Wednesday, January 20, 2021

ACA marketplace coverage can be as generous as the Biden administration wants it to be

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A core Democratic party campaign promise was to "build on" the Affordable Care Act -- which at a minimum means making coverage obtained in the ACA marketplace far more affordable.  The party now has the narrowest possible majority in the Senate, along with a narrowed majority in the House, and the presidency.  To what extent will they deliver, and by what means?

As noted in the last two posts, the current mainstream Democratic proposal, as expressed in the Affordable Care Enhancement Act that passed the House last June, includes generous boosts to ACA marketplace subsidies at every income level, capping premiums for a benchmark silver plan at a maximum of 8.5% of income, no matter how high the income. Those "enhancements" may well get watered down in legislation that must pass via reconciliation with zero defections from the most conservative party members. 

Whether in place of or to complement legislation, the Biden administration can take regulatory action on multiple fronts that would have a major impact on the coverage that marketplace enrollees get for their money. Stan Dorn and Frederick Isasi of Families USA recently proposed some half-dozen regulatory measures to improve affordability, along with other steps to streamline enrollment and expand eligibility. 

Here I want to focus on one arcane-sounding proposal, described briefly in the Families USA package, that could radically (or not so radically) increase the value of coverage at each of the ACA's metal levels.  Those levels are set by "actuarial value" (AV), the percentage of the average enrollee's yearly costs that a plan is designed to cover, as determined by a formula promulgated by a division of CMS.  By statute, plans in the ACA marketplace conform (with some wiggle room) to four AV levels: bronze (60% AV), silver (70% AV), gold (80% AV) and platinum (90% AV).

Revaluing AV

The regulatory action in question, conceived by health insurance professional Gabriel McGlamery and healthcare policy researcher David Anderson, is to change the basis by which the AV of plans at the ACA metal levels is calculated by excluding enrollees with predictably high costs from the calculation. Doing so would raise effective AV at each metal level.  

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AV allegedly reflects the percentage of the average enrollee's annual medical costs that will be paid by the insurer. At present, the small minority of enrollees who rack up tens or hundreds of thousands of dollars in medical costs skew the averages, as Bill Gates walking into a bar skews the average income of those present. Thus a plan that by AV formula covers 70% of "the average enrollee's costs" may have a $5,000 deductible and require 40% coinsurance for most services. For 99% of enrollees, that plan doesn't come close to covering "70% of costs." 

The current formula used to determine AV does exclude enrollees whose one-year costs top $1 million. The proposed action would cut far deeper, probably by using the "risk scores" that insurers assign to each enrollee (predicting the enrollee's medical costs compared to those of an average enrollee).  McGlamery estimates that cutting enrollees with a risk score above 20 out of the AV calculation (removing only about 1% of enrollees) would reduce the AV of a silver plan currently pegged at slightly above 70% to about 62%, and the AV of a bronze plan currently pegged at slightly above 60% down to about 50%.  (The proposal is to remove enrollees with high risk scores from the AV calculation, not from the plans or the risk pool. Risk adjustment is not affected.)

The extent of additional coverage offered at each metal level can be adjusted by choosing the score that will serve as cutoff -- the lower the "cut" score, the greater the increase in coverage, as this chart from McGlamery illustrates.

Cut points for actuarial value

Dorn notes that adjusting AV to better reflect the percentage of costs a plan covers for the vast majority of enrollees is a matter not only of improving coverage but of "truth in advertising." A plan with a $7,000 deductible that covers 50% of most costs after the deductible is reached up to a limit of $8,500 does not cover "60% of costs" by any commonly understood standard.

For whom the bronze bell tolls 

For subsidized enrollees, increasing coverage at each metal level by this method simply means higher subsidies, since a benchmark silver plan costs a fixed percentage of income. If a benchmark silver plan, deemed 70% AV under the new system,  would have an AV of 80% under the current system, the premium will rise accordingly, and the subsidy will rise to cover the difference.

For the unsubsidized, raising AV at every metal level creates a problem, in that the lowest-AV plans under the current system are no longer available. These enrollees will get more coverage from a "new" bronze plan, perhaps equivalent to current silver, but also have to pay for it. Removing the ACA's income cap on subsidy eligibility, so that no one pays more than a given percentage of income for benchmark silver (8.5% of income in most Democratic bills and proposals; more likely 10-12% of income in anything that passes) would remove this problem for individuals, albeit by further boosting the cost to the Treasury.

