Flavors of public ACA reinsurance

Delaware just had their ACA Section 1332 reinsurance waiver approved by the Center for Medicare and Medicaid Services (CMS).

This plan is one of two flavors of public re-insurance for the ACA market. This flavor is the external money flavor. In it, an external source of state based money is added to the pool of money collected by premiums.  This new pot of money is then used to pay claims and since, on a static analysis, the claim expense does not change, the average premium can decrease because it is displaced by some external funding.  The theory of change can range from a political need to do something and this is something for high, non-subsidized premiums to a more technocratic justification that the ACA individual market is acting as a quasi-de facto high cost risk pool and it should be compensated as such by other entities.

Within a state that has externally funded reinsurance, insurers now have less variability in their claims costs as their exposure to expensive to really expensive claims have gone down.  Insurers are still, usually, on the hook for ungodly expensive claims under these schemes.

There is another flavor of reinsurance.  CMS runs a small catastrophic reinsurance scheme that is funded directly by premiums through the risk adjustment program.

The high-cost risk pool reimburses issuers for 60 percent of an enrollee’s aggregated paid claims costs exceeding $1 million. To fund these payments, the high-cost risk pool collects a charge from issuers of risk adjustment covered plans that is a small percent of an issuer’s total premiums.  A total of 217 issuers nationwide received a high-cost risk pool payment. The high-cost risk pool charge was 0.20 percent of premium for the individual market (including catastrophic and non-catastrophic, and merged market plans), and 0.32 percent of premium for the small group market, nationally.

This self-funded public re-insurance shifts premium revenue from insurers that aren’t getting hit with incredibly cost individuals to insurers with very high cost covered individuals. It is a thin veneer of nationalizing the risk pool instead of having fifty one, independent risk pools. State based risk pools vary in their ability to eat recurring catastrophic risk; California, Texas, Florida are all big enough and deep enough that a single recurring, predictable ten million dollar claim would not distort the market, while risk pools in the Dakotas or Delaware are too shallow to handle that type of claim without quickly descending to a stable monopolist setting.

Premium funded reinsurance does not lower net, consumer facing premiums. It will change those premiums slightly higher for the insurers that don’t receive money from the fund and noticably lower for the insurers that are covering individuals with multi-million dollar claims. This type of reinsurance has a different objective; it is to make the markets more stable and less variable by spreading some of the costs of huge claims across a multi-million member risk pool instead of a risk pool of tens of thousands. If an insurer knows that there is an individual with a multi-million dollar claim year living in the service area, this reduces the distortion to an entire state’s market:

Rates have to be high enough to cover this individual’s costs. In a competitive market where the subsidies are tied to the second least expensive Silver and there is one super-outlier who can not be re-insured against, every carrier lives in fear of being chosen by the one outlier. If they set their rates low enough to be attractive to healthy people, they lose money on the catastrophic expected claims. If they set the rates high enough to cover a $12,000,000 claim, no one buys their product….
There are two other possible solutions. The first is a cynical solution. All of the insurers in Iowa could agree to kick in $300,000 a piece and buy this single individual a very nice house ten feet over the state line and make this person someone else’s problem.

The other solution is that this is the textbook case of where a high cost risk pool or invisible reinsurance or a prospective re-assignment system would make sense.

These two types of public reinsurance perform different functions. The external funded reinsurance lowers in-state premiums by injecting non-premium revenue into the claims payment pool. The premium funded reinsurance spreads catastrophic risk across the nation and makes the markets more functional.

Partisanship, policy and adverse selection

Samual Trachtman’s fascinating paper** on the feedback loop between political polarization and ACA premiums just got released by the Journal of Health Politics, Policy and Law (JHPPL).

The headline finding is fascinating on multiple levels:

Insurers have increased marketplace premiums at higher rates in areas with more Republican voters. In the preferred model specification, a 10-percentage-point difference in Republican vote share is associated with a 3.2-percentage-point increase in average premium growth for a standard plan.

The mechanism is fairly simple. At any given level of health, Republicans are less likely to sign up for insurance:

Recent scholarship indicates that the uptake decisions that individuals make with respect to the ACA are driven in part by their political partisanship. Using individual-level survey data from Kaiser Health Tracking polls, Lerman, Sadin, and Trachtman (2017) estimate that, ceteris paribus, Republicans are 6 percentage points more likely to forgo coverage than Democrats, 12 percentage points less likely to use the ACA marketplaces, and 7 percentage points more likely than Democrats to purchase plans off marketplace

In heavily Republican leaning areas, this means the average enrollee has higher expected costs than the average enrollee in a heavily Democratic leaning area. Higher expected costs, all else being equal, leads to higher premiums. The partisan take-up effect is fascinating. Paul Shafer and I ## had found conflicting partisanship signals when we looked at changes in enrollment in the 2017 open enrollment period before and after Trump’s inauguration.

