GHFV 830: A Hard Pill to Swallow: Appreciating The Math Dynamics of the ACA

Question 1

Introduction

Answer 1

1. ACA’s challenges have been evident
   a. lower than expected enrollment
   b. high premiums
   c. lack of attractiveness to some demographic segments.
2. 2. The ACA dynamics can be understood, but not with a traditional health insurance approach
      a. It requires accepting mathematical dynamics that are plainly true but clearly irrational.
      b. For example, lower premiums often increase consumer costs and create problems that most observers do not anticipate.

Question 2

Low Cost and Competition Create Problems for Lower-Income Enrollees

Answer 2

1. In 2020, ACA marketplace premiums will increase for significant segments of the currently enrolled
2. This is because gross premiums are decreasing in the ACA Marketplaces for the second year in a row

Question 3

Lower Gross Premiums Leads to Higher Net Premiums

Answer 3

1. Affordable coverage in ACA markets is determined based on a sliding scale percentage of income.
2. An enrollee can purchase the second lowest-cost silver tier plan (the “benchmark” plan) with an enrollee contribution equal to the calculated “affordable” percentage of his/her income.
3. Premium subsidy = Gross premium of benchmark plan minus maximum monthly contribution by the enrollee
4. Enrollees can carry the dollar amount of this subsidy to other plans, either within the same value tier or not, and purchase less expensive or more expensive coverage
5. Net monthly premiums = Gross monthly premium – Premium subsidy
6. Lower benchmark premiums result in lower subsidies and higher net premiums

Question 4

Competition Increases Prices for Subsidized Consumers

Answer 4

1. ACA architects let annual market rates determine the subsidy allocation
2. As a calibration was selected on the benchmark plan (2nd lowest silver), an increase in insurer participation alone creates a bias toward compressed premium subsidies.
   a. More data points depresses the second lowest result
   b. As more insurers enter markets, the benchmark is naturally based on a lower-cost plan.
3. If benchmarks decline and gross premiums stay the same, consumers pay higher net premiums
4. More competition results in a less attractive market and lower enrollment.
5. Figures 8-11 (not shown here) illustrate the impact of a new carrier entering the marketplace.
   a. If a lower cost insurer enters the market with a silver plan of $330, $330 becomes the benchmark plan
   b. APTC (a.k.a. “Advance Premium Tax Credit”, a.k.a. the premium subsidy) decreases and net premiums increase
   c. APTC-eligible enrollees pay more to retain the same plans

Question 5

Invasive Competition Makes Things Worse

Answer 5

1. New entrants with unusually low-cost structures can reduce premium subsidies to levels that require enrollees to switch health plans and networks
2. This can challenge the viability of traditional insurers to remain in ACA markets
3. It’s been rare for states to take an interest in avoiding low-cost plans
4. Some savvy state exchanges have recognized this dynamic, and avoided allowing low-cost plans on their platform.
   a. In 2017, a health plan in Rhode Island was prevented from joining the exchange
   b. “The exchange was concerned that the additional low-cost plans would have reduced the subsidies available to all exchange enrollees, making coverage less affordable if people chose plans other than the new low-cost options.”
5. Figures 12-15 illustrate the impact of a new carrier, Lionfish, entering the marketplace
   a. In Figure 12, Lionfish seeks to attract Silver enrollees and has aggressively priced Silver premiums
   b. The new benchmark plan is Angelfish Silver

Question 6

ACA Insurers Don’t Want Healthy People

Answer 6

1. Conventional wisdom: Insurance companies want to provide coverage for healthy people who have few medical claims and avoid those with high costs and chronic conditions
2. Reality: their survival depends on charging appropriate prices for the risks they assume and they are otherwise fairly indifferent to who they insure
3. ACA does not allow the rating to vary based on health status
   a. Thus a “risk adjustment” methodology transfers funds from insurers who enroll low-risk individuals to insurers who enroll high-risk individuals.

b. Insurers must base their estimates on overall market enrollment, not who they expect to enroll.

c. Many believe the risk-adjustment methodology results in imbalanced assessments that penalize the low cost insurers that attract healthy enrollees that the ACA needs to survive.
i. Health plan actuaries have confirmed
1. “healthy doesn’t pay under risk adjustment”,
2. the “transfer formula penalizes plans with lower premiums”
3. “low-cost insurers working to keep the marketplace affordable for individuals are being hit with the formula imbalance”.

d. The HHS-HCC risk-adjustment model established by CMS understates risk scores for healthy individuals and overstates them for those with significant health conditions.”

4. Young and healthy individuals have less incentive to enroll, health plans may not want to enroll them, but we need young adults to enroll in the market to preserve the risk pool.

Question 7

ACA Insurers Don’t Want Healthy People

Answer 7

1. Conventional wisdom: Insurance companies want to provide coverage for healthy people who have few medical claims and avoid those with high costs and chronic conditions
2. Reality: their survival depends on charging appropriate prices for the risks they assume and they are otherwise fairly indifferent to who they insure
3. ACA does not allow the rating to vary based on health status
   a. Thus a “risk adjustment” methodology transfers funds from insurers who enroll low-risk individuals to insurers who enroll high-risk individuals.

b. Insurers must base their estimates on overall market enrollment, not who they expect to enroll.

c. Many believe the risk-adjustment methodology results in imbalanced assessments that penalize the low cost insurers that attract healthy enrollees that the ACA needs to survive.
i. Health plan actuaries have confirmed
1. “healthy doesn’t pay under risk adjustment”,
2. the “transfer formula penalizes plans with lower premiums”
3. “low-cost insurers working to keep the marketplace affordable for individuals are being hit with the formula imbalance”.

d. The HHS-HCC risk-adjustment model established by CMS understates risk scores for healthy individuals and overstates them for those with significant health conditions.”

