer notifies the consumer about the consequences of missing his or her
payment and tells health care providers that the consumer is in a grace period.
The insurer still collects the APTC from the federal government on the
enrolleefs behalf, which covers an average of 73 percent of the premium,[2]
and covers the enrolleefs medical bills during the first month of
nonpayment. In the second and third months of the grace period, the
insurer postpones paying medical claims but continues to receive the
APTC on the consumerfs behalf.
If the enrollee doesnft fully catch up on premiums by the end of the third
month, coverage is retroactively terminated as of the last day of the
first month of the grace period. The insurer must return the second and
third monthsf APTC to the federal government and is not responsible for paying
any claims it was holding for medical care that the enrollee received during
those months. The insurer keeps the APTC from the first month.
The enrollee who loses coverage faces a number of costs at the end of the
grace period, which in many cases will exceed the missed premium payments.
The consumer still owes the first monthfs premium to the insurer and is
responsible for all medical bills incurred in the second and third months of the
grace period as well as any uninsured months that follow. At tax filing,
the consumer must repay the APTC the insurer received in the first month of the
grace period, and, unless a coverage exemption applies, the taxpayer will be
responsible for an individual responsibility payment (penalty) for the second
and third months of the grace period and any subsequent uninsured months.[3]
Finally, many people enter or exhaust grace periods for insubstantial premium
deficiencies that even the issuers themselves believe shouldnft warrant
termination. In fact, insurers supported a provision in the 2017 Notice of
Benefit and Payment Parameters, which updates marketplace rules annually, to
allow the continuation of coverage without requiring people to enter a grace
period in the case of insignificant premium shortfalls.[4]
The recommended threshold is 95 percent, meaning that a person who pays 95
percent of his or her share of the premium wonft trigger the start of a grace
period, and if the person is in a grace period, this minor deficiency at the end
of three months would not cause coverage to terminate. Thus, if an insurer
has a 95 percent premium payment threshold, for example, and an enrollee pays
$97 of a $100 monthly premium, the enrollee falls within the threshold.
The enrollee still owes $3, and future premium payments will cover that
deficiency first, but for this month, a grace period is not triggered.
Reasons for Premium Nonpayment
Enrollees may stop paying their share of the premiums for many reasons.
Many simply forget. Enrollees can also fail to pay their portion of their
premiums if they experience errors with their bank or billing issues with their
insurer, or they make a mistake such as transposing numbers on a check.
In some cases people intentionally stop paying their premiums because their
eligibility changes and they donft understand the need to terminate their old
plan or canft figure out how to do it. One-quarter of low-income adults
had at least one health insurance enrollment change in 2015, a recent study
showed.[5]
Confusion is inevitable because when and how to end a plan vary across Medicaid,
marketplace plans, employer-sponsored plans, and other forms of coverage.
For example, a person who starts the year in marketplace coverage but then
becomes eligible for and enrolls in Medicaid or the Childrenfs Health Insurance
Program (CHIP) may believe that because the marketplace made both eligibility
determinations, it would automatically terminate the original plan. This
is not the case, however, despite the fact that marketplaces are single points
of entry for multiple coverage programs.
Other families miss premium payments because they are unable to pay in a
particular month. More than 80 percent of enrollees in the most recent
open enrollment period had income below 250 percent of the federal poverty line
($29,425 for an individual and $50,225 for a family of three).[6]
These families are often at risk of financial hardship from one missed paycheck
or an unanticipated expense. A recent survey of enrollees found that 67
percent of people in the individual insurance market reported that they could
not meet basic expenses, barely met basic expenses, or met basic expenses with
little left over.[7]
One-third reported that they had difficulty paying for food, housing, or
utilities. The grace period gives families experiencing temporary
financial difficulties an opportunity to catch up on their missed premium
payments and stay covered.
No Evidence That Consumers Abuse Grace Periods
There are no national data quantifying how many people enter a premium
payment grace period or how many grace periods end in termination, but data from
Washington State illustrate how critical the grace period is in helping people
maintain coverage — and how a statutory or regulatory change restricting grace
periods could affect many marketplace enrollees.
In Washington, more than half of subsidized enrollees in 2014 and 2015
entered a grace period at some point.[8]
Of those who entered a grace period in 2015, 62 percent paid at least one
premium after falling into the grace period.[9]
On average, enrollees made a payment within 20 days of entering the grace
period. This is consistent with payment delays due to forgetfulness or a
temporary cash flow issue, not abuse of the grace period. Only 14 percent
of those who landed in a grace period were eventually terminated for
nonpayment.
The available data do not substantiate the contention that people are abusing
grace periods. One consumer survey showed that 21 percent of respondents
reported stopping premium payments in 2015, and that many of them reenrolled in
coverage through the marketplace the following year.[10]
The survey doesnft differentiate, however, between people who entered a
grace period for nonpayment and those who voluntarily terminated their plans;
nor does it show that payment stoppage was inappropriate. For instance, 36
percent of payment stoppers did so because they gained other coverage; another
quarter of respondents reported they had trouble affording premiums. Itfs
also not surprising that many people who stopped payments in one year returned
to the marketplace in the next. People reenroll for insurance on an annual
basis. A person whose change in income causes them to leave the
marketplace for Medicaid in one year could easily return to the marketplace the
next year based on a projection of higher income.
