Sunday, March 21, 2021

Should younger enrollees in the ACA marketplace be more heavily subsidized?

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Enrollment in the ACA marketplace skews old.  In 2020, only 26% of enrollees were in the 18-34 age range, while 28% were over age 55. That creates two problems: 1) a lot of uninsured young adults, and 2) a high-cost risk pool, which means higher costs for the federal government in premium subsidies.

The healthcare provisions in the American Rescue Plan (ARP) signed into law by President Biden on March 11 radically reduce the percentage of income paid by ACA marketplace enrollees for a benchmark silver plan (the second cheapest silver plan in each rating area). But the reductions are most stark at the bottom and top of the income scale, as the table below (from the CBO's February analysis of the legislation in progress) illustrates.

Enrollees with incomes ranging from 250% FPL up to, say, 600% FPL may still find premiums a heavy lift -- and younger adults are disproportionately likely to forego them. A bill introduced in the House by Florida Democrats Stephanie Murphy and Donna Shalala, HR 6545, the Health Insurance Marketplace Affordability Act, aims to entice younger adults into the marketplace by increasing subsidies for younger adults in inverse ratio to the increase in premiums as age rises. The bill will soon be reintroduced to mesh with the ARP.

The ACA mandated a 3:1 age rating curve for individual market premiums, which means that a 64 year-old pays three times the premium of a 21 year old. Premiums rise more steeply as age increases: the mid-point of the curve is age 53. Because ACA premiums are structured so that every enrollee at a given income pays the same percentage of income (and so the same premium) for a benchmark silver plan, subsidies rise with age. The increase in subsidy as age rises increases the buying power of older enrollees for plans cheaper than the benchmark (the cheapest silver plan, all bronze plans, and in some markets, some gold plans). 

HR 6545 would increase subsidies as age drops (age doesn't drop, but you get the idea) and so reduce premiums paid by younger enrollees.  

Take, for example, three adults earning a tad over $36,000 per year, a bit shy of 300% FPL. The ACA at present decrees that they will pay about $300 per month for the benchmark (second cheapest) silver plan. If that plan's premium is $400 per month for a 21 year-old, it's $1200/month for a 64 year-old. The 21 year-old's subsidy is $100/month -- and the 64 year-old's is $900/month. A 46 year-old's subsidy is $300/month. All pay $300 per month for the plan. 

Under HR 6545, the 21 year-old's subsidy would rise to $300/month and she'd pay $100 per month (one third what the 64-year old pays) for the benchmark silver plan. The 46 year-old's subsidy would rise to $450, and he'd pay $150 per month. For the 64 year-old it would be status quo ante: $900 subsidy, $300 premium. Charles Gaba has a more detailed description of the subsidy formula and effects here. [Update, 4/16/21: Charles explains the financial case in detail here.]

Gabriel McGlamery,  a former health insurance specialist at CMS, now at Florida Blue, is a chief proponent of HR 6545. He worked with a team of actuaries to produce a detailed analysis (incorporating an analysis by Oliver Wyman, and including the example above) finding that if combined only with the subsidy boosts in the ARP for those with incomes over 300% FPL, the age-weighted subsidies in HR 6545 would yield enrollment of 145% of the ARP alone at 116% of the cost.* The cost savings would come from improvement in the risk pool.  Enrollment increases would be concentrated at incomes above 250% FPL, where the percentage of income required for a silver plan remains substantial, and the phase-out of Cost Sharing Reduction at 250% FPL leaves silver plan enrollees with high out-of-pocket costs, with deductibles averaging over $4,000. Enrollment gains would be concentrated in ages 18-49, though children's enrollment (a relatively small slice of individual market enrollment, thanks to the wide availability of CHIP) would see the largest percentage increase, over 75%.  

I don't doubt that implementing HR 6545 would boost subsidized individual market enrollment (as of now, almost all individual market enrollment will be subsidized at least through 2022, and beyond that if the subsidy schedule enacted in the ARP or something close to it is made permanent). Gains would be concentrated among young-to-middle-aged adults, where uninsured rates are highest, and among the 50% of the uninsured population with incomes above 200% FPL (below that threshold, the ARP makes silver coverage with strong CSR affordable to almost all). As long as the basic ACA architecture remains our path toward universal coverage, layering something like HR 6545 into the ARP is a cost-effective way to advance that goal.

Regarding the economics and, in a certain sense, the ethics of tilting subsidies toward younger enrollees (proportionate to the 3:1 age distribution of premiums), McGlamery has managed to pound into my head a fundamental fact about health insurance: On average, it is literally worth less to younger adults, as they use less care, spend less on care, and therefore place less value on access to care. I personally tend to value health insurance chiefly as risk management -- protection from asset depletion, debt and bankruptcy -- and have since I was a young adult. But then, I was a father at age 23. A lot of young adults have little income to spare and little wealth to lose. 

