The Affordable Care Act Makeover – Part 3: Simplifying the Complex

Part 1 and Part 2 of this series discuss the individual health insurance market makeover that began in 2018. Industry profitability spurred insurers to return to Affordable Care Act (ACA) markets in 2019 and 2020. This article continues the discussion with a focus on the mechanics catalyzing the makeover.

 The dynamics of the ACA individual market are convoluted, elusive, nonintuitive and paradoxical. There may be more, but those are the words I believe I have used as market descriptors more often than “complex”. The complexity is somewhat fostered by the law’s oddities; if you are familiar with premiums dynamics in other markets, you may be somewhat handicapped here as the market dynamics are so different here. Also, if your interest in the ACA is from a political perspective (regardless of persuasion) and that overrides your interest of mathematical understanding, you will likely be troubled that policy implications do not neatly align with political talking points.

Part 3 of this 4-part series is focused on “Simplifying the Complex”. The ACA makeover is complex; however, grasping one key relationship is a key to understanding how the market functions. You will understand it after reading this article. First, let’s warm up with background clarification of the individual market.

Market Understanding

The Politico article referenced in Parts 1 and 2 was peppered with some interesting declarative one-liners that are worth exploring…and this is an open invitation, if you’re in the insurance industry and agree with any of these statements, please set me straight.

Obamacare plans are more attractive to insurers than Medicaid business, because they typically can charge high deductibles and copays and count on paying out less in claims for all but the sickest patients. 

It wasn’t too long ago when US senators were suggesting “that insurers who operate in other markets should be forced to participate in the individual market regardless of financial outlook”. Senator Tim Kaine, whom you may remember (or may not) as the 2016 Democratic running mate, told an insurance company witness that his company was “holding a knife to their own throat” by not participating in certain counties. Several legislative proposals mandated that insurers participating in government programs also participate in ACA markets. A 2017 Health Affairs blog said, “Private insurers that offer Medicare Advantage plans in a region should be required to offer such plans within the exchanges as well.” Also, insurers don’t really “charge deductibles”; they offer plans with different deductibles, and unless they are free, Obamacare rules incent purchase of plans with the highest deductibles.

 President Donald Trump ended a crucial subsidy to offset health plan losses.

I think there is confusion here between temporary risk corridor payments, which offset a portion of health plan gains and losses beyond certain expectations between 2014 and 2016, and cost-sharing reduction (CSR) payments. The former had no appropriation from Congress and the program was therefore budget neutral. Insurers recently won a Supreme Court case as budget neutrality was not a contractual understanding; they are due about $12 billion. Of course, this temporary program expired before President Trump assumed office, so he did not end it. The latter represents neither a crucial subsidy nor an offset of “health plan losses”. It was the catalyst for the mentioned “turning point” and is also regarded as the ACA’s 2018 “Life Raft”. President Trump’s action changed the funding of CSR payments form a federal pass through to increased silver premiums, which establish premium subsidy levels for all plans on the exchange.

Obamacare markets still aren’t a high-margin business like the lucrative employer insurance system, and the law requires health plans to spend 80 percent of the premiums they collect on patient care.

The law also requires health plans to spend 80 percent of the premiums they collect on patient care in the small employer market, and 85 percent of the premium in the high-volume large employer market. It is true that administrative costs can be higher in the individual market, but it is not universally true that individual markets are less profitable than employer markets.

 Complex --> Simple

In the opening paragraph of Part 1, I alluded to the importance of seeking to appreciate the complicated dynamics of ACA markets. The ACA dynamics are nonintuitive, wonky and complex. The two articles I have recently written that received the most attention are titled “The Elusive Paradoxes of the ACA” and “A Hard Pill to Swallow: Appreciating the Mathematical Dynamics of the Affordable Care Act”. The first title is self-explanatory. The second is based on the “red pill, blue pill” theme in the science fiction movie The Matrix. Both portray the ACA individual markets as convoluted and not intuitively obvious from a mathematical framework.

I realize this is really geeky stuff, and while I have written at length as transparently as I know how, and I encourage you to seek to appreciate ACA mechanics at the same level I do, particularly if you have media or policy influence, I understand that everyone doesn’t share my interest and fascination. Therefore, I am going to simplify the one thing that you really need to know about ACA markets, the one thing you can quickly check and understand a market’s position. It will explain the “2018 improved market dynamics” and why different states are at different stages in the ACA makeover process. It was not easy to condense, but I have worked it down to four sentences that anyone can understand. If you need to know one thing about the ACA, this is it. Ready…

There are three metal levels (we can ignore the fourth which is <1% of market) in the market. The premium of one the three decides what the government pays. The other two are what people buy. Markets work better when the plan that decides what the government pays is relatively higher than the plans that people buy. That’s it. It’s really that simple. Does this have anything to do with the ACA makeover? Yes. In 2018, President Trump’s action raised the premiums on the plan that decides what the government pays while leaving the other plans alone. Some like to debate his intentions here, but intentions are irrelevant; the government now pays a larger share and consumers pay a smaller share.

