Thursday, May 01, 2014

Republicans wouldn't scrap the main driver of ACA rate shock

As the reality that millions have benefited from full implementation of the Affordable Care Act takes hold, more and more Republicans are resorting to what Ezra Klein has dubbed Fauxbamacare: propose to repeal the hated law, replace all its popular components without providing any details.

Progressives counter that if you claim you want to make health insurance affordable to all, unless you come out in favor of a single payer system there is no real alternative to the basic structure of the ACA: guaranteed issue (that is, no variation in health plan price based on a person's medical history), an individual mandate or equivalent* to offset the influx of sick people into the risk pool, and subsidies (or Medicaid) for those who can't afford the premiums.

While that's mostly true, it's also true that some plans crafted to current conservative specs look significantly if not radically different from the ACA. The vast majority of Republican elected officials have shied from putting forward such a plan -- or ignored the one put forward by Senators Coburn, Burr and Hatch --  since such alternatives require tough tradeoffs. The main difference is that conservative schemes give insurers more leeway to sell plans with skimpier benefits and lower premiums. They eliminate or vastly reduce the Essential Health Benefits (EHBs) mandated by the ACA. They loosen the allowing "age banding" of premiums -- the degree to which older buyers can be charged more than younger ones -- from the ACA-mandated 3-to-1 to the pre-ACA norm of 5-to-1.

It's true that for healthy people who were buying insurance in the individual market prior to the ACA, the law's coverage rules substantially drove up the premium price. Rate shock is a real phenomenon. As the complaints poured forth, the EHBs were a prime attack point.  "I'm 55 -- I don't need childbirth coverage." "I'm of sound mind -- I don't need mental health coverage."  Limited age-banding was also a rallying point, since the 5-to-1 ratio was based on actuarial calculations.  Why should a 23 year-old pay more so that a 58 year-old can pay less?

These complaints have some legitimacy. The EHBs and age-banding limits involve tradeoffs that can be argued from either side. But they are not the prime drivers of the rate hikes caused by the ACA.

The prime driver is guaranteed issue -- the prohibition against varying the price or scope of insurance on the basis of the buyer's health and medical history. And most Fauxbamacare proponents say they want to keep guaranteed issue, (Small wonder: approval of the provision is at 70% nationally, according to Kaiser's March poll.)  Take New Hampshire Senate candidate Scott Brown:
"I've always felt that people should either get some type of health care options, or pay for it with a nice competitive fee," he said. "That's all great. I believe it in my heart. In terms of preexisting conditions, catastrophic coverages, covering kids, whatever we want to do."
Recently, Sabrina Siddiqui and Sam Stein demonstrated that many of the House Republicans who claim they want to "repeal and replace" the ACA declare their support for guaranteed issue (or some unspecified means of providing affordable coverage for those with pre-existing conditions) on their websites.

The pricing components of a health insurance policy are a complex brew, and it's difficult to tease out the impact of various factors affecting pricing. But in March 2013, the benefits consultancy Milliman prepared an analysis of the factors affecting likely 2014 premiums for the State of California. Milliman estimated that premiums for unsubsidized buyers would rise an average of 9% independent of the ACA, and 30% under the new law. Some ACA components, such as the reinsurance protection the law provides to insurers in the first three years, a boost to insurers' pricing leverage with healthcare providers, and anticipated reductions in administrative expenses, would push rates down; they are more than offset by factors driving rates up.

Far and away the largest factor in driving rates up  is the health status of people entering the risk pool. Milliman's best estimate is that the influx of less-healthy customers would drive rates up 26.5%. That's in large part because the risk pool in the pre-ACA individual market was healthier than the national average, since medical underwriting screened out those with a wide variety of pre-existing conditions. Pent-up demand among the previously uninsured and increased use of medical services by those to whom the law grants generous cost-sharing reductions would drive up prices an additional 6.3% according to Milliman's best estimates.

The ACA's benefit requirements, in contrast, would raise premiums only by an estimated 4.8%.

A couple of caveats are in order. First, that estimate does not include the cost of mandated maternity coverage, since California added that requirement on its own in July 2012.  A prior Milliman study, published in 2012, estimated that maternity care would add $8-12 per person per month to premiums.  As Milliman (in the 2013 study) estimates the base average premium of a silver plan at $450 (in the 2013 study), that suggests about a 2.2% addition to plan costs, boosting the cost of required benefits to something like 7%.

It should be noted that maternity coverage in America is ridiculously expensive, and so is insuring it. An exposé by the New York Times' Elisabeth Rosenthal of the predatory pricing rife in this medical specialty featured a couple who could not afford an $800 per month "pregnancy rider" to their policy purchased in the individual market. According to statistics from the International Federation of Health Plans  cited by Rosenthal, childbirth costs twice as much in the U.S. as in Switzerland, the next-most expensive country, and the prices paid by insurers rose 41% for vaginal births and 49% for Cesareans between 2004 and 2010. Milliman's estimate for the out-of-pocket costs of childbirth for ACA bronze plan holders, $4925, exceeds the total cost of childbirth in Switzerland, $4030, according to the IFHP.

Those figures point to a weakness in the ACA and to a conundrum. The weakness; the law attacks the obscenely high prices charged by U.S. doctors and hospitals only indirectly and piecemeal.  The conundrum: who pays?  Conservatives protest that a 50-something couple shouldn't have to pay for maternity coverage. Conversely, if that cost is not spread through the entire risk pool it must be borne either by increased taxpayer-funded subsidies or by those of childbearing age.