Enrollment data also refute the notion that large
numbers of people drop coverage late in the year to take advantage of three
gfreeh months of care in the grace period, then immediately reenroll for the
following year. Rather, Centers for Medicare and Medicaid Services (CMS)
data show an initial drop in the first few months of enrollment as some people
lose coverage due to unresolved data matching issues after the 90-day period for
resolving those issues runs out. After that, enrollment declines gradually
throughout the year. (See Figure 1.) This pattern of falling
enrollment makes sense as enrollees leave the market during the year for many
reasons, including obtaining other coverage, while entry is restricted to people
who qualify for special enrollment periods.
There is little to be gained by gaming the grace period. The average
single enrollee with coverage terminated for nonpayment would owe one month of
APTC on his or her tax return and possibly an individual responsibility
payment. Using marketplace average figures, a single person who fails to
pay premiums for three months would owe $464 at tax filing ($290 in APTC plus
$174 in penalties).[11]
Thatfs more than the $318 it would have cost to pay the premiums owed
to maintain coverage for those months ($106 per person per month).
Grace Periods: A Case Study
Consider an illustrative case of how the grace period could work for an
enrollee in marketplace coverage. Angela enrolled in the marketplace for
coverage starting January 1, 2015, was determined eligible for an APTC of $360
per month, and was responsible for a monthly premium of $60 per month.[12]
She paid her premium on time until she incurred a significant car repair in
August and couldnft afford to pay Septemberfs premium by the August 31 due
date.
Her insurer alerted her that she was in the three-month grace period and
would lose coverage if she didnft pay her overdue premium by the end of the
three months. In September, Angela paid $20 toward her premium — all she
could afford at the time. She made no other payments. At the end of
November, her coverage ended retroactive to September 30. She remained
uninsured in December.
Enrollee Would Owe More for Non-Payment Than for
4th Quarter Premiums |
$40 |
In-full September premium payment due to insurer |
$60
x 4 |
September through December premium |
+$300 |
Advance premium tax credit for September repaid on tax return (subject
to cap) |
-$20 |
September partial premium payment |
+$58 x 3 |
Individual responsibility payment for October, November, and December
on tax return |
|
|
Total:
$514 |
Total:
$220 |
The insurer received $3,740 of the $3,780 in premiums billed for nine months
of coverage. This includes $360 per month of APTC for January through
September (APTC from October and November was received but returned after the
retroactive termination) and $60 per month from Angelafs share of premiums for
eight months and the partial premium of $20 for September. The insurer
received no payment for October and November but also paid no claims for those
months.
In January 2016, in preparation for tax filing, Angela received a Form 1095-A
from the marketplace for use in preparing her tax return. It showed she
had insurance coverage in January through August and that she received APTC in
September. She owes an additional $300 on her tax return to repay
Septemberfs APTC to the IRS, since she failed to pay the full premium for that
montha. Because she didnft qualify for an exemption from the
individual responsibility payment, she also owes $58 a month for October,
November, and December. Angela owes $474 ($300 in APTC plus $174 for
three months of the individual responsibility payment). Separately, she
still owes $40 to the insurer for Septemberfs coverage, bringing her total
amount owed to $514. It would have cost only $220 to pay her premium for
the remainder of the year, and she would have had coverage for any medical care
she received and wouldnft owe a penalty.
a Her APTC was
$360, but repayment is capped at $300 for a single tax filer with income below
200 percent of the poverty line.
Reducing the Grace Period Would Weaken the Marketplace
Hastily terminating coverage for late payment could end coverage for a large
number of marketplace enrollees who simply forgot to pay on time. This
would push them out of the insurance marketplace until the following year unless
they had a life change qualifying them for a special enrollment period. To
the extent that a bigger pool improves risk, this diminishing overall enrollment
could negatively impact othersf marketplace premiums.
If one missed premium payment leads to a loss of coverage, the marketplace
risk pool as a whole may suffer from the departure of healthy people and their
inability to reenroll. While we donft have data on the characteristics of
late-payers or the health status of people whose coverage is discontinued due to
nonpayment, it stands to reason that sicker people will make the greatest
efforts to maintain their coverage whereas healthier people may believe that
they have less to lose by letting insurance lapse. If this is true, we
would expect the people who exit the marketplace due to nonpayment to be
healthier, on average. And because young adults — who also tend to be
healthier — are 25 percent likelier to pay bills late than older adults,[13]
those exiting enrollees may skew younger and healthier as well.
Conclusion
Shortening the premium grace period to only 30 days would leave
well-intentioned consumers with too little time to catch up on premiums when
other basic expenses cause them to fall behind and would lock people out of
coverage for the rest of the year. That would add to the ranks of the
uninsured and weaken the marketplace risk pool. The current three-month
grace period strikes the right balance by giving people who fall behind on
premiums extra time while limiting the financial liability for insurers,
providers, and the federal government.