Health Plan Economics Part 2:  How The Lapse Of Premium Subsidies Could Hurt The Exchanges’ Relatively Stable Finances

This blog is part of a four-part series on Health Plan Economics. In this series I plan on simply laying out some important trends in different lines of business and some of the impacts from a healthcare economics standpoint. Here is my plan, subject to change of course based on breaking news:

April 25 – Medicare Advantage and Rumors Of Humana’s acquisition by Cigna

April 29 – How The Lapse Of Premium Subsidies Could Hurt The Exchanges’ Relatively Stable Finances

May 2 – How Falling Medicaid Enrollment is Impacting Health Plans and Providers Alike

May 6 – Other Healthcare Trends And Their Economic Impacts On Plans

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Part 2 – How The Lapse Of Premium Subsidies Could Hurt The Exchange’s Relatively Stable Finances

I hope you are enjoying this blog series on health plan economics. Last week we covered some economics in the news right now for Medicare Advantage. This week we are covering the Marketplace Exchanges.

What are the Marketplace Exchanges and the healthcare subsidy supports?

The Marketplace Exchanges were created as part of the Affordable Care Act of 2010 (the ACA or popularly known as Obamacare). The Marketplace Exchanges and the state Medicaid expansion under the ACA began on January 1, 2014. While it has had its problems, the ACA’s Medicaid expansion and Exchanges have helped well over 40 million obtain coverage. That number could drop some due to the ongoing Medicaid redeterminations that started in April 2023. They are almost complete and that has led to losses in the Medicaid rolls.

The Exchanges work as such:

• People who do not have access to other coverage can access the federal Exchange or a state Exchange depending on whether a state has taken over the responsibility of running the Marketplace in its state.
• Plans are broken out between the following:
  • Catastrophic Plans for those largely under 30 years of age
  • Bronze (the plan covers 60% of costs)
  • Silver (the plan covers 70% of costs)
  •  Gold (the plan covers 80% of costs)
  • Platinum (the plan covers 90% of costs)
• Premium subsidies under the permanent law are available on a sliding scale for those from 100% of the federal poverty level (FPL or poverty) to 400% of FPL. In general, those at the lowest end pay very little in premiums, but those between 300% and 400% of poverty pay nearly 10% of income before a subsidy kicks in.
• Premium subsidies have been temporarily enhanced from 2021 through 2025. The enhancements are dramatic at the low end of the income scale, but does help even some middle-income earners.  In addition, those over 400% of poverty are eligible for a subsidy. All of these changes have led to a surge in enrollment.
• Those with an FPL of 100% to 250% also receive cost-sharing subsidy (CSR) support by enrolling in special Silver CSR plans that limit cost-sharing based on income. This did not get enhanced.
• The individual insurance system moved from one based on underwriting to community rating. Underwriting is where insurers look at applicants and can deny insurance, accept, or accept with a higher rate based on the individual’s disease states and medical risk. Community rating in the exchange world is where no one can be denied and the only rate differentials are based on age, smoking status, geography, and benefit richness. Even costs based on sexes is blended in age groupings. The difference between age groupings is also capped so as to lower older person’s rates and transferring some of that cost to younger individuals.
• There are numerous other reforms in Obamacare. Two more I will feature here are:
  • No one can be denied insurance for pre-existing conditions.
  • All pre-existing conditions are covered by the insurer and no waiting periods apply.

The first table below gives you all the pertinent details on the permanent and temporary enhancement laws as it relates to premium and cost-sharing reduction subsidies:

The road to financial stability – the poor financial decisions in the Obama and Trump years

For many years, both the Obama and Trump administrations put major roadblocks in front of the success of the program – this despite Obama being the “father of the law.”

The start of the program was very rocky. Few understood it and marketing and outreach did not work. What’s more, the launch of the enrollment website was horrendous and many lost faith in the program. So very low enrollment occurred in year one.

In the first three years, the financial success was anchored by the three Rs – risk adjustment, reinsurance, and risk corridors. This was meant to take away some of the risks for insurers as the nation transferred from rates based on underwriting to modified community rating. Risk adjustment redistributes premium between plans based on the risk of individuals enrolled. This is a permanent feature.

Reinsurance, a temporary feature from 2014 to 2016, was meant to provide additional funding to plans that saw catastrophic cases. Risk corridor payments were also a temporary transfer mechanism from plans that did better than others. Both the reinsurance (to some degree) and the risk corridor (to a large degree) were not fully funded and badly destabilized plans. This led many plans to exit the market, which impacted premiums, the number of plans in states, and network coverage. It was a very poor financial policy decision by both administrations.

