Thursday, October 31, 2019

Should states pursue reinsurance for their ACA marketplaces?

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While sabotaging the ACA marketplace on multiple fronts, the Trump administration has from the beginning supported one means of keeping premiums down: encouraging states to submit waiver proposals seeking federal funding for reinsurance programs.

These programs partially reimburse insurers for costs incurred by individual enrollees that cross a certain threshold. In New Jersey for example, the program pays 60% of an enrollee's costs exceeding $40,000 per year, up to a threshold of $250,000. To date, CMS has approved 12 state reinsurance waiver proposals, 7 of them implemented by 2019.

The ACA marketplace began life with a national federally funded reinsurance program, but it sunset after three years (2014-2016). Not coincidentally, premiums nationwide rose by about 25% in that year -- a year of correction, in which insurers also recognized that they had significantly underpriced coverage in the ACA's first three years. They recovered profitability in 2017.

By reducing premiums, reinsurance also reduces premium subsidies. Trump's HHS has proved willing to pass much of the savings through to the states, providing tens-to-hundreds of millions of dollars annually to the approved programs.

The case against reinsurance

Some progressives, however, have concluded that reinsurance is a poor use of state resources. The ACA benefit structure subjects these programs to a Catch-22: Reducing base premiums tends to raise premiums for subsidized enrollees.

Subsidized enrollees pay a fixed percentage of costs, varying by income, for the benchmark plan, which is the second cheapest silver plan in their area. When premiums go down, the "spread" between the benchmark and cheaper plans tends to compress, reducing discounts for cheaper plans.

The spread wouldn't matter so much if ACA subsidies were adequate to the task. Discounted cheaper plans would not be an acute need if a single person with an income of, say, $43,000 (~250% of the Federal Poverty Level) had to pay 6% of income for a plan with an actuarial value of 85%  --halfway between gold and platinum in today's marketplace. That's drawn from the subsidy schedule of an ACA enrichment bill introduced by none other than Elizabeth Warren.

In the current marketplace, however, that person will pay over 8% of income for a plan with an actuarial value of just 70% -- which translates to an average deductible of about $4,600 in 2020.  Many subsidy-eligible prospective enrollees consider marketplace offerings too rich for their blood -- though it's always been hard to distinguish where lack of knowledge as to what's on offer leaves off and an informed judgment that coverage is too expensive takes over. A silver plan that costs much less than the benchmark, or a bronze plan that costs so much less that it's free or near-free, or a gold plan offered for little more even less than the silver benchmark (more on that below) can make a big difference.  Reinsurance makes such offerings somewhat less likely.

Two further twists on the premium paradox bolster the case against reinsurance:

1. Silver loading. In October 2017 Trump, with the stated purpose of destroying the ACA, cut off of direct federal reimbursement to insurers for the Cost Sharing Reduction (CSR) subsidies they are required to provide to low income marketplace enrollees who select silver plans. Faced with the cutoff at the brink of open enrollment for 2018, most state insurance departments allowed or encouraged insurers to price CSR into silver premiums only. Since premium subsidies, designed so that the enrollee pays a fixed percentage of income, are set to a silver plan benchmark (the second cheapest silver plan), inflated silver premiums create discounts for subsidized buyers in bronze and gold plans. This result had been long forecast, by the Urban Institute and CBO,  but Trump's promises that he was destroying the ACA bespeak obliviousness.

The discounts resulting from silver loading likely boosted enrollment by about 500,000 in 2019, chiefly among people in the upper range of subsidy eligibility (201-400% FPL). Gold plans cost less than silver in about 1100 counties nationwide, and free or near-free bronze was available to millions of prospective enrollees.  By compressing premium spreads, reinsurance cuts against silver loading.

Future state innovations.  The ACA empowers states to submit "innovation waiver" proposals to improve marketplace performance. The state may propose changes to most marketplace features, but they must show that the amended structure will cover as many people as comprehensively as the current state marketplace -- and that the plan will be deficit-neutral for the federal government.

Silver loading has boosted premium subsidies, and so federal costs. Under a sympathetic Democratic administration, states looking to improve marketplace functioning can theoretically take those inflated costs to the federal bank. That is, they could propose a revamped subsidy structure that deploys the silver loading windfall (which produces haphazard and volatile discounts that often change radically year-to-year) into more stably augmented subsidies.  Because the federal government calculates deficit neutrality in a waiver proposal on the basis of most recent costs, reducing federal subsidies via reinsurance reduces the potential pot.

The case for reinsurance

The reinsurance question needs to be considered in light of ACA history.

In 2017, the ACA marketplace was in crisis -- both because of the one-year price correction outlined above, which had nothing to do with the Trump victory, and because Trump was baying for the law's blood and Republicans were gunning for repeal.  The threat of repeal, coupled with the threat of CSR cutoff (executed in October), the halving of the enrollment period, and the Trump administration's gutting of federal funding for advertising and enrollment assistance, either spooked insurers, or, depending on your perspective, gave them license to massively increase premiums for a second consecutive year, which they did, with increases averaging well over 20%. In the two years of steep hikes, 2017-2018, benchmark silver premiums rose an average of 61% nationally.

