Moving to state based exchanges and catastrophic reinsurance

Pennsylvania is in the process of moving their individual market from being hosted and run by to a state based exchange. This is a step that several other states are taking. However, Pennsylvania is being really creative in why they want to do this. First let’s get the details from WESA:

House Bill 3 would have Pennsylvania operate the online health insurance exchange that has been run by the federal government since 2014 through the Affordable Care Act.

The bill is being co-sponsored by Lancaster County Republican state Rep. Bryan Cutler and Allegheny County Democratic state Rep. Frank Dermody. Both are their respective parties’ floor leaders….

Pennsylvania pays the federal government about $94 million a year to run the marketplace, Cutler said. With the proposal, Pennsylvania would use technology other states have already shown to be effective to run the marketplace at a much lower cost, which he estimated to be about $35 million annually…

the measure would also take advantage of a federal Section 1332 “reinsurance” waiver that can help to lower costs and tailor the program for Pennsyvlanians.

That last sentence is the most interesting and unique part of the Pennsylvania plan.

Pennsylvania wants to take the difference between what they pay to and what they think they can run their own exchange for and apply that increment to a Section 1332 reinsurance waiver. This is nifty. 1332 waivers are fairly common for reinsurance purposes in red, blue and purple states. Waivers are required to be federal budget neutral against a “no change” baseline. Reinsurance waivers bring in a non-premium infusion of funds that creates a wedge between claims and premiums. That wedge reduces federal subsidies and those lower federal subsidies are then fed back into the reinsurance program. The end result is that non-subsidized premiums are lower and the relative spreads of subsidized premiums are compressed. This leads to higher non-subsidized enrollment and slightly lower subsidized enrollment.

Usually, the state reinsurance waivers have the non-premium cash infusion come from some state tax revenue. Pennsylvania is not doing that. Instead, they are betting that they can run the exchange cheaper and while charging insurers the same amount of money, there will be a wedge that can be diverted to paying off some catastrophic claims. This is different.

I am not sure how much rate relief reinsurance provides when the reinsurance is funded by premiums. It is not a new wedge of non-premium related cash. It does two things. First it slightly increases the amount of premiums paying claims so total premiums can go down. It is also a pool of money that might be worth one or two percent of state wide premium that can eat some catastrophic claims. This is valuable. It reduces extreme tail risk for any one insurer. Less variance means marginally lower rates as well.

More importantly from the goal of reducing non-subsidized gross premiums, removing some catastrophic claim risk marginally increases the incentives for current insurers to expand their footprint and minimize the number of monopoly counties. Iowa’s insurance markets had an extreme example of a hyper expensive individual with recurring million dollar claim months.

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.

No one wants to catch a spinning, falling knife.

Reinsurance funded by a fixed surcharge on premiums among all individual market insurers in the state smooths the pool and dramatically reduces risk.

If the Pennsylvania proposal goes through and the waiver gets approved, this is an interesting experiment to increase competition.

Performative instead of performing marketplace protection

There are many ways a state can improve its own individual marketplace. Some are effective at lowering premiums and increasing enrollment and others merely are full of sound and fury and contain no real money flows. We need to differentiate these actions as some states do a bit of both but have rules and cultural/political norms that hobble the markets more than anything that they have done since January 20, 2017.

New Jersey is a good example of both performing protection of their marketplace and performative projections.

New Jersey has a Democratic trifecta. It has passed a state based individual mandate that went into effect on January 1, 2019. It uses the revenue from the state based mandate to partially fund reinsurance. It is in the process of transitioning to a state based marketplace. It can free ride on New York and Maryland state based exchange awareness advertising.

These steps all actively improve the guaranteed issue, community rated individual market. There are also some performative protections as Andrew Sprung at Xpostfactoid lays out:

On May 31, New Jersey legislators introduced, with Governor Murphy’s support, a raft of bills* that  codify in state law the ACA’s coverage rules in the individual and small group health insurance markets, including protections for people with pre-existing conditions

Separate bills maintain a ban on medical underwriting or exclusion of pre-existing conditions (S626), mandate coverage of the ACA’s Essential Health Benefits (S562) and a set of preventive services (S3803), and limit age rating — the degree to which the oldest enrollees can be charged more than the youngest adult enrollees — to the ACA’s 3-to-1 ratio (S3810).**

Many other states with Democratic governors and legislatures have passed or have in progress similar laws that duplicate the ACA’s federal standards. Such laws are redundant by definition; they are designed as protection against future further Republican action to undermine the ACA.

