Preparing for 2021

New Mexico is preparing for an ambitious future for health policy. Louise Norris notes that New Mexico is looking to move off of and open up their own state based exchange.

In order to reduce user fees, the exchange board considered the issue during a September 2018 board meeting, and voted unanimously to transition to a fully state-run exchange in time for the 2021 plan year.

The exchange will put out a request for proposals in early 2019, as they work to find a vendor to create their state-run enrollment platform. The system will be live by the fall of 2020, in time for the open enrollment period for 2021 coverage (November-December 2020).

There are two good reasons to go down this path. The first is the obvious one: it’s cheaper than using charges 3.5% of premium as an Exchange fee for states that don’t do anything on their own, and a 3.0% of premium Exchange fee for states that manage significant elements of the enrollment process. New Mexico is one of the “partnership” states that uses the front-end but manages a lot of their own back-end. 3.0% of premium is not a good deal. The same fee level would either be used to fund significantly more outreach, advertising and navigators or the same level of outreach and support that provides could be funded at a much lower fee which would slightly reduce baseline premiums.

Secondly, New Mexico is getting ambitious. They are the leading innovators in doing the actual hard work of figuring out how a Medicaid buy-in proposal. This would be effectively a state based public option. This would be a major rejiggering of the New Mexico individual market.

The Center for Medicare and Medicaid Services (CMS) has repeatedly stated under both the Obama and the Trump administrations that they can’t do much with the back-end of to support unusual or aggressive waiver requests. If New Mexico moves towards a Medicaid buy-in model, their open enrollment, subsidy structure and eligibility structures would be unique. The only way that can work within an Exchange framework is if New Mexico can customize the exchange that their citizens and residents see.

So, this is both an effort to reduce premiums through either attracting a healthier risk pool or lower costs of attracting the current risk pool AND a necessary step in building the infrastructure to support a Medicaid buy-in program.

Basic Health Program and Market Concentration notes

I’ve been busy this week at Health Affairs. The big piece at the HA Blog is an overview of the new Basic Health Program rule that the Center for Medicare and Medicaid Services (CMS) issued in August. Dr. Lynn Blewett and I went over how the BHP funding stream is predicated on the counterfactual of a fully offered Qualified Health Plan (QHP) market and not the actual premiums in that market. That would have been an esoteric point from 2014-2017 but it is critical in 2018 and beyond as Cost Sharing Reduction (CSR) subsidies are not being paid:

In December 2017, CMS notified Minnesota and New York that it would no longer fund the cost-sharing reduction component of the BHP payment formula, citing the lack of congressional appropriations for cost-sharing reductions. CMS stopped payments for the first quarter of 2018. The states initially asked CMS to revise its calculation to reflect a higher “premium tax credit” portion of the BHP payment due to the effects of silver-loading….

The new payment methodology provides an 18.8 percent adjustment to the BHP payment for both Minnesota and New York. CMS cites Section 1331 to add a new plan adjustment factor based on the experience of other states with a special focus on enrollees with incomes below 200 percent of poverty. Section 1331 requires CMS to “take into consideration the experience of other states with respect to participation in an exchange and such [premium tax credits] and [cost-sharing reductions] provided to residents of the other states.” CMS uses this provision as its rationale for examining the effects of silver-loading in other states and imputing those to BHP payments in Minnesota and New York…

I also have a letter to the editor in the most recent issue of Health Affairs that comments on Dr. Jessica Van Parys recent article on monopoly pricing. I am concerned about using the time series of 2014-2018 as an analytical approach as 2018 was just too goddamn weird from a pricing and competitive region perspective. Insurers did not know what the rules were so they either ran like hell (and are re-entering in 2019 now that the new rule set is known) or raised rates very aggressively.

Generic Harvoni, Hep-C and risk adjustment

A few weeks ago, Gilead Pharmaceuticals announced that they were creating an authorized generic version of Harvoni with a list price of $24,000.

In the case of Harvoni and Epclusa, which carry list prices of $94,500 and $75,000, respectively, the $24,000 price tag for a course of treatment with the generics is roughly equal to the net price paid by many insurers…

There are a lot of interesting nuggets to pull out of this. The most obvious is that list price and actual price are at best tenuously connected. The second point is that the average cost of treatment for a Hep-C cure is someplace under $30,000 once all of the behind the scene deal making is accounted for. Thirdly, this is a case where me-too/look-alike drugs actually have created a very viable, competitive market.

