APTC Hacks, Non subsidized plans and choice revelation

Advanced Premium Tax Credits (APTC) are only relevant for people who buy policies on the Exchanges.  However the subsidized universe is only about half of the entire individual market.  The non-subsidized and off-Exchange universes will help us determine how carriers embark on their Silver pricing strategies.

If an individual would have qualified for an APTC but buys an off-Exchange policy for whatever reason, they do not get any subsidy to help offset the premium.  They pay full price.  There are some non-subsidized buyers on the Exchanges.  A common case will be people with variable incomes who are not sure if they are subsidy eligible.  They may overestimate their income so they don’t have to pay the APTC back but if they have a bad year, they can collect the Premium Tax Credit the following year when they file for their tax refund.  People who know that they can not qualify for the Exchange have no reason to shop on Exchange.  Indeed, they have a mild incentive to look off-Exchange.

Policies that are sold on Exchange must be offered off-Exchange.  However carriers can offer policy and plan designs off-Exchange that they do not offer on Exchange.  Mayhew Insurance did that in 2014 with an experimental product as we needed data to see if our hunch was right (we weren’t).  Carriers can decide to only participate off-Exchange if they wish to do so.  The advantage of selling off-Exchange is that the population is a bit higher income and that tends to correlate with two things; better health and more stability in paying bills.  Even though policies are offered off Exchange, the on and off-Exchange policies in a single metal band in a state are in a common risk pool for risk adjustment purposes.

Off Exchange has a typical policy buying decision maker earning over 400% Federal Poverty Level (FPL).  On Exchange, subsidized buyers have a median policy decision maker earning around 200% FPL.  These are very different market segments.  And those differences can feed some insight into why a carrier that has the ability to capture the #1 and #2 Silver positions would engage in either a Silver Spamming or Silver Gapping strategy.

We’ll make some assumptions.  The first assumption is that on-Exchange buyers are very sensitive to post-subsidy premiums for a given metal level.  Off-Exchange buyers are not as sensitive for two reasons.  The first is that they have more income so the marginal pain of paying an incremental dollar is less than someone earning half as much.  Secondly, a $10 difference in premiums may be a 20% price difference post-subsidy for an Exchange buyer while the same policy off-Exchange a $10 difference would only be a 3% difference in premium.  Expectations are anchored differently on and off-Exchange.

The second assumption is that the Off-Exchange market is a fairly clean revelation of preferences. We see where people go when they are not subsidized. Right now we see that people off-Exchange tend to go a bit more Bronze and a bit more Gold and a lot less Silver compared to the subsidized Exchange population.  That gives us a rough anchor of the relative attractiveness of the actuarial value levels.  We can also assume that there are at least as many choices off-Exchange as there are on, and usually significantly more, so the price-value-network trade-off curve is far more continuous than discrete.

From these assumptions, we can make some inferences about the actual attractiveness of the first and second silver plans on Exchange.  If we see the first and second Silver plans selling reasonably well off-Exchange then those plans are most likely fairly attractive.  If the first and second Silver plans are selling like dogs off-Exchange then the comparative value proposition offered by those plans is very poor.  A good selling Silver plan off-Exchange will have a decent but not huge network, it might be an EPO and the customer service is decent to very good.  A poorly selling Silver plan off-Exchange that is the #1 or #2 Silver on Exchange probably has an extraordinarily narrow network with high barriers to care (HMO with significant pre-authorization)  and horrendous customer service.  There are probably plenty of plans that are in-between with some off-Exchange/non-subsidized sales.

I am speculating now but I think Silver plans that sell well off-Exchange that are also the #1 and/or #2 Silver plans in a region are good candidates for Silver Gapping strategies.  The plans are inherently attractive and can hold their own off-exchange.  The comparatively lower pricing of all Silver plans with a high #2 Silver benchmark and a large spread between the #1 and #2 will work to bring in significantly large number of buyers as they can get a very good value proposition for significantly less than their expected personal contribution at the #2 Silver benchmark plan.  Other carriers may benefit as their above Benchmark Silvers are now being subsidized at a higher percentage of total premium than they would have been but the inherent attractiveness of the Gapped Silver plans will drive significant membership to the #1 Silver.

On the other hand, I am again speculating, carriers whose Silver plans that have comparatively very poor off-Exchange sales but have the #1 and #2 Silver positions on Exchange have every incentive to Silver Spam.  Creating near isomorphs with modest tweaks to benefit configurations that are attached to the same network and the same plan type as the poorly performing #1 Silver is inexpensive and straightforward.  A cynical carrier can create six clones (including the Standard plan design of the #1 Silver with minimal pricing spread.  The benchmark Silver will be inexpensively priced while the #1 Silver is only slightly less expensive (post-subsidy) than the benchmark.  The goal is to increase the absolute gap between the benchmark Silver and the competing carriers’ low cost plan offerings.  If this goal is achieved, it will drive all price sensitive and healthy membership to the Silver Spamming carrier while dumping the high risk membership to other carriers.  Given the flaws in the risk adjustment procedure, the high risk membership will be difficult to compensate for as the low cost Silver Spamming carrier is most likely paying providers significantly lower rates than the other carriers in the market.  The high risk members will be receiving care that is paid at higher than on Exchange market weighted provider rates.

The Spamming strategy will produce a risk pool, all else being equal, that is smaller and sicker than the Silver Gapping strategy.  Furthermore, it will shift more people at a lower income level off of subsidized coverage and to unsubsized, off-Exchange coverage.  The Silver Spamming company will get a higher percentage of a smaller pie.  And if it is aggressively gapping, it will get the healthiest component of a fairly ugly risk pool.