Some of these are typical state insurance regulations of varying degrees of wisdom. But there is a fundamental challenge to a state trying to protect the ACA benefits and regulations without federal funding — money matters for the ACA market to by functional:

State-based ACA-mirroring laws would not mitigate the damage if the Supreme Court strikes down the entire ACA, however — including the marketplace subsidies and the Medicaid expansion. Guaranteed issue, modified community rating and Essential Health Benefits together would render coverage unaffordable for the majority of current enrollees without the federally funded subsidies, which the states could not afford to replicate.  Pre-ACA, states like New York and New Jersey that had enacted guaranteed issue were prohibitively expensive. New Jersey enacted guaranteed issue in the individual market in 1993; by 2003, enrollment had been halved and stood at 78,000, compared to about 300,000 today…

It is a statement of values and intent but without the money, it is also a statement of unaffordability.

New Jersey has another step that it could take that would increase coverage in the state, improve affordability for both on and off-exchange individuals and make the markets more functional but so far they have not done anything about a state based policy that makes the market smaller and more expensive than it could be.

New Jersey has fairly strong requirements of allowable cost sharing within a metal band. Silver plans in New Jersey are all at or over 70% actuarial value and Bronze plans must hover around 64% actuarial value. The possible spread in New Jersey is between 6 and 8 actuarial value points. The Center for Medicare and Medicaid Services (CMS) allows for Bronze plans to range from 58% to 65% actuarial value and Silver plans to range from 66% to 72% points. The maximum allowable spread is 14 points. As a rule of thumb, the bigger the spread in actuarial value points for the same insurer and network between the benchmark plan and the least expensive plan, the cheaper the plan is for subsidized buyers.

We have talked about premium spread strategies on this blog for years. I have several papers under review/accepted that play with this idea that should be out sometime in the second half of 2019 or early 2020. This is not a new idea.

New Jersey has the ability to maximize the spread. It could mandate all Silver plans to have actuarial values above 70% while mandating all insurers offer a low actuarial value Bronze plan and then anything else that the insurer wants. It could do that. Doing so could potentially double the spread which would dramatically increase affordability for subsidized buyers. Improved affordability for subsidized buyers brings in a healthier and cheaper, on average, risk mix which lowers non-subsidized premiums.

Yet, the decision New Jersey has made is that it wants to lower top end exposure for people who are insured at the trade-off of having more people uninsured and facing an infinite deductible. That is a viable trade-off to make, but it is one that weakens the market.

We need to separate signal from noise and make trade-offs explicit when we look at what states are doing to their individual health insurance markets.

Reducing enrollment frictions in Maryland

Maryland is making a big push to increase health insurance coverage in the state.  There is a recently signed bill that dramatically lowers the friction to enroll.  Stan Dorn, one of the architects of the policy proposal, has more at Health Affairs:

 the Maryland Easy Enrollment Health Insurance Program (MEEHP)….represents the country’s first attempt to use income tax filing as an immediate on-ramp to health coverage. By simply checking a box on their state income tax return asking the exchange to determine their eligibility for free or low-cost insurance, an uninsured tax filer can have relevant information from their return sent automatically to Maryland’s health insurance exchange. The exchange then uses that data and other available records to determine the individual’s eligibility for Medicaid, CHIP, and PTCs….

People who qualify for Medicaid or CHIP are invited to choose a managed care organization by a specified date. If they neither choose a plan nor opt out of coverage, they are enrolled in a Medicaid plan by default….

Uninsured tax filers with incomes too high for Medicaid or CHIP have a brief special enrollment period (SEP) for enrolling into the individual market. The SEP is triggered by the filing of a return with the relevant box checked, so long as the return is filed before a date specified by the exchange (presumably April 15 or earlier). The exchange determines PTC eligibility as quickly as possible, encouraging uninsured consumers to obtain insurance and helping them select an appropriate plan.

The default assumption in Maryland is that people want to be covered and the state government as well as the Exchange board should facilitate that coverage using current data streams.  Eyeballing 2019 data on RWJF Hix Compare, most single 27 year olds earning under 180% FPL will be exposed to at least one zero premium Bronze plan.  Older buyers and larger families will see zero premium plans at higher income levels.  Some families will see zero premium silver and gold plans.

