One of the biggest controversies surrounding the Affordable Care Act (ACA), also known as ObamaCare, is the continuation of non-ACA compliant policies. While policies in existence since March 23rd, 2010, may be grandfathered, depending on changes the insurance company has made to the policy, many Americans found out that their current insurance plans sold after March 2010 were being cancelled and replaced with new policies that met the requirements of the law. Unfortunately, these new policies were generally more expensive than those they replaced.

The cost of adding additional coverage – with no exemptions for preexisting conditions and no yearly or lifetime limits – has caused many insurance companies to raise the monthly premium of new ACA-compliant policies. However, in many speeches and Presidential addresses, President Obama had promised the ACA would not require Americans to change their insurance plan if they did not want to.

Maintaining Pre-ACA Coverage

The Administration’s solution was to offer the states the option to allow non-ACA compliant policies to renew until October 1, 2014, and the coverage could continue for another year following renewal. This transitional policy fix was announced in November of 2013 and the states were then left with the question of whether to allow it in their individual states. In states that allow the renewal of non-compliant policies, these policies would be sold “off” the Marketplace since they do not meet its requirements.

On March 5th, 2014, the Obama Administration announced that the federal government would give states the opportunity to have non-ACA plans renewed for an additional two years. This would apply to policies renewing on or before October 1st, 2016. This means that non-ACA compliant policies may be in effect in some states through September of 2017.

If a state agrees to allow this extension, health insurance companies who are taking advantage of the fix must send a notice to policyholders to offer a renewal. This notice highlights the ways in which the non-compliant plan will differ from the ACA law.

In addition, Americans whose pre-ObamaCare policies are cancelled, can be exempted from the mandate and tax penalty, although this does not necessarily guarantee exemption. Additional steps must be taken, such as filling out a hardship exemption form and providing documentation that your pre-ObamaCare policy was cancelled.

Regardless of whether a U.S. citizen lives in a state that has extended non-compliant policies, Americans whose plans have been cancelled can apply for a hardship exemption and purchase catastrophic coverage. Catastrophic coverage is generally only available to young people who are unable to find an insurance policy that fits within their budget.

The primary differences in an ACA compliant plan and a pre-ObamaCare plan are in the level of coverage and rating factors. Pre-ACA plans don’t have the requirements of rating only on age, location, and tobacco use. In addition, they can decline to cover pre-existing conditions, impose annual or lifetime limits on coverage, and they don’t have to provide all of the essential health benefits the ACA requires. As a result, however, these policies can be cheaper, especially for younger, healthier Americans, but may be more expensive for older Americans or those with significant health conditions.

Another major difference between ACA-compliant plans and plans that pre-date ObamaCare lies within eligibility for premium subsidies — a set amount of money or percentage of the cost of insurance that is offered to Americans to assist with purchasing a plan. Because non-compliant policies can’t be sold on the Marketplace, Americans are ineligible to receive subsidies on these non-compliant plans. Depending upon a person’s income, a seemingly more expensive Marketplace policy with a higher premium may actually be cheaper than an off-Marketplace, non-compliant policy. If an individual’s income grants them eligibility for premium subsidies, once those subsidies have been applied to a more expensive Marketplace policy, it may actually cost them less each month than what they would pay for a non-ACA-compliant coverage.

Concerns About the Transitional Policy Fix

As the states consider the policy fix options, there are many concerns that arise. The primary concern is that allowing non-ACA compliant policies to continue undermines the Marketplace exchanges and gives consumers an option that was not intended under the ACA. Those who choose the transitional non-compliant plans will likely be healthier Americans who don’t need extensive coverage options – exactly the Americans that the ACA needs to enroll in the Marketplace to balance out the cost for sicker citizens.

In addition, there is a concern that allowing continued extensions will create two tiers of insurance. The non-compliant plans will be maintained by Americans who need less coverage and are not willing to pay higher costs for insurance. The Marketplace plans will only be purchased by those who need a lot of coverage – older, sicker citizens. As a result, both types of plans will become unbalanced and the health insurance system as a whole will struggle. In the most extreme case, the ACA could fail if the costs in the Marketplace system become unreasonably high.

The transitional policy fix offered by the Obama administration leaves the decision in the states’ hands. Each state can decide what extensions to offer. With Americans frustrated that lower-cost policies are being cancelled in favor of more expensive ones, there will be pressure on many states to extend existing pre-Obamacare policies as long as possible. However, knowing that this might have long-term consequences, it’s possible that many states will refuse the extension.