One of the major proposals in the draft Center for Medicare and Medicaid Services (CMS) rule that was released on the 15th is to increase the de minimas allowed actuarial value band. Currently the regulation allows a plan to be included in a metal band if it is within two Actuarial Value (AV) points of the target band for normal bands, and within a point in either direction for the targeted Cost Sharing Reduction Silver plans. So that means a standard Silver plan which should be a 70% AV could be anywhere from 68% AV to 72% AV. The proposed modification would allow for a plan to qualify for a band if it was no more than four points below or two points above the target. A Silver plan would be anywhere from 66% AV to 72% AV.
All else being equal, a lower AV means a slightly lower premium. It also means higher out of pocket spending for patients. But all else is seldom equal so things can get messy.
This has significant distributional consequences. And these consequences are not entirely straightforward as the individual market is a complex market. Let’s start looking at the easiest scenarios and then build in complexity. We will need to divide the analytical units into four groups. The vertical split of a 2×2 grid are people who either have met their out of pocket limit or have not incurred sufficient claims to meet their out of pocket limit. The horizontal split is between people who receive premium tax credits that are keyed to the price of the second Silver and people who are not receiving premium tax credits and thus pay the full premium out of pocket.
We will only look at individual beneficiary consequences.
The simplest scenario to analyze is a market that has converged with multiple carriers. Indianopolis, Indiana is a good example. There are two carriers that currently offer Silver plans with 68% AV with similarly narrow networks and very similar pricing. The strategic logic of that situation will have both carriers offer Silver plans that would be near 66% AV as soon as they could.
That produces a nice simple outcome matrix:
Individuals who are receiving subsidies and have significant claims that matched their out of pocket maximum under a 68% AV Silver are indisputably worse off. They will face higher cost sharing. If all cost sharing is from deductibles (an oversimplification), they will go from having a $4,400 deductible to a $4,850 deductible. They do not benefit from lower premiums as the federal government is the risk bearer and reward recipient of lower premiums as the subsidy formula is based on the federal government filling in the gap between the calculated individual contribution as determined by income and the cost of the second least expensive Silver.
Individuals who have not met their out of pocket maximum and are subsidized for a 68% Silver will still not meet their out of pocket maximum and their post-subsidy premium will not change. They are indifferent.
Individuals who are not subsidized and who meet their out of pocket maximum are almost always worse off. They have a small gain in lower premiums (2% drop in AV leads to a 2.4% premium drop on first estimate) but higher cost sharing. There is a small sliver of individuals whose costs above current cost sharing is less than the premium drop. But this is a sliver of people whose total costs are within $100 of the current out of pocket maximum.
The big winners of this change from a beneficiary point of view are individuals who are not subsidized and who are under the out of pocket maximum. They have no incremental cost sharing and they have lower premiums. If the non-subsidized market is extremely price sensitive this will bring in more healthy individuals as prices will fall slightly.
This is the simplest scenario. This intuition should serve people well, but things will get complicated.