It seems plausible that this impact should have been widely understood in 2017; it takes about 10 minutes of addition and subtraction to comprehend, and billions of dollars are at stake. I hope somebody advising the government worked through the math. Some public statements from the president suggest it was not understood within the White House, and the House Minority Whip either misrepresented or didn’t understand the Congressional Budget Office (CBO) report discussing the impact. Ultimately, President Trump’s decision on the matter did not come until he had a legal recommendation from the Department of Justice, so perhaps he was just following the law and deserves neither credit nor blame, though he naturally received much of the latter in the form of “sabotage” gibberish. Again, ascribed intent is irrelevant to the resulting impact and focus away from objective mechanics only complicates proper understanding.

Let’s illustrate the CSR decision with more enjoyable imagery. Imagine you frequent a pizza shop and have an endless stack of coupons at home for $5 Hawaiian pizzas. You do not like Hawaiian pizza, but you can you use the coupon toward the price of other pizzas. If Hawaiian pizzas are $8, your coupons are worth $3. If Hawaiian pizzas are $12, your coupons are worth $7. How would you feel if new ownership came in and cranked up the price of Hawaiian pizzas but left other prices the same? You would love it, and your friends would love you if you shared your coupons with them, because the cost of your pizza wouldn’t change but your coupons would suddenly cover more of the cost. This is exactly what President Trump did to ACA markets in 2018, and the dramatic impact was discussed in Parts 1 and 2.

The One Thing You Need to Remember

The subsidy dynamics are now calibrated on a higher metal level; this is the one thing that you need to remember about the ACA; it is what is responsible for the improved dynamics that began in 2018; it is what we began the ACA makeover. Respectfully, some of my friends who cite recent ACA market improvements as “resilience to uncertainty or policy headwinds” are either ill-informed or being disingenous. ACA markets are functioning better because of consequential changes, not because of passive maturation. Without such action, we would likely have “stayed the unsustainable course until significant adjustments were necessary”.

Once you have digested the enhanced subsidy dynamics, I do need to add a few caveats. While the increased benefits are substantial, there is not an immediate benefit all enrollees. About 25% (declining % each year) of ACA market enrollees do not receive premium subsidies because their income is too high to qualify under ACA rules, barring a state waiver or state funding. Without premium subsidies, ACA markets are unattractive and the proportion of enrollees not receiving subsidies continues to decline every year.

Another population caveat exists for enrollees with incomes below 200% of the Federal Poverty Level. These individuals are eligible for the enhanced subsidies, but they are also eligible for generous CSR benefits, which are usually a stronger incentive and only available in silver plans. The dynamic of increased silver premiums and increased subsidies is largely neutral, but enrollees choosing the lowest cost silver plan will benefit as the spread from the benchmark (second-lowest cost) plan becomes larger.

Are premium subsidies really what influences the health of ACA markets? Listen to the concerns and look at the proposals being discussed. Every proposal is littered with increasing premium subsidies and expanding them to a wider population. California just did exactly that with state money. In the wake of the federal government’s unprecedented release of trillions of dollars and everyone having a slice of the pie, what are insurers asking for? Money for themselves? Bailouts? Nope. They are simply asking for increased premium subsidies for the populations that were harmed by the ACA. “Tax credits for those with incomes over 400% of the federal poverty level should be made available, and adjustments to the tax credit formula by age to would encourage more younger people to get covered”, they say.

Everyone recognizes the ACA created premium challenges for consumers and the easiest way (I didn’t say this policy is ideal, but if we’re not going to replace the ACA, we need it to work) to relieve pressure is to offset premiums with larger federal support. The question I would ask is this: why have we spent the last several years petitioning a divided Congress to pass low profitability legislation, rather than petitioning states to simply understand the ACA makeover and achieve the same result by enforcing ACA rules? It’s a reasonable question, right? It may not surprise you that I have been doing that, and it’s had some positive impact, but there is still a lot to do to complete the ACA makeover.

Conclusion

Overpriced insurance markets only function when a third party contributes a significant portion of the premium dollar. ACA markets did not function well until conditions changed in 2018. The clear reason for the market improvement is that the subsidy calculation was recalibrated from a silver level to a near platinum level. One thoughtful ACA blogger directly says “Silver is platinum. Insurers should treat it as such. Regulators should make them.”

If markets are left alone, the ACA makeover will occur naturally, but it could take a long time. The CBO predicts “by the end of the decade”. State policy action can speed or slow the makeover. Some states have created “silver loading templates” which limit enhanced silver plans from being priced near platinum level. This will slow the ACA makeover. A concern I expressed last year was that a slow makeover may be overlooked among impatient lawmakers, “All markets will eventually drift toward that equilibrium…transitional misalignment and overpricing will likely be interpreted as market dysfunction…prompting lawmakers unfamiliar with the market mechanics to prematurely stop the gold rush”.

The ultimate dynamics of the 2018 market improvement is lower premiums for subsidized enrollees, attracting a healthier market and leading to reduced premiums for unsubsidized enrollees. The mechanics are more complicated than the pizza example, and while all state markets will eventually get to “market equilibrium”, they are taking dramatically different paths and are at different speeds. The reasons for different dynamics across the country are various; competition, insurer incentives, and perceived inequities in risk adjustment limit movement toward equilibrium. In other cases, states have prescribed direct actions to insurers in their markets, some which slow and some which speed up movement toward market equilibrium. Part 4 will conclude this series with a nationwide view of where states are relative to market equilibrium in the ACA makeover process. Check back later this week and see where your state is.