This has interesting dynamics on the subsidized versus unsubsidized experience split (this is the manuscript I need to revise and resubmit by the end of the week). All else being equal, a more morbid/expensive risk pool is good for affordability for subsidized individuals who can buy a plan that is priced below the benchmark. All else being equal, a more morbid/expensive risk pool is horrendous for non-subsidized individuals as they pay the entire premium. The partisan feedback loop creates a differential experience wedge conditional on subsidy eligiblity.

** Samuel Trachtman; Polarization, Participation, and Premiums: How Political Behavior Helps Explain Where the ACA Works, and Where It Doesn’t. J Health Polit Policy Law 7785787. doi: https://doi.org/10.1215/03616878-7785787

## David Anderson, Paul Shafer; The Trump Effect: Postinauguration Changes in Marketplace Enrollment. J Health Polit Policy Law 7611623. doi: https://doi.org/10.1215/03616878-7611623

Silver gapping and silver loading goes to the academy

Health Services Research has selected an article by Coleman Drake and Jean Abraham that I then commented on for a visual abstract.

This all should be familiar to Balloon-Juice readers:

This is mathed up Balloon-Juice and my obsession on silver spread games that insurers can play to choose their own markets. The more competitive a market is when there are at least two insurers of the same type/price point, the more expensive the market is for subsidized enrollees in reasonably good health and the less expensive it is for non-subsidized enrollees. Monopolistic insurers have a great deal of option space to choose their own risk pools. Smart ones will maximize both revenue and enrollment by creating large spreads so that the the healthiest parts of a cohort are exposed to dirt cheap plans. Dumb ones will make insurance expensive for the healthiest groups.

Social and health spending

The big problem in US healthcare spending is that we don’t spend enough on social services and as social services can act as an upstream substitute of expensive medical services. This is a core assumption of the social determinants of health argument.

A new article in Health Affairs by Irene Papanicolas and others explodes this argument.

We found that US social spending (at 16.1 percent of gross domestic product [GDP] in 2015) is slightly below the average for Organization for Economic Cooperation and Development (OECD) countries (17.0 percent of GDP) and above that average when education spending is included (US: 19.7 percent of GDP; OECD: 17.7 percent of GDP). We found that countries that spent more on social services tended to spend more on health care. Adjusting for poverty and unemployment rates and the proportion of people older than age sixty-five did not meaningfully change these associations. In addition, when we examined changes over time, we found additional evidence for a positive relationship between social and health spending: Countries with the greatest increases in social spending also had larger increases in health care spending.

The US social spending exclusive of health care is not too unusual. US healthcare spending is the outlier. I’m dropping Exhibit 3 into the post here which plots healthcare expenditure as a function of GDP on the vertical axis and social spending exclusive of healthcare on the horizontal axis.

If we exclude the US from the analysis, social spending and healthcare spending seem to be complements instead of substitutes.

There is value in taking care of social determinants of health as things in and of themselves. If we can find ways to minimize asthma exacerbation or congestive heart failure crisis by improving local air quality or if we can find ways improve health by improving housing situations for people living without stable housing, those are good things in and of themselves. They may be cost effective solutions but they may or may not be cost saving solutions.

I want to see another confirming study, but this is moving my priors.

The unsubsidized have fled

The ACA market is really two markets in a state: the subsidized market which has seen great deals due to Silver Loading and the non-subsidized market which saw several years of junk kicking rate increases.

The unsubsidized market has shrunk dramatically as premiums skyrocketed. States have tried to send some extra money towards the over 400% Federal Poverty Level (FPL) cohorts through either direct subsidies or through reinsurance which effectively blends in some money that is not derived from premiums with federal money that otherwise would have gone to individuals earning between 100% to 400% FPL. The last option states have is to built out alternative markets that are based on underwriting and exclusions to cover insurable risk instead of health management costs. This last choice is good for the healthy and makes the unhealthy but earning over 400% FPL worse off.

Sick and >400FPL is SOL. However combining a cap on premiums as a function of income and an underwritten market could work as I argued in March 2018:

Removing the cap on ACA subsidies so every family can access the ACA Silver plan for no more than 10 percent of its family income would provide immediate relief for Senator Cassidy’s constituents and others in similar situations. At the same time, the proliferation of underwritten plans will offer less expensive options for families without health challenges.

Patients and families will be able to choose the plans that will work for them. The ACA market will mostly cover the working poor who receive high subsidies and low deductibles, as well as the very sick who need to have comprehensive benefits and broad provider networks.

The underwritten market… will consist of healthier individuals whose premiums no longer subsidize the care of the chronically ill in the individual market.

Those costs do not disappear, as the size of the federal commitment to premium subsidies for the ACA plans will increase significantly. However, everyone will have access to health insurance with a premium ceiling and lower risk consumers will be better off.

Cliff policies are bad not because of the fall but because of the landing. The 400% FPL cliff has made many families go splat.