But in many ways, Trump damaged the financial position of plans even more. He immediately reduced outreach and marketing dollars. He also restricted open enrollment periods. Most important, he defunded the cost-sharing reduction (CSR) subsidy appropriation. Because plans had to still offer cost-sharing reduction plans under law, Silver premiums had to be increased dramatically for CY 2018 and on. To show how foolish Trump and Republicans in Congress were, from 2018 on the move actually has cost the federal government more net spending, as the amount of the CSR subsidy was less than the amount paid out for higher premium subsidies when premiums shot up.

The road to financial stability – the wise moves from Biden

 Wile the CSR subsidies were not re-appropriated, Biden did make some major changes to the financial paradigm for the Exchanges. He reinvigorated outreach and marketing dollars and returned to more liberal open enrollment and special enrollment periods. In addition, he won passage on two occasions of enhanced premium subsidies in the Exchange – in 2021 as part of COVID relief bill (for 2021 and 2022) and in the Inflation Reduction Act of 2022 (for 2023 through 2025).

The simple financial rules

What does this tell us? Insurers were looking for predictability from federal regulators. You can see it in the second table below. The controversial launch of the Exchange program combined with short funding in some key financial protection programs meant low enrollment, insurers bailing on the program and numerous plan participation and network access issues in many states. As such, after its terrible start in 2014, the program bumped around between 11.2 to 12.7 million enrollment and as low as a 3.5 average number of plans per state because of all the uncertainty from regulators.

Beginning in 2021, with a vigorous endorsement by Biden as well as enhanced premium subsidies, enrollment surged as did the number of plans in the program by state. Contracted offerings, network, and access all stabilized. Geographic penetration looks so much better. In fact, with larger enrollment and less risk, premiums are pretty stable, having come down after the CSR debacle and only moderately increased.

Opponents like to attack the ACA for driving up costs.  If you set aside the philosophical debate about whether the ill should get coverage through community rating, the fact is average Silver benchmark rates are only up by about 75% in ten years – or 7.5% per year.  What’s more, based on research I have assumed that about 60% of the 2018 increase is due to Trump’s defunding of the CSR (which has been in the baseline since). That taken out, the increase over ten years is just 48% — or 4.8% per year on average. That is robust inflation, but nothing extraordinary, especially given all the turmoil in the program. And since enrollment has increased dramatically, the average increase is below 2% per year.

Is community rating, rich benefits, and major subsidies all worth it?

Yes, premiums surged when we moved from underwiring to community rating. Some did not like that, but that is what occurs when you cover all regardless of medical condition. It is a worthy pursuit. What opponents don’t tell you is that is exactly how the lion’s share of our insurance in the nation has worked for decades — employer sponsored coverage. Before community rating we rationed care for the sick based on employment status.

As to benefits, a case can be made that they are too rich. Over time, some of the coverage areas and scope could be looked at. It does drive costs in the Exchanges, but also in other coverage where ACA mandates preside. But free preventive services to me are key to identifying disease early when it is cheaper to treat.

On the issue of subsidies, I am of the mind that at the low end of the income range we are too generous right now and we are not generous enough at the high end of income even with enhanced subsidies. But I am also a pragmatist: the enhanced subsidies have worked to drive coverage in a big way. Yes, some of it may be due to the Medicaid redeterminations, but a very good share of it is tied to better subsidies. It is hard to mess with success. So, I would tend to agree that the subsidies should be made permanent and even the subsidies from 250% on up be looked at.

What would happen if enhanced premiums subsidies lapsed in 2026?

Health plan economics would kick in. The number of people enrolled would fall dramatically. That alone could create financial issues for plans in terms of revenue and margin. Premiums would likely increase.

A compelling case, too, could be made that the sick will retain coverage while the healthy abandon it. That creates what is known as adverse selection and insurers would need to take that into account. This would send premiums up even more.

What’s more is that the number of insurers participating, the average number of plans per state, and therefore choice and network adequacy, would suffer. We would likely return to the plan participation levels seen prior to premium enhancements. That would create issues in many states that have only recently seen plan participation rise. The number of counties with just 1 or 2 insurers would surely increase.

Conclusion

We all can argue that the ACA can be improved, but now is not the time to jeopardize the progress we have made on coverage. We will already see a rise in the uninsured rate due to many losing Medicaid coverage. We cannot afford to see Exchange rolls drop as well. While I am not opposed to some tweaking of the premium enhancements, the wiser move would be to leave them where they are (and perhaps be a little more generous at the high end) for at least five more years. Perhaps then a consensus can be built on healthcare reform and the benefits, subsidies, and more be revisited.

#exchanges #aca #obamacare #medicaid #healthplans #managedcare

— Marc S. Ryan