What I am most interested in is the risk adjustment games that can be played with a new, much lower list price (even if the effective net price is close to the same as before).

Risk adjustment for the ACA, Medicare and Medicaid use claims from the past to predict incremental cost increments for different disease and therapeutic drug classes. Pharmacy claims are based on the list price and not the net price. Risk adjustment co-efficiencts lag reality. This works well when the treatment modality is reasonably constant and pricing does not have a huge shock.

Oops… that is precisely what will happen with Hep-C. Right now, Hep-C antivirals risk adjust on the ACA individual markets at about a co-efficient of 39. Someone picking up a Sovaldi, Harvoni or any other Hep-C antiviral cure gets a risk score that predicts their annual costs will be about 39 times average statewide premium.

That co-efficienct is based on the last three years of available data and it is a blend of commercial and Exchange information. The list price of the Hep-C drugs for this period was over $80,000 per dose.

Insurers have been fairly aggressive in shifting their formularies to lower net cost to them Hep-C anti-virals. I would expect that insurers will aggressively push for the authorized generics for a risk adjustment edge. If the list price collapses to $24,000 there is a huge arbitrage wedge that insurers can exploit for at least 2019 if not also in 2020. They can get credit for $84,000 or $95,000 treatments while only paying out $24,000.

This advantages insurers that can both aggressively identify and treat folks with Hep-C. It also advantages insurers that have very good pharmacy benefit management that can get a really good net price on Hep-C anti-virals as it creates a bigger wedge to exploit.

On net, this type of wedge will incrementally encourage more Hep-C treatments to be approved and taken for folks who are in the ACA individual market for 2019 and perhaps in 2020 until the risk adjustment co-efficiencts catch up to the pricing/technology/legal shock of low list price authorized generics.

Levels, levels, levels

Last week HHS Secretary Azar bragged that the benchmark premium for the 2nd least expensive Silver plan on went down by 2% for 2019 compared to 2018.

That is good news for the US Treasury. A lower benchmark premium means smaller premium tax credits.

It might be good news for non-subsidized buyers as some plans are now cheaper.

It is slightly bad news for states with either a 1332 reinsurance waiver or a Basic Health Program (BHP).

It is either indifference or slightly bad news for subsidized buyers.

States that rely on pass through funding for either 1332 or BHP have an incentive to want high benchmark premiums in order to generate large pass through amounts that can be used for reinsurance or for the expansion of pseudo-Medicaid to 200% FPL which is the BHP program.

Individuals who get subsidies don’t care at all about benchmark levels. They care instead about the price spread between the benchmark plan and all of their other choices. Subsidized buyers are indifferent to the following two pricing scenarios:

Subsidized Buyer Indifference SpreadsLow PremiumHigh Premium
Bronze $         400 $         600
Silver 1 $         500 $         700
Silver Benchmark $         525 $         725
Gold $         600 $         800

This price indifference is the core resiliency feature of the ACA that allowed it to muddle through in 2018.

I think that as more insurers enter and re-enter markets and the Silver gaps compress again due to more competition, we’ll see fewer subsidized buyers than we otherwise would have seen and a slight increase in the number of non-subsidized buyers.

Medical Loss Ratio rebates and 2019

Medical Loss Ratio (MLR) rebate letters are starting to arrive:


MLR is part of the ACA. The regulation requires insurers to refund customers money if the small group or individual market plans spend less than 80% of net premiums on claims or quality improvement expenses and for large groups, the insurer must spend 85% of net premiums on claims or quality improvement.

MLR has not been a big deal. Insurers quickly adjusted their pricing schemes and provider contracts to minimize their MLR exposure. Individual market insurers had massive MLRs in 2014 and 2015, meh MLRs in 2016 and “normal” MLRs in 2017.

MLR is a minor story this year. It is $76 here and $122 there. If I got a $122 check in the mail, I know I won’t complain but it is not huge income shock and given insurer pricing it is not a common income shock.

However, I am expecting MLR to be a big deal in 2019 for individual market buyers. The big story on the ACA individual market pricing is that insurers massively overpriced 2018. Bob Herman at Axios has done yeoman work

Between the lines: These data suggest the Blues have raised premiums well beyond what they thought they’d ultimately pay to providers….

