Reinsurance revisited: The upside of smaller premium spreads in the ACA marketplace
As the ACA marketplace suffered steep premium increases and Republican political assault in 2017, one of the hardest-learned lessons for policymakers was that action to reduce baseline premiums (full retail cost before subsidy) could hurt more enrollees than it helped and reduce total enrollment.
That is, reducing retail premiums also reduces premium subsidies, and in particular, reduces price spreads between the benchmark (second cheapest) silver plan, which determines the size of subsidies, and plans cheaper than the benchmark, making those plans more expensive net of subsidy.
As a simplified example, imagine a market in which the retail premium for the benchmark silver plan is $400 per month, and an enrollee for whom the premium subsidy is $300 per month, leaving her to pay $100 per month (5% of a $24,000 annual income). A bronze alternative is $350 per month, leaving a net-of-subsidy premium of $50/month. Now suppose a 20% across-the-board premium cut, triggered by the kind of reinsurance program that 14 states established with partial federal funding between 2017 and 2020. The benchmark unsubsidized premium is now $320/month, and the subsidy drops to $220, as the enrollee pays a fixed 5% of income for the benchmark. The unsubsidized bronze plan premium is now $280 per month, and with the reduced subsidy, the enrollee pays $60 per month for it instead of the original $50.
The negative effect of retail premium decreases on affordability for subsidized enrollees was exacerbated by a pricing practice that came to be known as “silver loading,” which began in the 2018 plan year after President Trump in October 2017 abruptly cut off direct reimbursement of insurers for the secondary Cost Sharing Reduction (CSR) subsidies that attach to silver plan for enrollees with incomes up to 250% of the Federal Poverty Level. CSR increases the actuarial value of a silver plan to a roughly platinum-plan level for enrollees with income up to 200% FPL, and to a much weaker extent to enrollees in the 200-250% FPL income range. Because the ACA statute stipulated that insurers be reimbursed directly for this benefit, the value of CSR was not priced into silver plans until Trump cut off the reimbursement (on grounds that the Republican Congress had never appropriated the funds for CSR). Trump’s action, which was in accord with a stayed court order, was anticipated, and regulators in almost all states reacted by allowing or encouraging insurers to price CSR directly into silver plans only, since CSR attaches only to silver plans. This “silver loading” increased subsidies and generated net-of-subsidy premium reductions in bronze and gold plans — in particular, rendering bronze plans free for a large number of enrollees.
State reinsurance programs, or other factors reducing unsubsidized premiums in a given market, can reduce the silver loading effect, and so reduce affordability for subsidized enrollees. More substantially, as the ACA repeal threat receded and the subsidized market proved stable, insurers newly entered many markets with cut-rate plans that reduced benchmark premiums and so subsidies.
Reinsurance: What’s it for?
Before the American Rescue Plan Act (ARPA) removed the income cap on subsidy eligibility in March 2021, reinsurance could be justified as relief for unsubsidized enrollees in ACA-compliant plans — sharply needed after steep premium increases in 2017 and 2018. Unsubsidized enrollment in ACA-compliant plans (on- and off-exchange), which stood at about 43% of enrollment in ACA-compliant plans in 2016, was decimated by the premium increases of 2017-18, dropping to 27% of enrollment by the first quarter of 2019, according to a KFF estimate (from 6.7 million in Q1 2016 to 3.4 million in Q1 2019). In New Jersey, a reinsurance program enacted in 2018 did appear to stop the bleeding in unsubsidized enrollment, while modestly increasing premiums for subsidized enrollees; the program appeared to have been more or less a wash with respect to total enrollment.
The ARPA subsidy boosts took much of the urgency out of protecting retail premiums for the unsubsidized; the chief beneficiary of low premiums now is the federal government (and so, taxpayers). ARPA reduced on-exchange unsubsidized enrollment to about 10% of total enrollment in 2022, as no one who is otherwise eligible for marketplace subsidies (i.e., lacking access to other affordable insurance) pays more than 8.5% of income for a benchmark silver plan. Because the ARPA subsidies have been extended only through 2025, however, reinsurance programs may still make sense as a protection for enrollees with income above 400% FPL should the income cap on subsidies return in 2026. But states have little current incentive to control marketplace premiums, as the federal government pays the full subsidy.
