Friday, April 24, 2015

Scrap the ACA's awkward dual subsidy system?

I have devoted a lot of blog space to trying to figure out what proportion of low-income private health plan buyers on ACA exchanges have availed themselves of powerful Cost Sharing Reduction (CSR)  subsidies by buying silver plans -- silver being the only metal level at which CSR is available. I'd like to step back and ask knowledgeable readers: why is CSR sold separately, so to speak? 

As the ACA is now constructed, these subsidies are vital for buyers with incomes under 200%  of the Federal Poverty Level in that they lower out-of-pocket costs to something approaching affordability. For those with incomes under 150% FPL, CSR raises the plan actuarial value to 94%, better than most employer-sponsored plans. That generally puts the deductible in the $0--500 range. For those in the 150-200% range, CSR raises actuarial value to 87%. Deductibles might run $0 (rarely) to $1500.

The catch is that silver plans for CSR-eligible buyers can be expensive -- $118 per month for a single person earning $23,000 -- whereas bronze plans can be almost free, particularly for older buyers. But bronze plans usually carry deductibles over $5000; their actuarial value is just 60%. For a lot of low-income buyers, a lot of bronze plans are close to worthless.

Troubled by that bronze temptation, I proposed once that CSR attach to bronze plans as well, at proportional levels.  Richard Mayhew, an insurance professional involved in plan design and a blogger at Balloon Juice, has done me one better, proposing that CSR be integrated into the cost of plans at all metal levels. Richard's sketch -- which he floats as a potential "innovation waiver" proposal for a blue state -- is below.

I want to pursue the question further, get more opinion and history on this. Why did the ACA's Founding Fathers (and Mothers!) engrave separate CSR subsidies into the tablets of the law? Why dangle free or nearly free plans with $6,600 deductibles in front of people earning, say, $20,000 a year? (The temptation is less stark at lower income levels, as silver premiums are more affordable at those levels).  Yes, bronze plans might work for some low-income people: a healthy 62 year-old with low income but some savings; a healthy twentysomething whose parents can cover costs into the mid-thousands in the event of serious illness or accident. But for the huge percentage of Americans who would have to borrow to cover an unexpected cost as low as $500, plans with sky-high deductibles are, shall we say, problematic.

Conversely, what would be the downside of simply integrating the value of CSR into the actuarial value of every plan on the exchange? Presumably, the law's drafters wanted to push low-income buyers toward spending a bit more on premium to get more comprehensive coverage. After I floated the 'attach CSR to bronze' idea, I found myself wondering if that wouldn't induce too many buyers to buy plans with cost-sharing that they found prohibitive in practice.  In fact, CBO projections of CSR costs indicate that the drafters assumed that almost everyone eligible for CSR would buy silver.

As currently designed and presented, CSR produces some serious cognitive dissonance. I sat in on a signup session for a 24 year-old with an income in the $23k range who was seriously baffled by the low out-of-pocket costs posted for silver plans. Why were they better than gold and platinum? A brief explanation on a prior screen had blinked past un-absorbed (the navigator did not flag it). It's kind of a miracle that over 80% of buyers under 200% FPL on healthcare.gov did choose silver and avail themselves of CSR. The takeup rate was worse on a lot of state exchanges (and better on some that do a better job than healthcare.gov of steering eligibles toward silver).

Below is Mayhew's proposal. It swings in the opposite direction I'd envisioned, in that gold and platinum plans emerge as cheaper options for those who qualify for AV 94% silver under the current system. That is, Mayhew inserts gold and platinum with out-of-pocket costs unchanged but premius lowered by the CSR subsidy-equivalent  below CSR-enhanced silver as options for those who qualify for the subsidy.

I'll ask again: what's the downside? And what was the thinking of those who designed separate CSR? Here's Mayhew:
Currently, CSR is only attached to Silver plans.  What if states decided to change their subsidy attachment point as part of the Wyden Waiver?

If a state decided to look at the total cost of providing the second lowest Silver in determining subsidy levels instead of just looking at the second lowest premium for Silver, average actuarial value would increase as choice space increases.  The change in subsidy formula would be the sum of premium plus CSR subsidy cost minus the individual contribution = subsidy.

Let’s work through an example.  A 35 year old individual making 140% FPL in zip code 90210 qualifies for a CSR Silver at $34 per month and a $200 premium tax credit.  The cost sharing subsidy bumps the actuarial value from 70% to 94%.   The same individual qualifies for a Platinum plan at $98 per month.  The Platinum plan covers 90% AV.  The incremental bump in AV from 70% to 90% costs $64, so the incremental bump from 90% to 94% AV is probably another $15.  The total cost to the government for this person to buy the CSR Silver is about $280 per month.  The total cost is $314 per month.

Inserting total bundled cost of a policy in place of premium into the subsidy formula would re-order the offer a much wider choice set.  This same individual could get a CSR Silver at 94% AV for $34 per month, a Platinum at 90% AV for $20 per month, CSR Silver 87% for $14 per month, Gold at 80% AV for almost nothing in monthly premiums.  Straight Silver and Bronze plans would almost not be worth wasting time looking at.

Plumbing this type of dynamic premium subsidy attachment is fairly straightforward.  Insurers already have projections what each age band for each product produces in cost sharing subsidy revenue, so new reference tables would be needed, but the data is already present.  It would increase the average expected actuarial value of Exchange coverage, especially for the people who can least handle a $3,200 surprise bill while also increasing choices.  It might make sense for a relatively healthy 35 year old making 140% FPL ($1,375/month) to accept a little more risk of an $800 deductible instead of a $350 deductible to reduce premium expenses by $22.  At the same time, someone who is in poorer health and qualifies for an 87% AV CSR Silver plan could decide the bumping up to a 90% Platinum for an additional $17 per month might be a good choice.

1 comment:

  1. Mayhew is solid as always, but does he estimate the cost to the government of mandating low CSR levels across the board?
    The entire exercise is wildly overdone in my view. Mandate that out of pocket costs not exceed a per cent of income, and then walk away from the government offering multiple insurance choices. See Uwe Reinhardt's latest piece on deductibles, where he cites the fetish that Americans have for giving everyone a host of baffling choices. Canadians are much happier with no choices at all on coverage, and no huge coinsurance payments either.

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