We assume that gravity works. We assume that when we cut a coconut from a tree it will fall to the ground and bonk a monkey on their furry little head. We should be shocked when a coconut rises from the ground and punches a coconut harvester in the face thirty feet in the air. ** When our analysis shows contragravity coconuts we either have something wicked cool or we messed up our analysis.
Affordability in the ACA is like contragravity coconuts.
Virginia has a reinsurance program for their ACA market. Reinsurance adds some non-premium funds to pay for some portion of claims. Since premiums typically are expected to cover both claims and administrative overhead and profit, an outside source of money means premiums will decrease. Sixteen states, including Virginia, have an ACA reinsurance program. The goal is to make ACA plans more affordable because the premiums go down.
However (and this is a chunk of a paper I have under review with two great co-authors) the ACA is WEIRD. The key thing for most ACA buyers is not the premium level which is what the reinsurance program targets to drop, but the difference in premium between the plan that an enrollee chooses and the benchmark plan which is the 2nd cheapest silver plan. Most ACA buyers have always been spread sensitive rather than price level sensitive.
The analysis projects individual coverage would rise by 28.5% in 2024, after the reinsurance program the state financed — in tandem with a much larger federal sum — cut this year’s premium rates an average of 17.2% from 2022’s average premium rates.
Wow this sounds bad!
IT IS CONTRAGRAVITY COCONUT TIME!
Higher price levels are great for most on Marketplace ACA enrollees.
WHAT! Higher prices are good?
Yeah, now let’s get weird.
Let’s start with the assumption that most ACA buyers are buying either the cheapest or second cheapest plan in each metal level. Structurally that means at least three plans (2 Bronze and 1 Silver) are priced below the benchmark plan level. There is a chance (depending on the state/county) that one or both Gold plans are also priced below the benchmark level. Sometimes the difference between the benchmark and the selected plan is small. Sometimes it is big. The ACA subsidy system works as a gap filler between what an enrollee is expected to pay at a given household income level and the price of the benchmark plan. Enrollees who select plans priced below the benchmark save dollar for dollar of the savings until they hit a zero dollar plan.
So what happens when there is a large rate shock? Let’s do a simple mechanical exploration.
Scenario A: With Reinsurance in 2024
Benchmark Silver: $600
Cheapest Bronze: $450
Premium Spread: $150
$0 premium available to a single 40 year old buyer to just over 270% Federal Poverty Level
Scenario B: No reinsurance and uniform 28% rate increase
Benchmark Silver: $768
Cheapest Bronze: $576
$0 Premium available to the same buyer up about 295% Federal Poverty Level.
Reinsurance reduces premiums which is really important for folks who are either unsubsidized or buying plans priced above the benchmark. Reinsurance makes the folks who are buying below benchmark plans never any better off and often times substantially worse off.
These dynamics are messy and complex. They have always been like that but they have gotten even messier since the passage of the American Rescue Plan’s enhanced subsidies which both increased the subsidy value of the previously eligible and greatly expanded income eligibility for upper middle class households.
** This analogy came from the former front pager Tim F. as he was explaining his coolest research project to me the summer before I started to write at Balloon Juice.