Bad ACA Rules Cost Low-Income Americans $2 Billion a Year


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European Parliament / Flickr

Bad regulatory decisions governing the Obamacare exchanges will cost low-income Americans over $2 billion this year, according to my analysis. Moreover, these same decisions made shopping for insurance more confusing and discouraged competition. This is a problem that can easily be addressed and should never have existed to begin with.

In a previous article, I explained why low-income Americans buying health insurance on Healthcare.gov (38 states) are often better off if they’re in a market where one insurer has a monopoly.

The main reason why is that insurers in moderately competitive markets exploit the way Advance Premium Tax Credits (APTC) are calculated to improve their market share while hurting low-income people. For people who qualify for APTC, the size of their subsidy equals however much is necessary to make the Second-Lowest Cost Silver Plan (SLCSP) cost them only a set percentage of their income. The higher the SLCSP premiums, the more help they get.

In theory, this design should encourage competition. It should mean low-income people have the choice of at least two plans from two insurers that, due to their APTC are “affordable.” In practice, it works very differently. Since the Obama administration in 2012 inexplicably decided to make Healthcare.gov a weak clearinghouse exchange instead of an active purchaser exchange, insurance companies can put any silver plan that meets the minimum rules they want on Healthcare.gov.

This has let insurers engage in a practice I call “silver squeezing” to boost their market share by hurting low-income people. If, as a result of their exclusive provider network, an insurer believes they will be able to offer the cheapest silver level insurance plan, what they often do is offer two nearly identical silver plans which are priced just a few dollars apart. This results in their plans being both the lowest cost and SLCSP, so only their plans are affordable.

Union County, Pennsylvania provides a prime example of this. There are only two insurers on Healthcare.gov in the county: Geisinger Health Plan and Capital BlueCross.

So what Geisinger has done is only offer two nearly identical silver plans to keep the APTC low: one with a $4,500 deductible that cost $694.31 per month for someone age 40 and another with a $4,650 deductible that cost $694.40. A person making $35,000 a year qualifies for an APTC worth $424 so that second-lowest cost Geisinger plan cost them only $270 a month. As a result, the one Capital BlueCross plan at $790.15 a month is effectively unaffordable with APTC. If Geisinger could offer only one silver plan, then the BlueCross plan would be the SLCSP. The individuals would get an APTC of $520, have two “affordable” insurance companies to choose from, and the ability to buy a Geisinger silver plan for much less than they currently can.

This is a very widespread problem. This “silver squeezing” is either accidentally or intentionally taking place in roughly two thirds of counties with actual competition on Healthcare.gov. Any insurer with a clear network advantage would be stupid to not employ this strategy, which is why it needs to be regulated out of existence.

It also likely has a negative spillover effect in some of the monopoly counties. While a monopoly insurer can engage in the “silver stretch” to increase subsidies for people in monopoly counties, the insurers might still be using the silver squeezing strategy there since they might need to keep their plans consistent across the whole state or to scare off competition.

This problem is fixable and never should have existed to begin with.

California from the beginning implemented a solution. In California, each insurer can offer only one standardized silver plan on their exchange per network type/level. Among insurers that do offer two silver plans — say, one HMO and one PPO — the average difference in premiums for a 40 year old this year was $70 per month. This makes comparison shopping much easier. (This is also the rule in the Swiss health care system, which Democrats claimed to base the ACA on but made little effort to understand what it takes to make it function in that country.)

Federal regulators or state governments could require insurers to only offer one standard silver plan per provider network and force all monopoly insurers to offer at least two very different silver plans. If need be, regulators could provide extra leeway for monopoly insurers to increase the silver spread. Varied bronze or gold plans could even still be allowed.

Without full 2018 enrollment data and knowing how every individual and insurer would react, it is difficult to say the exact impact these changes would have, but analyzing Florida we can see it would likely be significant. Florida is one of a few states on Healthcare.gov this year where all insurers offered a “simple choice” standardized plan as well as numerous non-standard plans. If only the standardized plans were allowed to be sold on Healthcare.gov, that would have meant significant extra savings for low-income people there. A basic model puts the net reduction in personal spending on premiums at around $570 million a year for roughly 1.5 million people in Florida who are receiving subsidized insurance.

Projecting the likely impact in most other states using Healthcare.gov is more difficult, but based off simply comparing the cost of the two cheapest plans for the two cheapest insurers, it is likely this strategy would increase help to the roughly 7.7 million low to modest income individuals on Healthcare.gov by around $2.2 billion a year or more. Savings would likely be much more since companies doing the silver squeeze are likely offering plans near the legal bottom of the acceptable actuarial value range for silver plans, while a standardized plan could be required to to be on the high end of the range.

Besides increased federal government spending, the only theoretical downside of this plan would be for people who don’t qualify for subsidies but want to buy the cheapest possible silver plan. Due to several factors, it would be idiotic for anyone without subsidies to ever buy a silver plan, and no one should do that.

This regulation I am suggesting would make health insurance cheaper and easier to shop for, for millions of people. It would also likely significantly increase the number of people purchasing insurance, due to the low cost to them. While it would still not be as potentially good for low-income people as a monopoly engaged in aggressive silver stretch it would be a vast improvement over the status quo. It is deeply unfortunate the Obama administration didn’t adopt this rule from the beginning, but at least his team has the possible excuse that they might have been trying to keep the federal cost of the law low.

What is inexcusable is that the vast majority of state governments have basically left billions of free federal money on the table because they didn’t prevent insurers from gaming the system in such a clear and simple way. That alone should destroy anyone’s belief that states can effectively regulate private health insurance markets. Since state officials have after multiple years failed to take even this basic step, the depressing, least bad outcome might be to hope that current dominant insurers using the “silver squeeze” quickly eliminate all remaining local competition. That way they can switch to exploiting the rules by “silver stretching,” which would at least help regular people.