NBER** has a really interesting (to me) paper on the economic and policy ramifications of linking subsidies to a non-fixed price versus a subsidy that is independent of price. This is very important to my thinking because my Silver Gap and Silver Spam ideas are effectively hacks that exploit the problems that this paper identifies with price linked subsidies. Let’s look at the paper and then go through a phalanx of indecipherable text:
price-linked subsidies as involving a basic tradeoff. On the one hand, they create a competitive distortion, increasing consumers’ or government’s cost by leading to higher prices compared to “fixed subsidies” set independently of prices. On the other hand, price-linked subsidies create an indirect link between subsidies and cost shocks, which can be desirable in the face of uncertainty about health care costs…
If a higher price yields a higher subsidy for the firm relative to other options in the market, the firm has an incentive to raise its price. Even in markets where subsidies are constant across plans, as in the ACA, the subsidy usually does not apply to the “outside option” of not purchasing insurance. A higher subsidy decreases the cost of buying a market plan relative to not buying insurance. (My Emphasis) Each firm gains some of the consumers brought into the market by the higher subsidy, so each firm has an incentive to raise the price of any plan that may affect the subsidy.
The second paragraph is the key insight behind the Silver Gap strategy where a carrier in a region that owns the least expensive Silver should attempt to maximize the spread between in order to make the subsidized buy/no buy decision more favorable and less expensive compared to running naked. We have seen examples where aggressive Silver Gapping leads to families of three being able to pay $0 per month in premiums for a Silver plan up to $38,500 in income and $0 in premiums for a Bronze plan while earning over 300% FPL per year. Signing up is painless for quite a few people in aggressively gapped counties even before we account for the mandate penalty.
And now the big meaty policy questions below the fold — what does this do to enrollment?