If Democrats can't muster the political will to remove the income cap on premium subsidies, then cutting high risk scores out of AV would create a demand for preserving plans equivalent to bronze plans under the current AV scale for those who have to pay full freight. For healthy unsubsidized enrollees, paying full cost, the premium savings gained by choosing bronze will usually outstrip the savings offered by lower deductibles and copays at higher metal levels. For those with predictable high costs, i.e. expensive chronic conditions, the MOOP in silver and gold plans is rarely significantly lower than in bronze.  Since they will hit the MOOP, they may as well pay the lowest premium possible. Accordingly, bronze is the most popular metal level among unsubsidized enrollees.

The problem with creating a "copper" level of coverage under a new AV formula that would offer coverage comparable to current bronze plans (with an AV of perhaps 40-50% under the new system) is that bronze plans, with deductibles averaging $6,921, are generally inappropriate for people at low incomes: the purpose of changing the AV scale is to make coverage with income-appropriate out-of-pocket costs affordable to all. Ideally, then, sub-bronze plans would be available only to the unsubsidized. Creating this new coverage level (say, 50% AV under the new system) would require legislation, as would making a coverage level available to the unsubsidized only.*

Subsidized enrollees arguably would not be disadvantaged by not being able to apply subsidies to "copper" plans. Since cutting high risk scores out of the AV calculation raises subsidies along with premiums, plans classed as bronze under the new regime (but with AV higher than under the current standard) would be as affordable to subsidized enrollees as bronze plans today -- or more so, since higher benchmark premiums generate bigger subsidies and bigger spreads between the benchmark and cheaper plans. [See update below regarding problems with creating skimpier plans for the unsubsidized.]

What about silver loading?

Dorn and Isasi cite another regulatory means of increasing the generosity of ACA marketplace subsidies. That is to mandate full silver loading so that every prospective marketplace enrollee has access to a gold plan for less than the cost of benchmark silver and even more low income enrollees than at present have access to a zero-premium bronze plan. 

Silver loading is a premium pricing practice that began in 2018 in response to Trump's abrupt cutoff in October 2017 of direct reimbursement to insurers for the Cost Sharing Reduction (CSR) subsidies they are obligated by statute to provide to low income enrollees who select silver plans. State regulators  responded by permitting insurers to price CSR into silver plans only, since CSR is available only with silver plans. 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. So far, though, these discounts have been haphazard and partial; on balance, actuaries tell us, silver is underpriced relative to the average actuarial value obtained by enrollees (which various according to the level of CSR they obtain, if any).

I have written about this before and hope to do so again soon elsewhere, so for now suffice to say since each insurer's silver plan enrollees collectively obtain higher actuarial value for their coverage than gold plan enrollees (thanks to Cost Sharing Reduction, priced directly into premiums since 2018), the ACA statutorily obligates insurers to price gold below silver, and they usually don't. Bronze is also overpriced relative to silver. The problem is best addressed on a national level, since the risk adjustment formula promulgated by CMS and used in all states currently favors silver plans.

Cutting high risk scores out of the AV formula could work either in tandem with or in place of maximized silver loading. Since the degree of subsidy enrichment in amended AV varies according to the chosen "cut point," arguably it could function efficiently as a single means of enriching coverage. In fact it could be combined with the opposite of enhanced silver loading: restoring CSR funding, or simply using (enhanced) platinum as a benchmark for incomes up to 200% FPL, a threshold up to which CSR currently raises silver plans to a roughly platinum level. 

Of course, these regulatory measures aren't free: they would raise the cost of federal subsidies substantially. But aggressive regulatory action would take some of the heavy financial lift off the shoulders of a barely-Democratic Congress.

Generosity of coverage is in CMS's hands

While silver loading was an accidental product of political combat, the option to adjust AV highlights a startling little-known fact about ACA coverage (previously unknown to me, anyway): coverage can be as rich as an administration wants it to be.  Until the option to amend AV was explained to me, I think I regarded the basic parameters of AV as a fact of nature, and the high out-of-pocket costs in ACA plans as fixed by statute: I blamed the ACA's creators for under-subsidizing the marketplace. In fact, as low takeup of ACA marketplace offerings became evident, the Obama administration could have introduced a risk score cut point. They could also have called the Republican Congress's bluff in refusing to appropriate funding for direct CSR reimbursement of insurers and implemented full silver loading in orderly fashion, with adequate advance warning and directions for pricing CSR into silver plans.  They were probably inhibited by then-current notions of fiscal responsibility and by the certainty of Republican hysteria should they move to make coverage more generous. The Biden administration should be free of such inhibitions.

