States seeking to reduce their uninsured populations must beware a Catch-22

By David M. Anderson, Charles Gaba, Louise Norris and Andrew Sprung

Note: this post is the third joint effort by David, Charles, Louise and me. Others here and here.

State policymakers have been prolific and creative in putting forward measures to strengthen their ACA marketplaces. Measures enacted since 2017 or in progress now include reinsurance programs, which reduced base premiums by an average of 20% in their first year in the first seven states to implement such programs; new or renewed state-based exchanges, which capture insurance user fees that can be used for advertising and outreach; state premium subsidies to supplement federal subsidies; and state-based individual mandates, which can provide funding for all of the above.

Policymakers must recognize, however, that these choices entail tradeoffs — and not just in budgetary constraints. Specifically, built into ACA marketplace architecture is a pricing dynamic that bedevils state attempts to improve ACA marketplace performance: reductions in premiums for unsubsidized enrollees tend to raise premiums for subsidized enrollees. Because premium subsidies are designed so that enrollees pay a fixed percentage of income for the benchmark (second cheapest silver) plan, premium increases also increase subsidies — and tend to increase the difference, or "spread," between the benchmark plan and cheaper plans.

The year after: Does reinsurance boost marketplace enrollment?

Subscribe to xpostfactoid via box at top right --->

I have written on various occasions about a Catch-22 that bedevils state governments trying to improve affordability and boost enrollment in their ACA marketplaces: reductions in premiums for unsubsidized enrollees tend to raise premiums for subsidized enrollees. Because premium subsidies are designed so that enrollees pay a fixed percentage of income for the benchmark  plan, premium increases also increase subsidies — and tend to increase the  "spread" between the benchmark plan and cheaper plans, creating discounts. Premium reductions reduce those spreads and discounts.

States face this Catch-22 when considering reinsurance programs, for which federal funding is available. By reimbursing insurers for costs incurred by their most expensive enrollees, reinsurance reduces premiums by predictable amounts, averaging 20% in the first year of implementation as of 2019, according to Avalere Health. That helps unsubsidized enrollees but sometimes hurts the subsidized.

By 2018, states faced intense pressure to help the unsubsidized. A federal reinsurance program helped control premiums nationally in the marketplace's first three years of operation, 2014-2016. When the program sunset in 2017, premiums skyrocketed, as they did in 2018 (other factors included insurers' initial underpricing in a new market, which was manifest by 2017, and political turmoil in advance of the 2018 enrollment season). From 2016 to 2018, average benchmark premiums increased by an average of 61%.  By 2019, unsubsidized enrollment in ACA-compliant plans was down about 50% from 2016.

Let's take a look at how enrollment fared in ten of the twelve states that have stood up reinsurance programs (as CMS has encouraged states to do) since 2018 (Rhode Island has not yet reported 2020 totals, and Maine's 2019 enrollment was affected by late implementation of the ACA Medicaid expansion).