Anthem’s actuarial assumptions on CSR

Cost Sharing Reduction (CSR) sabotage could lead to the situation of significantly increasing the average actuarial value purchased on the Exchanges depending on what assumptions are made by the actuaries at various insurers.

Reading Anthem’s VA filing again – it sounds like if they go the “No CSR” rate route, they will only allocate the increase to silver plans

— Wesley Sanders (@wcsanders) May 12, 2017

Seems to be a debate – do you do it as an AV adjustment just to silver plans, or a morbidity adjustment to the Index Rate?

— Wesley Sanders (@wcsanders) May 12, 2017

For every whose eyes have not glazed over, let’s work through the implication. (Update — Oliver Wyman actuaries have a great report that came out after I wrote but before I published this that plays with the same ideas)

What I have been told is that most insurers are assuming that if they price as if there will be no CSR payment, the revenue has to be made up through all metal bands to cover the additional cost of the Silver plans. The index rate would increase. Bronze plans would increase in premium because of CSR, Silver plans would increase because of CSR, Gold plans would increase because of CSR and Platinum plans would increase because of CSR.

Wesley, a very sharp analyst of the regulations because his company depends on him being very sharp, notices that Anthem’s filings in Virginia implies that Anthem is not making this assumption. Instead, Anthem seems to be allocating all of the cost of the CSR non-payment only to Silver plans. Bronze, Gold and Platinum plans will be priced on medical trend only.

This is interesting as it opens up the potential for some very odd games. We need two cases.

The first case is if not all carriers use the same assumptions. I am assuming the prices of the carriers in a non-sabotage world would be converging as my baseline counterfactual. We’ll keep the world simple and just assume two carriers in a pricing region. I think the analysis logically expands to more than two carriers.

If one carrier elects to spread the cost of CSR throughout the entire product line and one carrier elects to concentrate the price increase in Silver, the spreader most likely captures the least expensive Silver plan. They are adding 10%-20% of premium to their non-sabotage Silver premiums. The concentrated Silver needs to add enough premium between 15% to 20% actuarial value which with induced demand factors probably means a premium increase of 25% to 30% over their non-sabotaged Silver plans. If each company only offers a single silver plan, there is a large silver gap and there are great deals for buyers of the spread Silver. Most likely the spread Silver company captures most of the CSR Silver market.

Odd things happen in other bands. The concentrated Silver has a massive price advantage on their Bronze plan as they add in no sabotage premium increase. The spread Silver plan has to add in a significant bump to their Bronze plans. And since there is a large Silver spread between the benchmark and the low cost Bronze plans, these plans will be very attractive to non-CSR eligible individuals. The same dynamic will occur at Gold. There is a decent chance the concentrated Silver Gold plan will cost less than their Gold plan and may be near the spread Silver’s premium.

I think in a situation where there is a split actuarial assumption on how to distribute the costs of non-payment of CSR, the company that spreads the cost over all metal bands will get almost all of the 100-150% Federal Poverty Line (FPL) Silver purchases, most of the 150-200% FPL CSR Silver purchases and very little else. The concentrated Silver carrier will get almost all of the people who would have otherwise bought the Silver 200-250% FPL CSR Silver as Gold buyers, and then pick up most of the Bronze, Gold and Platinum buyers.

The next scenario is if all carriers in a rating region adopt the Anthem assumption that their Silver premium contains the entire CSR sabotage price as an actuarial value adjustment. That adjustment will price the Silver plan somewhere between 85% and 90% AV depending on local market conditions. That means the Silver plan will price as if it is a very rich Gold plan or poor Platinum plans.

In 2015, I played around with a single subsidy which is functionally similar to this scenario:

Let’s work through an example. A 35 year old individual making 140% FPL in zip code 90210 qualifies for a CSR Silver at $34 per month and a $200 premium tax credit. The cost sharing subsidy bumps the actuarial value from 70% to 94%. The same individual qualifies for a Platinum plan at $98 per month. The Platinum plan covers 90% AV. The incremental bump in AV from 70% to 90% costs $64, so the incremental bump from 90% to 94% AV is probably another $15. The total cost to the government for this person to buy the CSR Silver is about $280 per month. The total cost is $314 per month.

Inserting total bundled cost of a policy in place of premium into the subsidy formula would re-order the offer a much wider choice set. This same individual could get a CSR Silver at 94% AV for $34 per month, a Platinum at 90% AV for $20 per month, CSR Silver 87% for $14 per month, Gold at 80% AV for almost nothing in monthly premiums. Straight Silver and Bronze plans would almost not be worth wasting time looking at.

Effectively Bronze plans in most counties will be low to no cost for most buyers who earn under 400% FPL. Weak gold plans (76%-80% AV) will be priced for subsidized individuals as if they are Bronze plans today. Platinum plans will have relative prices as if they are Gold plans today.

If every carrier in a region prices on the assumption that Wesley thinks Anthem is making, the average actuarial value of plans purchased on Exchange will increase significantly for everyone but for 100-200% FPL CSR Silver buyers. They will be getting the same (87% or 94%) actuarial value as before with perhaps some of the 150% to 200% FPL buyers choosing to buy down to a Gold to take a larger out of pocket in exchange for a lower monthly post-subsidy premium or buying up to Platinum for a small increase for less out of pocket.