The Biden Administration has explicit policy to increase health insurance affordability. Andrew Sprung and I in a new Health Affairs Blog post outlines how the Administration has two options to maximize short run affordability through administrative action on silver loading. Silver loading is the practice of placing the entire incremental cost of Cost Sharing Reduction (CSR) subsidies that low income ACA buyers receive to reduce out of pocket expenses onto only the premium of silver plans. Higher relative silver plans set the subsidy benchmark higher and makes non-silver plans for subsidized buyers comparatively cheaper.**
But silver loading has stopped halfway. Those who analyzed the likely effects of a cutoff of direct CSR funding anticipated that gold plans would become consistently cheaper than silver. That’s because CSR raises the average, blended value of silver plans above that of gold plans….
In practice, discounts generated by silver loading have been partial and haphazard….
The second factor is the risk adjustment program that CMS administers to deter insurers from trying to attract the healthiest enrollees. The current formula, based on usage in employer-sponsored insurance, favors silver plans, at the expense of gold and bronze plans, by assuming that CSR will stimulate more usage of medical services than has proved to be the case. That’s probably because CSR enrollees have lower incomes than those in employer plans, and even the reduced out-of-pocket costs inhibit care more than anticipated.
Risk adjustment in the ACA is the process by which insurers with populations coded as healthy and inexpensive send money to insurers with populations coded as expensive and chronically ill. The formula is zero sum. An insurer that gains a dollar means another insurer loses a dollar. Usually insurers that mostly insure younger populations or whose portfolios are very heavy on the cheapest plans will pay into the risk adjustment pool and insurers that cover a disproportionally older population or who sells broad network, low gatekeeper plans like PPOs will receive risk adjustment payments from the pool.
The formula also attempts to estimate utilization equalized to benefit structure by adding utilization and cost factors to different metal levels. As benefits get better by lower cost sharing, the Center for Medicare and Medicaid Services (CMS) calculates that the lower deductibles and cost-sharing increases the probability that someone would use more services. This is not controversial. CSR Silver plans that are relevant to silver loading increase the value of a silver plan from 70% actuarial value (where the insurer pays about 70% of all claims for a large, statistical construct known as a standardized population and the other 30% is made up vid deductibles, co-pays and co-insurance) to either 87% or 94$ actuarial value. Deductibles and out of pocket limits drop dramatically.
The problem is that these factors are likely off.
The factors for CSR-87 and CSR-94 plans which only people who earn under 200% of the Federal Poverty Level (FPL) can buy were calibrated by assessing changes in utilization brought about by ~90% AV plans in the employer market. People who get 90% AV plans in the employer market are likely to earn significantly more than 200% FPL. People with higher incomes are more likely to not be deterred by a $200 or $500 deductible than someone making $20,000 (~165% FPL). If we’re right, then the formula overpays silver plans and underpays for gold and bronze plans. More directly, if these factors are off in the direction that we think they are off, silver plans are underpriced while gold and bronze plans are overpriced relative to a universe where the factors are more reflective of actual experience.
Okay, that was the short version of a very long and technical argument that will bring actuaries to the table with a knife and a gleam in their eye.
So what can be done to get pricing right? CMS has two options. One is short term and the other will take more time but I think will produce a better functioning market.
Some states have mandated that insurers price at actuarial value relativity. These states say that if blended silver has an average acturial value across all products of 87% and blended gold actuarial value is 79% (a more than plausible situation), then silver should be priced roughly 10% higher than gold. This produces short term gold discounts below the silver benchmark while producing opportunities for aggressive rule-lawyering insurance companies to find ways to optimize their portfolio of plans offered to only sell silver and not sell not-silver. There are plenty of ways to do that. I don’t think that we want insurers to play games on how not to cover people.
The longer term solution is to fix the risk adjustment formula by calibrating factors against the actual experience of the CSR eligible population. This is not a fast solution. It will involve white papers. It will involve lots of actuaries talking to each other and debating the upsides and downsides of various modeling choices. It will involve long comments to proposed regulations. And if it is done well for the 2023 or 2024 plan year, it will be a realistic solution that does not give cynical rule-lawyering insurers an advantage over insurers that want to cover sick people while also providing for significant discounts for gold and bronze plans relative to the same insurer’s similar silver plans.
** DISCLOSURE A good chunk of my research agenda is, directly or indirectly, driven by silver loading
I know it’s the conventional wisdom, but is it correct?
Or, more specifically, is it correct over the long term?
Yes, if someone has no money and no way to pay they cannot go to the doctor. That is true. And people who have not been to a doctor in a decade who suddenly have a way to pay for one may have a backlog of problems that suddenly need to be addressed. That’s true too.
But for people who are able to pay, does a $25 copay per visit really do what backers claim? Prevent people who are hypochondriacs or are lonely and need someone to talk to from overwhelming waiting rooms? Isn’t it instead yet another way to punch down and discourage people on the margins from using services that their taxes and their circumstances as living in America entitle them to? I don’t know anyone who likes going to the doctor – most put it off whenever they think they can and it’s not primarily a function of deductibles and co-pays. $0 co-pays is not like free SuperBowl tickets.
Has anyone done a, say, 5 year study of total costs and health outcomes for people who have to pay big deductibles and those who don’t?
I think we’re both on the same page about reducing friction and time thinking about this stuff for normal folks. I’d like to see some actual data about the impacts of deductibles and co-pays on health outcomes and total costs over the long term. My gut tells me that they drive up costs and worsen outcomes (look at our population health statistics compared to advanced countries without such things)…
@Another Scott: Let me send you to a great new NBER paper
Problem with your thesis is that the rate setting cycle is 1 year not 5 or 10 years…..
@David Anderson: Thanks for the pointer.
I suspected as much.
Yeah, annual policies make extending analysis beyond one year difficult. :-/ But it’s good that people are looking into these things and not just doing “assume a spherical cow” economics and taking the results of policy changes as being obvious.
Thanks very much.
Isn’t our long term goal to get to universal health care as an entitlement? In which case, isn’t demonstrating expensive friction in the system yet another way to underscore that we need to just pass universal health care without any levels, deductables, ratchets, chickenwire, and spit?
@Minstrel Michael: A smooth, low friction environment is best. But given the 218-51-1-5 constraints we face, administrative action is highly important so figuring out ways to maximize affordability and minimize transaction costs is critical through comment and rule-making.
Dave, regarding the prospect of mandating strict silver loading *without* fixing risk adjustment, some random thoughts:
1) We’ll get a natural experiment in whether this distorts markets, as at least three states have done it.
2) Enrollees over 200% FPL have already in large part abandoned silver in most markets. Even with a risk adjustment skew, will most insurers opt to disincentivize gold/bronze?
3. Given required AV constraints, how bad can you really make bronze/gold?
4. I gather risk adjustment isn’t exactly exact science. If gold becomes cheaper than silver, might that change relative induced demand between the metal levels, as more healthy people choose gold?
5. How many insurers understand the market well enough to sabotage their bronze/gold offerings as a deliberate strategy? And, per all the points above, is that likely to be an effective strategy?