Wendell Potter argues that just the threat of a ruling against the government in King will lead to a death spiral of premium increases on the Exchange for the 2016 benefit year. He is wrong for two reasons.
What you probably have not heard is that regardless of how the Court eventually rules in King v. Burwell, your premiums will likely go up next yearsimply because the justices agreed to take the case in the first place…
the nine justices are expected to vote within days of Wednesday’s hearing, the Court’s is not expected to announce its decision until June. That’s just how the high Court does things.
The problem for insurance companies is that by June, many if not most of them will already have told state and federal regulators how much they plan to charge customers for policies they will sell on the exchanges in 2016.
The first reason why he is wrong is that the June numbers are preliminary numbers. Those numbers are not set in stone. The second reason is if the subsidies are upheld, any uncertainty costs that appear on the 2016 Exchange gets eaten by the subsidy. For the subset of people who are buying on Exchange without financial assistance and all people buying off Exchange, they could pay slightly higher rates but on-Exchange subsidized buyers are protected by the subsidy structure.
Mayhew Insurance submitted late spring/early summer rates in 2014 for 2015. We then engaged in a three month back and forth with all relevant regulatory stake holders plus network construction to get our final, final, really truly final rates that went up on the Exchange for the 2015 open enrollment. The rates that we sold at this fall were significantly different than the preliminary rates.
Insurance companies in Healthcare.gov states will file oh-shit the Supremes went boinkers rates. They’ll set them as high as possible because it is always easier for the insurer to ask for a rate cut then a rate increase during the back and forth for final rates. These rates will be based on a demographic risk pool that is extremely ill or likely to be ill. Most actuarial firms can chew gum and punch their calculator at the same time, so there will also be a supplemental rate request for a pro-government King decision sitting on the shared drive ready to be filed thirty minutes after Legal finishes reading the decision. The King decision is a material difference that justifies a rapid refiling no matter how it is decided.
So even assuming that King is favorably decided for the government, Mr. Potter is worried that consumers will pay more. People who are off-Exchange aren’t protected by the subsidy structure. People who are on the Exchange but don’t qualify for subsidies could pay more. However, most people who are buying on Exchange are getting subsidies. The subsidies are set up to put the Feds on the line for excessive cost growth.
A person’s subsidy is determined by a function of the difference between the premium cost of the second cheapest Silver in the region minus a percentage of that person’s family unit income as determined by federal poverty level (FPL). The gap is the subsidy amount. Someone at 101% FPL will pay 2% of their income. Someone at 250% FPL will pay about 6% of income. King does not change people’s cash income, it does not change the subsidy formula. Once a person contributes their expected amount, the Feds pick up the rest.
So if the second Silver was, in an alternate non-goatee universe, priced at $221 for Ms. Doe, and she was subsidy eligible for $98 a month, in our universe with a favorable King ruling, that policy in Mr. Potter’s concern might be priced at $243 as a King uncertainty compensater. However Ms. Doe’s expected premium payment is flat, but her subsidy is now $120 per month.
From the point of view of an individual, a favorable ruling for King that keeps subsidies in all states can not create a death spiral.