MLR is based on rolling three year calculation. The Fall 2019 rebates will be based on a “meh” 2016, a “normal” 2017 and a “wicked low” 2018. I think states that had mostly monopolistic insurance markets in 2017 and 2018 (including North Carolina) will be more likely to have significant and widespread MLR rebates to the individual market buyers than states with very competitive markets.

MLR rebates in 2019 will be widespread and they could be large in some states. This is going to be a fascinating economics experiment and an interesting political event.

The dog that has not barked

Charles Gaba is projecting that the average, population weighed rate hike for the individual market for 2019 to be 3.3%. This is due to a lot of variables:

Price Hikers

  • No Individual Mandate
  • Short Term Plans
  • Association Health Plans
  • Normal medical expense trend

Price Cutters

  • 2018 rates are way too high (this is a 5th grade percentage change math problem issue not an actuarial issue — denominator is too big)
  • 1332 waivers for reinsurance
  • Far fewer monopoly counties
  • No Health Insurance Premium Tax (HIT) for 2019

Baked in

  • CSR Termination
  • Low outreach
  • Negative messaging


The big thing, in my opinion, is that the 2018 rates were set very high and right now insurers are running very low Medical Loss Ratios.

This means that the denominator for the percentage change equation (New-Old)/Old is too high so a lot of the price increases that people expected due to the repeal of the individual mandate penalty and the new rules on limited duration, short term plans, was baked into the 2018 pie.

Now there is a very interesting political point that Kimberly Leonard is picking up on:


Almost no Republican is claiming credit for inflation level price increases on a national basis or even local premium decreases.

The following ad could easily pass a Polifact fact check**:

“10% increases, 15% increases, 35% increases —
Middle class families were getting hit with massive premium increases on their health insurance because of Obamacare.

now that we’ve taken action and gotten tough on the insurers to get a better deal for you, people in this fine state of East Wobegon are seeing their monthly premiums decrease by 10%… vote for Generic Republican Incumbent as I’ll fight for you…

I’m Generic Republican Incumbent and I approve this message”

Now there is a long explanation about the denominator being too big because of the 2018 rate hikes being too high so under the right counterfactual (assume 2018 was priced accurately for an 82% MLR), the proposed 2019 rates are still much higher than they would have been given 1/19/17 policy … but my eyes are glazing over as I write that.

ACA premiums are a quiet dog sleeping in the corner right now. Interesting…..

** I should never write ad copy for anyone

Class notes on CSR strangeness

I was asked by Professor Richman to talk to a bunch of law students this evening about healthcare. They are part of a colloquium where some of the leading minds on health policy and law are flown in and talk. A few weeks ago, it was Nick Bagley, next week, Tim Jost is supposed to be here, and then Mark Hall is scheduled for November. And then me.

I’ll be speaking about the entire Cost Sharing Reduction (CSR) saga. This is something that I’ve been hammering on here at Balloon Juice for the past two years, and it is a natural extension of the thought process that goes into my Silver-Loading arguments and analysis that I’ve been bird-dogging for almost four years now. However this is the first time I’ve presented in this format, so I want to go over some of my major points:

Joint Letter on Silver Loading options Anderson, Norris, Gaba, Sprung (October 2016)

Section E Legal Limits and the Implementation of the Affordable Care Act Nicholas Bagley (January 2016)

“Implications of CMS Mandating a Broad Load of CSR Costs” Anderson, Norris, Gaba, Sprung (May 2018)

“Mining the Silver Lode” Sprung, Anderson (September 2018)

Major points to make:

  • No working majority in Congress to touch coverage expansion elements of the ACA since 3/23/10
  • Both Obama and Trump campaigned aggressively on reforming what they saw as an unfair and unjust healthcare system
  • Mechanics matter
  • States have tremendous flexibility with their insurance markets
    • Mixed choice states are fascinating for anyone who wants to study natural experiments
    • State Insurance Commissioners knowledge and involvement in decision making varies widely
  • Last successful vote in Congress matters
  • If law is to be used as a lever, understanding the entire structure is needed so things don’t go OOPS
  • Legal follow-up on Silver loading, mitigation and implied contracts will be a big deal


And my rough timeline is below the fold:
Read more