Insurers are preparing the 2020 plans for the ACA exchanges. They are looking at their networks, tweaking their benefit designs and trying to figure out their pricing strategy. This is a tough problem because the ACA has price linked subsidies that invite a lot of game playing. A good chunk of my work at Balloon-Juice and elsewhere over the past four years has been about the pricing games that can be played.
I need to speculate about the challenge of optimal pricing for on-Exchange subsidy eligible folks. This is about half of the individual market. They have special conditions that create, in my opinion, very different pricing strategies that I’ll think about some other time.
I am making the following assumptions:
- Insurers are profit maximizing
- Demand curve slopes downward
- slope is indeterminate (may be constant, may be step wise, may be funky looking)
- Maximum willingness to pay by an individual is positively correlated with expected health expenses in the upcoming year
- Cancer patient more willing to pay than a 23 year old triathlete in perfect health
- No negative pricing is allowed (minimum allowed premium paid by an individual is zero)
- Any policy offered on Exchange will, on aggregate, be actuarial sound and profitable in normal circumstances.
- This gets rid of invest and harvest incentives.
This is a tough problem.
The ACA subsidy regime is a price linked scheme where the benchmark silver plan has the same premium paid by an individual buyer at the same family size and income measured by federal poverty level (FPL). The subsidy size is the gap between the individual premium paid and the benchmark premium. If an individual buys a plan more expensive than the benchmark, they pay the benchmark personal premium plus the entire incremental cost of the more expensive premium. If an individual buys a plan cheaper than the benchmark, they save dollar for dollar the incremental difference with a lower bound of no negative personal premiums are allowed.
Working from my assumptions, insurers would love to offer plans to healthy folks that minimizes the personal contribution while maximizing the federal premium tax credit revenue. Federal premium tax credits have the advantage of being paid in a timely manner and in bulk so administrative costs are low and there is no worry about non-payment.
It is not hard for an insurer to create a policy array that can provide a no personal cost plan to any given individual. The challenge is minimizing the wasted premium tax credit. Right now, most ACA plans allow a 64 year old to be charged three times as much as a 21 year old. For subsidized folks, this means the gap between the benchmark and any other plan increases at a much faster rate for older buyers than it does for a younger buyers. Younger buyers are less likely to see cheap plans net of subsidy at any given income level.
Insurers can design plan arrays that may offer low or no cost plans to 64 year olds. That leaves the healthier group of 22 year olds still paying cash every month. Some of those 22 year olds will opt out of enrollment.
Insurers can offer plans that have no premiums for a 22 year old. But that “wastes” a lot of premium tax credits for older folks as any plan that is precisely zero premium for a single 22 year old is priced too high for any multi-member families of the same income level or older people.
This is a tough problem that has me scratching my head right now.