At the same time, it seems to me that the strong case for age-weighting health insurance subsidies in the individual market is an artifact of our fragmented and dysfunctional healthcare system. If the ACA marketplace were firing on all burners, absorbing its highest possible share of the now-uninsured, it would cover perhaps 8% of the U.S. population. Medicaid, Medicare, and employer-sponsored insurance costs for individuals are not age-weighted.** Nor are premiums or taxes dedicated to healthcare coverage in countries with universal coverage.*** 

The need to subsidize younger adults in the individual market more heavily is premised on their unwillingness to pay substantial premiums out-of-pocket. Under ARP, however, those premiums, even when coupled with maximum out-of-pocket costs, demand a lower percentage of total compensation than employer-sponsored insurance, especially for family coverage. In ESI, however, the costs are largely hidden: on average, the employer pays 83% of the individual coverage premium and three quarters of the family coverage premium.  Those costs are further subsidized by the federal government, via tax exemption. The average family premium is over $20,000. That's over 20% of compensation - before out-of-pocket costs are figured in -- for a family with an income of $80,000 plus a $15,000 employer premium contribution  Should premiums in employer-sponsored coverage rise with age?

Weak takeup of subsidized coverage in the ACA marketplace -- it averages just over 50% -- is a result not only of underpowered subsidies for some but also in large part  of widespread ignorance of what's on offer, and of the difficulty and uncertainties attendant on applying, gaining a subsidy, and not losing it or being forced to pay a portion of it back.  As I noted recently, Cynthia Cox of the Kaiser Family Foundation, citing survey data, highlights the ignorance factor:   "If you ask uninsured people why haven’t signed up, 75% will say it's because of cost. That can’t be, because 40% of them are eligible for free coverage. If you ask, have you shopped in last two years?...75% have not."  

Application for coverage often entails snags in identity verification, income estimation, income verification, and eventual reconciliation of premium tax credits, based on income estimates, with actual income as documented in the subsequent tax return. These snags generate confusion, anxiety, and sometimes large unanticipated costs. If the far lower premiums made available by the ARP were coupled with effective enrollment outreach and streamlined enrollment, perhaps integrated with tax filing, takeup at younger ages might improve substantially.  In countries with universal coverage, enrollment in at least basic insurance is a given -- whether in an employer-sponsored plan, an individual market plan, a government-run plan. Individuals' costs may be submerged in taxes or payroll deductions, or mandated. People don't need to be enticed to enroll.

Finally, insurance is less valuable and less costly to younger enrollees only on average. From an ethics standpoint, should a 26 year-old with an income of $32,000 pay less for coverage than a 63 year-old with the same income? The older adult may have more assets accumulated and more need for medical care -- or may not. In a truly universal system, the higher average costs of older enrollees, and of sicker enrollees more generally, are absorbed by the whole society -- as we in the U.S. absorb the costs of Medicare. HR 6545 does hold older adults harmless, in that it does not reduce their subsidies; the additional subsidy money is gravy for those at younger ages.  Stepping back, however  -- or forward in time -- whether the premiums paid by individuals (net of subsidy) should rise with age in insurance sources that cover most of the population is questionable.  

Within the confines of the limited individual market we now have, I think age-rating subsidies makes sense. If subsidized marketplace coverage is eventually extended to people with access to employer-sponsored insurance, however -- probably coupled with introduction of a public option into the marketplace, as in the Medicare for America bill -- the question becomes more complicated. I suppose that with an 8.5%-of-income cap on benchmark premiums (net of subsidy), as in the ARP, marketplace coverage would make sense for some older adults with access to employer-sponsored insurance. But should subsidized premiums rise with age for what could eventually be more than half the population, or even all of it? I'll leave that question open.

Update, 4/2/21: A KFF analysis of the effects of the subsidies boosts in the ARP illustrates McGlamery's core point:

Compared to current premium payments, a 60-year-old with a $55,000 income would pay 77% less for a bronze plan ($146 vs. $634 per month), 56% less for a benchmark silver plan ($390 vs. $887 per month), and 52% less for a gold plan ($453 vs. $951 per month), on average, under the COVID-19 Relief law. Many young adults with incomes above 400% of poverty who are currently in the subsidy cliff would also see savings under the COVID-19 relief law, but those savings would be more modest (a 6-9% drop, depending on the metal level, for an average 27 year old).


* The Florida Blue analysis is focused on the Florida market, the nation's largest; the Wyman analysis is national. The ARP subsidy changes at incomes over 300% FPL incorporated in the analysis of the combined effect of the bills include the removal of the ACA's income cap on subsidies at 400% FPL.

** McGlamery points out that various factors affecting the risk pool in large group plans -- the dearth of plan choice compared to the individual market, the fact that employees are by definition healthy enough to work -- alleviate the burden on younger workers of partially subsidizing older ones. Nonetheless, he asserts that uptake would increase if employee contributions scaled to age.

*** In some countries that filter universal coverage through insurance companies, supplemental policies can be age-rated. Switzerland has three age categories: children to age 18, adults age 19-25, and adults over 25. 

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