Spend more, cover less mechanics

The Trump Administration’s recent policy actions will likely lead to millions more people uninsured and higher federal expenditures according to the Urban Institute.  

How does that happen?

It is a matter of the advanced premium tax credit (APTC) subsidy design.

Let’s work our way through a toy model.  We will assume a single insurer in the state so there is no risk adjustment problems.  We will assume perfect foresight on expenses.  We will assume that only a single Benchmark Silver plan is offered.  Premiums are equal to 125% of claims to cover an 80% MLR for admin and profit.  We will assume that everyone in the pool is single and makes $30,000 per year which means their expected monthly personal premium is $200 and the APTC picks up the difference between $200 and the actual premium.

Yes, none of these assumptions are particularly strong but this is a simplified toy model.

We’ll start simple and then build to complex. 

The first case is a single person in the pool with $50 a month in claims.  Premiums are $60.  They pay the entire premium and the Feds pay nothing in APTC.

We will now go to the other extreme.  Another pool only has a single person in it.  The expected monthly claims expense is $100,000.  Premiums are $125,000.  The person pays $200 and the ATPC pays $124,800.

So what happens if we put the two prior examples into the same pool?

There are now two people in the pool.  The total expected claims expense is $100,050 and the total premium $125,060.  The per-capita premium is now $62,530.  Each person pays $200 for a total of $400 in personal contribution while APTC picks up $124,660 in premiums.

Let’s add a third person.  Their expected medical expense is $160 for a total underwritten premium of $200 (coincidentally exactly equal to the personal contribution limit).  Total claims are now $125,260, per capital premiums are $41,753.  Each person kicks in $200 and APTC is now $124, 660.  If the third person has premium expenses underneath the personal payment limit, they bring down the total APTC spend while if their premium expenses are above the personal payment limit, total APTC expenses increase.

Urban is projecting that a lot of people who are likely to have very low expenses in upcoming years will leave the ACA risk pool and either get underwritten plans or go uncovered.  People who have serious, persistent, high cost medical needs will stay in the pool as the underwriters won’t touch them so there will be far less individual cross-subsidization of the expensive by the cheap.  The new gap will be automatically taken up by the federal government.