Wednesday, July 15, 2015

For ACA plan buyers, it's not the price, it's the price spread

There's good news and bad news in this forecast by Avalere Health of average premium increases in 2016 for health plans sold on ACA exchanges:
...premiums for the lowest and second lowest cost silver plans in the eight states analyzed will increase on average 4.5 percent and 1.0 percent respectively, compared to a 5.8 percent across all silver exchange plans. 
There was similar good news/bad news in HHS's report on actual premium increases from 2014 to 2015:
Premiums for the benchmark (second-lowest cost) silver plan will increase modestly, by 2 percent on average this year before tax credits, while premiums for the lowest-cost silver plan will increase on average by 5 percent. The plans offering the lowest prices have sometimes changed from 2014 to 2015, so consumers should shop around to find
the plan that best meets their needs and budget.
The good news here (in both years, if Avalere's forecast proves more or less on target and applicable to all states) is for the federal government. Since individuals' premium subsidies are set to the benchmark second-cheapest silver plan, a small increase in the benchmark plan means a small increase in subsidy outlays.

The bad news is for many individual customers: the spread between the second-cheapest and cheapest silver plans is widening. That means that silver is less affordable, which means that access to Cost Sharing Reduction (CSR) subsidies -- which attach only to silver plans -- is also less affordable.

The premium subsidy is calculated to leave the buyer paying a fixed percentage of her income if she selects the second cheapest silver plan. If her income is 137% of the Federal Poverty Level, she'll pay 2% of her household income. If it's 199% FPL, she'll pay over 6%.  That can be a really heavy lift -- in 2015, an individual earning $23,000 would pay about $118 for the benchmark silver plan. But CSR would radically reduce his out-of-pocket costs, raising the actuarial value of the plan (the percentage of the average user's yearly medical bills paid by the plan) to 87% from a baseline of 70% for silver unenhanced by CSR. CSR is available to buyers who earn less 250% FPL or less, though it fades to almost nothing for those over 200% FPL.

The customer facing a $118 premium for the benchmark silver plan might be tempted to buy a bronze plan -- which, depending on the user's age and region, might cost anywhere from $75 per month to next to nothing. (The older the customer the wider the spread between subsidized bronze and silver premiums -- see note at bottom for an explanation.) But bronze plans have an actuarial value of just 60%, which in most cases translates to a deductible of over $5,000 -- as opposed to usually less than $500 for the CSR-enhanced silver plan.

When the cheapest silver plan in a given area is significantly cheaper than the benchmark, that creates an opportunity for those whose incomes qualify them for CSR to obtain the benefit for that much less. This happened in the Philadelphia area in 2014.  As I noted in December 2014:
A Philadelphia couple, both 57 years old, with a 19 year-old at home and a household income of $28,000 would last year have paid $86 per month for the benchmark second-cheapest Silver plan. (Let’s call this family the Paynes). That’s 3.7 percent of the family income. The cheapest Silver plan, however, would cost them $0. Unsubsidized, the benchmark plan would cost $1,294 per month; the Payne’s tax credit would be $1,208. The unsubsidized premium for the cheapest Silver plan would be $1,104. The tax credit wipes out the premium.
This example underscores that rate changes affect different people differently. When the price of a benchmark plan in a given area goes down, that makes other plans more expensive for subsidized buyers, because the subsidy amount goes down (in 2015, our $23k earner would pay within a couple of dollars of $118 per month for the benchmark silver plan, regardless of whether its unsubsidized price had risen or fallen). Conversely, if the benchmark plan premium spikes but other plan premiums rise less sharply or drop, those plans become cheaper.  If silver plans rise more than bronze ones, more people may be tempted into cheaper plans that leave them on the hook for high out-of-pocket costs. Conversely, if silver plans rise more quickly than gold or platinum ones, more buyers on the upper end of the subsidy scale may reach for the richer coverage.

When average rate increases for plans sold on ACA exchanges are moderate, that's good for everyone, if only because it keeps the program affordable for the federal government and signals that healthcare cost growth in general is moderate, an essential for the nation's long-term fiscal health. But that's small consolation for an individual who wants to buy a non-benchmark plan with a shrunken subsidy.

* For older buyers, the unsubsidized plan premium can be up to three times as expensive as for younger customers. The subsidy will cover the difference for the benchmark silver plan -- so the subsidy is much larger for the older buyer. That large subsidy may cover all the cost of a bronze plan.

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