4. Young and healthy individuals have less incentive to enroll, health plans may not want to enroll them, but we need young adults to enroll in the market to preserve the risk pool.

Question 8

Risk Adjustment Dilution Will Attract Insurers Who Enroll Low-Risk Consumers

Answer 8

1. The goal of risk adjustment (RA) is to equitably transfer funds from insurers with higher morbidity to insurers with lower morbidity, accounting for the inability to use morbidity as a rating factor.
2. A common measure of risk adjustment success is loss ratio compression
   - Insurers generally target similar loss ratios in ACA markets
   - If risk adjustment (and modifications to risk adjustment) improves results for poorly performing issuers and dampens results for well performing issuers, it is generally thought to be doing a good job
3. Changes to RA have been imposed (e.g. “caps” on transfer payments) In Figure 16 (not shown here), a simple example of 50% dilution is modeled
   - After each carriers’ transfer amounts are determined, the transfer payments are diluted by 50%
   - Loss ratio deviation is calculated based on pre-RA results, post-RA results, and post-dilution
   - For both Absolute Deviation and Least Squares, the differences are reduced for both risk adjustment and the dilution modification

Question 9

A Medicare Buy-In Option Will Increase ACA Costs

Answer 9

1. A proposal to allow adults as young as 50 to buy-in to Medicare. This is perceived to accomplish:
   a. An additional (and presumably more cost-effective) option for older people to obtain coverage.

b. The migration of older people out of the ACA risk pool reduces the average age and leaves the ACA risk pool younger and healthier.

c. It would reduce the average cost of Medicare enrollees.

2. Surprisingly, a recent RAND study found that this proposal would cause ACA premiums to increase as the ACA population would become less healthy.
   a. A broad variety of older adults, including both healthy and unhealthy people, tends to enroll in the individual market.

b. Younger adults who enroll in the individual market, in contrast, tend to be unhealthy and expensive.”

c. If the older adults leave the individual ACA market, the remaining pool is left with a higher concentration of unhealthy young adults.

Question 10

Cost-Sharing Reduction (CSR) Defunding

Answer 10

1. President Trump discontinued Cost-Sharing Reduction (CSR) funding in October 2017, and this had unexpected effects.
   a. Insurers responded by increasing silver premiums (colloquially “silver loading”), thereby increasing premium subsidies and reducing net premiums.

b. The higher subsidies increased enrollment and made the market more attractive to consumers and insurers alike.

c. Enrollment significantly exceeded expectations in 2018, insurer profitability skyrocketed to record levels, and premiums decreased in 2019 and 2020.

d. The beneficial market changes reignited insurer interest, and the number of state-levels insurers increased in 2019 and 2020 after reductions in 2017 and 2018.

Question 11

Market Response Reflects Conflicting Incentives

Answer 11

1. Of the four benefit/metal levels (bronze, silver, gold and platinum) in ACA markets, ACA architects decided to select one level to drive two important subsidy mechanisms.
   a. Silver was select to determine premium subsidies, and also to serve as the base benefit for CSR enrollees
2. As the individual market is extremely price-sensitive, insurers are advantaged by the ability to increase silver premiums and enhance premium subsidies while not having corresponding increases at other metal levels.
   a. The conflict arises with CSR enrollees, who must select a Silver plan to obtain CSR benefits.
3. This is a large and profitable block of business and it represents the lowest income, most price-sensitive consumers in the market.
   a. Insurers compete fiercely at the Silver level and often offset aggressive Silver premiums with excessive premiums at other metal levels.
4. The results of these dynamics are negatively two-fold
   a. higher premiums for non-CSR enrollees in non-silver plans
   b. compressed premium subsidies due to lower Silver premiums
5. The migration of non-CSR enrollees away from Silver will eventually lead to a larger concentration of CSR enrollees and higher Silver premiums and premium subsidies.
6. While state regulators are attuned to gross premium changes, evidence suggests that there is less
   enforcement of appropriate premium alignment which has a greater impact on consumer net premiums.

Question 12

Conclusion

Answer 12

1. We can no longer pretend ACA individual markets function like other health care markets and the solutions are similar
2. The ACA’s federal financial commitment provides some individuals new opportunities to enroll in individual markets.
3. The ACA is full of counterintuitive dynamics and perverse incentives.
   a. Reducing premiums results in higher cost for low income enrollees.
4. Competition provides more choices and lower gross premiums.
5. Competition harms ACA markets.
6. Some state exchanges do not want some insurers in their markets because their costs are too low.
7. ACA markets need young and healthy individuals to enroll, but the system provides both enrollmentn disincentives for young eligible enrollees and penalties for insurers who enroll them.
8. ACA markets received a needed boost through enhanced premium subsidies resulting from CSR-
   defunding in 2018.
9. The structural ACA design is extremely inefficient, resulting in a cost of about $17,000 annually for each incremental enrollee.
10. Markets will not be further improved unless we engage in a serious understanding of ACA dynamics.