Reduced spreads may help some enrollees
There is, however, a potential downside to large premium spreads (and so to higher benchmark premiums) — and the downside may be becoming more salient as the marketplace continues to evolve. While higher benchmark premiums and the resulting increase in premium spreads tend to benefit enrollees in plans that cost less than the benchmark, they potentially hurt enrollees who want a plan that costs more than the benchmark. Because across-the-board premium cuts reduce spreads, they tend to reduce the additional premium paid by enrollees who select a plan that costs more than the benchmark. As competition among insurers increases the prevalence of narrow-network plans in the marketplace, more enrollees may be willing to pay for more expensive plans.
To return to our example of a a benchmark plan with a $400/month premium and an enrollee with a $300/month subsidy: suppose that a silver plan with a superior provider is available for $450/month. Our enrollee would pay $150 per month net of subsidy. If premiums are cut 20% across the board, again, the subsidy drops from $300 to $220, while the premium for the plan with a more robust network drops to $360/month, leaving the enrollee with a premium of $140/month.
That’s not a huge difference, but incremental differences do affect behavior. In a 2020 article, Paul Schafer, David Anderson et al. calculated (as a control in a study of the effect of advertising on enrollment) that every dollar increase in the benchmark premium was associated with approximately one additional plan selection per 100,000 population younger than 65.
For a sense of how such choices play out in the real world, zoom in on the current choices for a single 40 year-old with an income of $19,000 in Charleston County, South Carolina, zip code 29485. At that income, the benchmark (second cheapest) silver plan is free and has a $100 deductible and $900 out-of-pocket maximum — quite a deal on paper. But the insurer is Ambetter (Centene), a narrow-network HMO with (I’m told) difficult customer service in that market. In fact, Ambetter offers an enrollee at this age/income level three zero-premium bronze plans in the region, and three more for under $6/month. Competitor BCBS South Carolina offers BlueExclusive plans, with a relatively robust regional network, and BlueEssentials plans, which cover every hospital in the state. For our 40 year-old with an income of $19,000, the cheapest silver BlueExclusive plan will cost $45/month, and the cheapest silver BlueEssentials plan, $95/month. But several BlueEssentials bronze plans are available for free — including one with a $0 medical deductible (albeit with a $3,000 drug deductible and a $1900/day facility fee for the first two days for in-hospital care). The bronze BlueEssentials plans have out-of-pocket maximums ranging from $8,550 to $9,100, however, while the Blue silver plans cited above have OOP maxes below $1000.
These bronze plans with a robust statewide network may lure a lot of enrollees eligible for free silver plans with much lower out-of-pocket exposure. And not just in South Carolina. As I noted in a prior post, bronze plan selection at low incomes rose steadily in the pre-ARPA silver loading era, when free bronze plans became widely available, and ARPA did not arrest the trend. In HealthCare.gov states, 9% of enrollees with income in the 100-150% FPL range selected bronze plans in 2017, and 89% selected silver, which in this income range has the highest level of CSR. In 2023, 16% of enrollees in this income bracket selected bronze plans, and just 80% selected silver.
To return to our South Carolina example: A 20% across-the-board premium cut effected by a strong reinsurance program might make the Blue silver plan premium more palatable to some enrollees. A 20% cut would drop the premium for our 40 year-old at $19k income from $45 to $37/month for the cheapest silver BlueExclusive plan, and from $95 to $76/month for the cheapest silver BlueEssentials plan.
These effects may seem modest. But small premium differences can have a substantial effect at low incomes. If the reinsurance-induced spread compression and resulting increase in net-of-subsidy premiums in plans priced below the benchmark is significant, so is the resulting decrease in net-of-subsidy premiums for plans priced above the benchmark. In a marketplace dominated by narrow network HMOs, a modest premium reduction for the one or two insurers offering more robust provider networks than the competition might be welcomed by less-healthy enrollees.
Photo by Budgeron Bach.