Friday, August 30, 2013

The WSJ spotlights an apparent anomaly in ACA subsidies

Once again, the WSJ combines factual accuracy with a negative emphasis in its reporting about the Affordable Care Act.

Today's front-pager, by Christopher Weaver and Louise Radnofsky, spotlights an anomaly: When the subsidies offered by the federal government are taken into account, older adults will pay less for insurance on the ACA exchanges than young adults of the same income if they opt for the cheapest, bronze-level plans. That raises the specter of adverse selection and is therefore worrying insurers, who have to offer insurance to older adults relatively cheaply (but not as cheaply as Weaver and Radnofsky imply). Here's the lede:

Robert Wengrow, a laid-off frozen-food packaging salesman here, will be one of the biggest beneficiaries of the U.S. health-insurance overhaul when it fully kicks in next year.

But the federal subsidies that make this possible for older people are causing headaches that insurers are struggling to understand. The programs reverse a long-standing tenet of the insurance business: That riskier customers pay more.

The subsidies can be far more generous to older people than younger ones, the analysis of Ohio's marketplace shows. In some cases, older and sicker customers will pay lower prices than younger, healthier people with similar incomes—even though older people are generally costlier to cover.
It's not mentioned that 1) the underlying premiums charged by the insurers can be three times higher for adults in the highest age bracket than for adults in the youngest (a smaller differential than they charge now but still substantial);  2) the subsidies in general are "more generous" to older adults because they cover that difference on the basis of affordability; 3) adults in their sixties generally earn far more than adults in their twenties and so, on average, will pay more; and 4) the federal government is seeking to attract 2.7 million young adults into the exchanges out of an estimated initial participant pool of about 7 million, or less than 40% of the total.

Still, the anomaly that Weaver and Radnofsky spotlight could be important, as it may make the cheapest, bronze-level plans especially attractive to older adults:
Insurers worry the subsidies could give customers like the Wengrows a bigger incentive to sign up for coverage than young people to offset their costs. For instance, a single 25-year-old whose earnings match the Wengrows' $24,000, would spend $124 a month for the lowest-cost midlevel plan, while a single 62-year-old with the same income would pay $100.

This disparity emerges from a complex quirk in how the subsidies are calculated, the Journal's analysis shows. The law sets maximum amounts that people must pay before subsidies kick in at specific income levels. Because premiums are higher for older customers, the value of the subsidies is also much larger. Thus, when older people use subsidies to buy coverage that is cheaper than the benchmark plan used to determine subsidies, they can end up paying less than younger people who earn the same.
If that disparity is indeed a bug, it's the kind that could be fixed easily enough if one party were not locked into insane opposition to the law. In fact, a subsidy calculator provided by the Kaiser Family Foundation, which does not take state differences into account, makes the disparity look larger. According to Kaiser, the subsidy for a 62 year-old opting for a bronze plan would virtually wipe the premium out, leaving a yearly payment of just $102, while a 24 year-old at the same salary would pay $1070 for bronze. With an income of $35k the gap narrows: a 24 year-old pays $2501 per year for bronze and a 62 year old pays $1841.  Conversely, older adults at higher income levels pay moderately more for the default silver-level plans -- $3325 for a 62 year-old earning $35k, vs. $3018 for a 24 year-old of the same income. For sicker older adults, higher level plans may still be a good deal: they pay about $1500 more per year to get an estimated 70% of their costs covered, rather than 60%, up to an out-of-pocket per-person maximum of $6,350.

I could use some help figuring out whether the apparently disproportionate subsidy for older adults opting for bronze plans eases or worsens the risk of adverse selection at higher plan levels (silver, gold, platinum) within the exchanges. Eduardo Porter recently highlighted the risk that insurance companies might jigger benefits to try to lure young adults into the bronze plans, creating older, sicker risk pools in the higher-level plans. The anomaly highlighted in the Journal might also draw healthier older adults toward bronze, exacerbating the normal gravitational pull of  healthier people toward cheaper plans.

The disparity does not negate the fact that $89 per month is still a very moderate price for a 24 year-old to pay for health insurance. From a fairness point of view, too, younger adults are well served by two other features of the law: 1) many adults under 26 can remain on their parents' plans, and 2) many young adults will qualify for Medicaid (and many more would if GOP-run states were not opting out of the ACA's Medicaid expansion). But those options actually worsen the risk of adverse selection in the exchanges.

WSJ leans into the "rate shock" narrative

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