While actuarially underpriced before 2017, unsubsidized coverage in the ACA marketplace felt expensive from the outset, as comprehensive coverage available to all comers regardless of their current health and health history had never been available in the individual market previously. The premium hikes of 2017 and 2018 accordingly decimated the unsubsidized market. Unsubsidized enrollment in ACA-compliant plans has been all but halved, from 6.7 million in the first quarter of 2016 to an estimated 3.4 million in Q1 2019, according to the Kaiser Family Foundation. In that period, the share of enrollees in ACA-compliant plans who were unsubsidized shrank from 42% to 27%.

Subsidized enrollment, on the other hand, did not drop at all from 2016 to 2018, according to CMS, and that probably holds true in 2019 as well -- or will, when the year's average monthly enrollment figures are complete (retention has improved in recent years).  Silver loading probably played a significant role in holding subsidized enrollment line in the face of individual mandate repeal and advertising/outreach reductions.

All this is to say that the unsubsidized needed relief -- and still need it.  And reinsurance provides it, dropping unsubsidized premiums by an average of 20% in seven states so far, according to Avalere.  That's been a contributing factor to premium stabilization, which has been basically flat for two years running (2019 and 2020) after the steep runup of 2017-18.  According to Kaiser's Larry Levitt, unsubsidized enrollment decline tapered in 2019 and may go into reverse in 2020.

Another factor in favor of states seeking reinsurance is the available federal funding. In early 2018 in New Jersey, the lawmakers were considering implementing a state individual mandate to replace the zeroed federal mandate and proposed to use the mandate revenue to further strengthen the market. While they could have used an estimated $90 million yearly to augment federal subsidies, plowing the money into reinsurance enabled an effective double match -- $180 million as it ultimately turned out -- in federal funds. That's hard to pass up -- though as mentioned above, the reduced premiums and subsidies may in future years reduce the pool of money available should the state seek an innovation waiver.

As I noted earlier this week, Jersey's decision to implement a reinsurance program coupled with an individual mandate appears to illustrate the tradeoffs. In brief, subsidized enrollment in the state is down slightly year-over-year, and subsidized enrollment is up pretty strongly, reversing the national trend. As of the second quarter, total individual enrollment is up 1.6% year-over-year.

Both/and?

As portfolio managers hedge their investments, I wonder if it doesn't also make sense for state governments that seek to maximize individual market enrollment to pursue measures pulling somewhat in opposite directions. Reinsurance may put some downward pressure on silver loading, but it shouldn't negate it -- and state regulators, should they choose, can take steps to induce insurers to maximize silver loading. That is, they can insist that insurers price silver plans closer to their real actuarial value, which thanks to CSR is generally higher than or at least equal to that gold of gold plans (or even equal to platinum). Actuaries Greg Fann and Daniel Cruz have proposed several means by which regulators might accomplish this goal, and I've seconded the motion.

Finally, I wonder whether states submitting waiver proposals to a Democratic administration could not only factor in premiums inflated by silver loading in their deficit neutrality claims, but also plow federal funding for their reinsurance programs back into the mix, using the money to augment subsidies and possibly extend them higher up the income scale, as California has done on its own dime.

While the premium stabilization of the last two years may have gotten an assist from reinsurance in a relative handful of states, the stabilization stems mainly from the massive overpricing of 2017-2018. The ACA requirement that marketplace insurers spend at least 80% of premium revenue on enrollees' medical claims (the so-called Medical Loss Ration, or MLR) or else rebate the excess is forcing the current correction. It could be argued that making the ACA's founding federal reinsurance program temporary made sense on policy grounds, rather than just as a means to game the law's CBO budget score, and that reinsurance is no longer needed going forward. In that case it arguably makes sense as a stopgap, since premiums are still sky-high for the unsubsidized.

UPDATE, 11/1: Just how much do premium cuts raise premiums for bronze and the cheapest silver plan for unsubsidized buyers?  To estimate, I've taken the average lowest cost plan (LCP) premium (for a 40 year-old) at each metal level in 2020 according to the Kaiser Family Foundation, calculated the spread of each LCP from the benchmark, then cut each premium by 20%.  I will post tables in the next post.  Long story short: for a single 40 year-old with an income of $30,000, at these averages, the cheapest bronze plan premium would rise from $68 to $94 and cheapest silver would uptick from $179 to $183 -- while cheapest gold would fall from $238 to $230.  At age 55, cheapest bronze would cost $17 more, cheapest silver $7 more, and cheapest gold would fall $13.

What might be the effects of these changes? For enrollees with incomes below 200% FPL (slightly more than half of on-exchange enrollees), the spread that matters most is the silver spread, because up to 200% FPL, the value of the Cost Sharing Reduction (CSR) subsidies that attach to silver plans only usually outstrips the value of silver loading discounts (CSR is a free benefit). 83% of enrollees at 100-200% FPL still choose silver.

Bronze and gold discounts from silver loading have had their chief impact at incomes in the 201-400% FPL range. Note that premium cuts (if evenly distributed among metal levels, a big if) have opposite effects on subsidized bronze and gold premiums -- so premium cuts might boost gold enrollment and cut bronze. From 2017 to 2019, bronze enrollment at 201-400% FPL increased by about 459,000 in the 39 HealthCare.gov states, while gold enrollment increased by about 254,000. 

Those who forecast silver loading (at Urban and CBO, per above) expected more of an impact in gold enrollment, less in bronze.  Premium reductions might tilt the effects in that direction while also weakening the effects overall. More in the next post, up now.


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