The second caveat is that a separate ACA feature, an increase in the actuarial value of the average plan, drives up the average premium by 11.5%, according to Milliman's best estimate. The actuarial value is the percentage of the average plan member's annual costs paid by the plan. The ACA requires a minimum actuarial value of 60% for bronze plans and 70% for silver. Of the pre-ACA market, Milliman writes, "Current national and state surveys suggest that the average individual market plan offers an actuarial value of 55% – 60%, with many plans falling well below the 60% threshold."

The exchange of increased actuarial value for increased premium is a straight tradeoff. And few would argue that the 60% minimum requirement under the ACA is a mandate for unduly generous coverage; indeed, once ACA prices were posted, conservatives turned around and attacked the offerings for the high deductibles and high out-of-pocket maximums that 60% coverage entails.  Moreover, most of the rise in actuarial value that Milliman anticipated was driven by the ACA's inducements to those who qualify for subsidies to choose silver plans. (Cost Sharing Reductions, offered to those with incomes under 250% of the Federal Poverty Level (FPL), are only available to those buying silver plans.)  Prior individual market buyers who earn too much to qualify for subsidies and want to keep premiums low can opt for bronze plans, which for most would not entail buying an increased actuarial value, or not much of one. In other words, most of this cost difference is optional -- and absorbed by subsidies.  And in the kind of tweak that Republican lawmakers could easily implement if they wanted to tweak the law toward their preferences, five red-state Democratic Senators and independent Angus King recently proposed, in a package of reforms to the law, adding a "copper" level coverage with lower actuarial value.

As for age-banding, the ACA-mandated reduction to a 3-to-1 maximum does raise base premiums substantially for adults under age 26,and modestly from ages 27 to 37, while reducing them for those over 40. Most adults under 26 lacking employer-sponsored insurance, however, will either be covered by their parents' plans or will be eligible for Medicaid or substantial ACA subsidies. In fact the vast majority of those in the individual market are eligible for Medicaid -- unless their state has rejected the ACA Medicaid expansion.

By banning differential plan pricing by gender, the ACA also raises the cost of coverage for males under 60, closing a pre-ACA gender price gap of about 19% for 27 year-olds, according to an analysis by Avik Roy and Yevgenity Feyman. That, however, is a zero-sum game: men's loss is women's gain.  It does not affect costs for the subsidy-eligible -- or for taxpayers.

The majority of individual market buyers qualify for ACA subsidies, and for most of  them the law dramatically reduces costs (by an average of 83.8% of those earning under 250% FPL, according to Milliman, and by 46.6% for those earning 250% to 400% FPL). It also lowers costs for the very substantial percentage of subsidy-ineligible buyers who have a pre-existing condition in their household -- as almost 60% of respondents in a recent poll of four southern states reported having.

For those who are both subsidy-ineligible and free of pre-existing conditions, the ACA does raise the price of individual market insurance.  But the law's conservative critics, if they sincerely aim to make health insurance affordable to all Americans, could offer this relatively small subset of the nation's population only marginal relief.

For reference, here is the Milliman breakdown of ACA-related cost factors.

Figure 8: Premium Rate Adjustments due to Affordable Care Market Changes Affordable Care Act Market Changes Low Best Estimate High
Health Status 15% 26.5% 40%
Provider Contracting Changes -9.0% -6.0% 1.0%
Benefit Coverage Adverse Selection 1.0% 1.9% 2.9%
Cost Sharing Induced Utilization 3.7% 4.1% 5.0%
Reinsurance Protection -12.0% -9.1% -8.0%
Increased Taxes and Fees 2.3% 4.1% 7.2%
Pent-up Demand 0.0% 2.1% 2.2%
Change in Administrative Expenses -7.0% -4.5% 0.0%
Composite – Affordable Care Act Market Changes See note. 14.0% See note.
Some of these factors are not independent, so the reader should use judgment in using these factors to estimate the low or high composite values.  

*     *     *

* Coburn-Burr-Hatch would replace the mandate with a) a single open enrollment period in which all uninsured Americans could buy insurance without medical underwriting -- that is, pricing based in part on an individual's medical history; b) continued protection from medical underwriting for anyone who maintains continuous coverage; and c) an option for states to auto-enroll anyone who loses coverage in a catastrophic plan that would cost no more than the subsidy that person was eligible for, with an opt-out for those who were determined to "go bare" and thus lose their future protection from medical underwriting.

1 comment:

  1. Thanks for a very good post.
    You are supported also by the history of guaranteed issue in several states like NY, NJ, Wash, etc. Prices of insurance went up 30-40% immediately and a death spiral ensued.
    The mandates, however clumsy, are in place to stop the spiral.

    The Republican plan is combine the resentment of self-employed people who have to buy ACA insurance with no subsidies, and add to this whatever resentment can be fanned up among seniors, and in that way forge a coalition to defeat the Dems.

    The self-emplolyed group is I think too small and dispersed to make an electoral differnce. I think that the 2014 elections will be decided by the mood of seniors, even though the ACA is barely relevant to them.

    Finally, I kind of like the auto-enroll provision in the Cobunr bill. Ideally, the dollar amount of the mandate penalty would actually buy some insurance!

    bob Hertz, The Health Care Crusade