Facilitating on-exchange enrollment is a net positive for the state as it will increase the number of people covered and most likely decrease the average morbidity in the pool.  It is the easier step as it costs the state a slight increase in administrative costs but no program costs.  The federal government takes on the entire incremental cost of increasing on-Exchange enrollment if that enrollment is exclusively coming through zero premium plans.

More notably is the commitment by Maryland to expand their Medicaid rolls.  Medicaid has split financing; some state and some federal.  Depending on the type of eligibility an individual has, Maryland is paying anywhere from ten to fifty percent of the incremental costs.  We saw with the launch of the ACA exchanges that there was a significant “woodworker” effect as people who were always qualified for Medicaid actually enrolled in Medicaid as health insurance coverage had higher salience.  We should expect a similar, but smaller, woodworker effect as Maryland uses its administrative systems to maximize enrollment.

Maryland is adding lubrication to the health coverage system while many other states are throwing sand to increase the friction people must fight through to get and maintain coverage.

Standard plans and Silver gapping

Washington State is about to pass major state level health policy legislation.  There are several moving parts:

  • Public Option at roughly 160% Medicare rates
  • Standard Benefit Design
  • Requirement that all insurers only offer the standard benefit on Exchange

Given Washington State’s market where there is at least one Medicaid Managed Care company in each rating area, I don’t think a public option will be price competitive as Medicare +60 is closer to “standard” commercial rates than either Medicare-ish or Medicaid-ish rates that Centene/Ambetter and Molina are paying their networks.

However, I think the real action is in the single standardized plan design requirement.  Centene/Ambetter is a low cost insurer.  They are in most rating areas.  They offer a number of silver plans that are all priced tight to the benchmark position.  This means two things.

First, they get most of the price sensitive and reasonably healthy very heavily subsidized folks as the next cheapest Silver plan offered by another company is significantly more expensive.  Secondly, since the benchmark plan is close to the cheapest Silver (also offered by Centene/Ambetter), there are very few great deals so the enrollment pool is smaller than it would be if there are larger silver premium spreads between cheapest silver and the benchmark.  This is the “silver-spamming”  strategy that Centene loves.

Single standardized plan requirements takes away this spamming strategy.  We can see this if we look at Washington State Rating Area 1 and 3 for 2019 (data via RWJF HIX Compare and premiums are for a single 27 year old)

Currently, in rating Area 1, the benchmark is $10 above the cheapest Silver. This means that a 27 year old earning $18,000 a year can buy a CSR-94 Silver plan for $51/month. If we assume that an insurer can only offer a single plan and they will offer their cheapest plan, the new benchmark would be offered by Molina and the cheapest Silver would still be offered by Centene/Ambetter. However, the silver spread is much bigger at $36. This means a 27 year old earning $18,000 could buy a CSR-94 Silver plan for only $25 per month. This is half the monthly outflow.

Single, standardized plans are not panaceas. In Rating Area 3, Molina has the cheapest plan while Kaiser Permanante is offering the benchmark silver. There is a $10 spread so there would be no change under the assumed rule I applied in Area 1 as there are two distinct insurers offering their cheapest plans already.

I think the single standardized plan rule is the biggest thing in the package that Governor Inslee (D-WA) will be signing as it an effective step that minimizes spamming of the exchanges and it will increase plan affordability for subsidized buyers. Off-Exchange buyers can be held harmless or at least harm can be minimized if the state allows for anything to be offered Off-Exchange. The distinction is that on-Exchange buyers are far more sensitive to premium spreads while off-Exchange buyers are indifferent to spreads and sensitive to levels.

Oklahoma Medicaid expansion is on the ballot

Oklahoma activists are going the same route as Utah, Idaho and Nebraska activists successfully used in the 2018 election cycle: They are trying to get enough signatures to get Medicaid expansion on the ballot.



If you live in Oklahoma, this question needs slightly more than 177,000 valid signatures to appear on the 2020 ballot.

Odds are that even if it passes, there will be follow-on shenanigans as we have seen in Utah, Nebraska and Idaho to either delay or water down the expansions. In my opinion, a bad expansion is better than a perfect non-expansion. I assess the counterfactual as no expansion instead of a full expansion so people with different reasonable counterfactuals will vehemently disagree with me.

The ballot box is not the only way that Medicaid expansion of some sort may come to Oklahoma. There is a bananpants county level expansion proposal floating out there.

Here the scheme would be two or more bordering counties could expand Medicaid. The state share of the expansion (10% of costs) would be funded by local taxes. This would be wonderful for health and public finance economists and a complete cluster for everyone else.