UPDATE, 1/22/21: Gabe McGlamery tells me that there's a problem with creating lower-AV/lower premium plans for the unsubsidized: "the premium difference between bronze and copper wouldn't necessarily be significant...because most of the premium of the low-value plan goes towards paying for high-cost/high-risk individuals" (who will hit the MOOP whatever the plan design). He adds: "Think of risk adjustment creating a rubber-band like effect where the premium impact of cutting benefit value goes down as you get further from the average benefit design."  In other words, insurers don't save much by offering skimpy coverage to those who would buy it -- when more generous coverage is affordable to most people, i.e., the subsidized majority.

This caveat takes me back to the better solution: cap premiums as a percentage of income at all income levels. If Congress can manage that one major enhancement, CMS can make coverage more affordable for subsidized enrollees by adjusting the AV formula. 

Also, a further thought regarding the Obama administration's inhibitions with respect to using the means described above to enrich coverage: raising premiums for the unsubsidized would also constitute a major barrier. But ACA premiums upon launch in 2014 came in lower than expected, whereas enrollment also came in lower than expected and skewed toward older and sicker enrollees. Subsidized health insurance is subject to something like a genuine Laffer curve: if adequately subsidized, more healthy people will enroll and premiums will go down. 

Update, 1/23/21: One further thought: AV adjustment addresses a weak point of ACA design: relentlessly rising OOP costs.  Enrollees pay an allegedly fixed percentage of costs, and medical costs continue to rise faster than overall inflation. The average deductible for a silver plan without CSR has risen from $3,201 at the marketplace's launch in 2014 to $4,544 today. By adjusting the risk score "cut point," an administration can absorb as much of the rising cost as it chooses. More generally, the cut point provides policy flexibility: CCIO** can experiment until it finds a sweet spot.


*  "Copper" plans plans would fill the place currently filled by catastrophic plans, which offer no services outside a high deductible, are available without subsidy only, and available only to enrollees under age 30 or those for whom the cheapest bronze plan is deemed unaffordable by ACA standards. Getting leave to buy a catastrophic plan if you're over 30 is...a process.

** CCIO,  the Center for Consumer Information and Insurance Oversight, is the division of CMS that produces the AV formula.

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  1. Thanks for another excellent article.

    It took me a few years to catch the fraudulent nature of these 60-70-80 per cent ratings. (and I was selling ACA plans as an agent!) I kept staring at these high-deductible and high-coinsurance plans, and seeing policyowners with small claims getting next to nothing from their insurance.

    My immediate preference would be to outlaw high deductibles, unless the insured could post a $5000 or $10,000 bond.

    I would also ban coinsurance totally. It is ludicrous to think that a person facing surgery or who suffers a broken leg is going to make wiser buying decision because of coinsurance.

    One idea I have toyed with is to leave insurance deductibles alone, but to provide federal support for a type of Med Supp policy for persons under 65.
    For $100 or $200 a month, the insured would get a separate policy to cover their out of pocket costs.

    Actually I believe that French health insurance works something like this. The US government would have to support these plans, but our gov't supports Med Advantage and Part D drug plans with billions already.

  2. Thanks for a useful post, as always.

    1)Note your third paragraph hyperlink ("proposed") does not seem to be taking me to the right thing. Perhaps you have pointed it to something local on your machine?

    2)In case you didn't catch it, the dropping of the "subsidy cliff", and reduction of terms to 8.5% of income post-subsidy cost is also in Biden's current COVID relief attempt:

    "[President-elect Biden] is also asking Congress to expand and increase the value of the Premium Tax Credit to lower or eliminate health insurance premiums and ensure enrollees - including those who never had coverage through their jobs - will not pay more than 8.5 percent of their income for coverage."

    If I understand it correctly, there is nothing like this COVID relief bill out their yet -- it's just what Biden will try to negotiate, and get through in a bipartisan fashion.

    From reading in the Washington Post, this fix will go the "reconciliation" route if it doesn't go in this bipartisan attempt, assuming the Democrats have the political will. (Ditto the high-copays, by actuarial value or other methods, and the "family glitch", again only if there is sufficient support among Democratic people in Congress.)

    3)You or other readers might find this helpful:

    It's a convenient source to look up individual rates and deductibles and out-of-pocket maxima for common cases for the real plans available in a tabular form. It's only for states using the federal exchange, and it doesn't give premium subsidies or further copay caps from cost-sharing reductions. So the main use is really over the 400% FPL "subsidy cliff" people. (The link I have given points to Cook County, IL, but you can get any location using the Federal exchange from it. I believe it is derived from public CMS datasets, turning those into a more convenient form for humans to read.)

    Less convenient for some purposes, you can get exact rates post-subsidy, plus the deductible and OOP max, individually, case by case, from: (without setting up an account or anything--just plug the details for the hypothetical person in)