Obama administration increases insurer subsidies

The Obama administration announced earlier today that it would increase the  rate of subsidy provided insurers under the transitional reinsurance program established by the Affordable Care Act.  This program, in effect for the policies sold in 2014, 2015, and 2016 on one of the individual insurance exchanges fostered by the ACA,  provides free specific stop loss reinsurance to insurers, something insurers would otherwise have to pay a lot of money to obtain.  The Center for Medicare and Medicaid Services  (CMS) announced today that instead of taxpayers giving insurers  80% of the losses on any individual for their claims between $45,000 and $250,000, it would now pay a full 100% of these losses.

The higher rate of reinsurance should not be interpreted as a sign that claims were lower than insurers expected — something that would run contrary to many of the recent insurer rate hike filings or the losses reported by many insurers.  It is not a sign of the success of Obamacare; rather it is an artifact of its problems.  If, for example, there were 14% fewer people enrolled in Obamacare than at the time the reinsurance rates were initially determined (7 million vs. 6 million), reinsurance payments could be, as here, yet more generous to insurers even if claims were 10% higher than originally projected.

There are several implications of today’s announcement.  First, it means that, on a percentage basis, the ACA is subsidizing exchange insurers for 2014 even more than regulations enacted under it had heretofore prescribed.  Since this same money paid to insurers could instead have been used to provide greater subsidies to poorer and middle class individuals trying to purchase health insurance, the candy distributed today to insurers is a bit troubling. Second, because CMS says it will actually have money left over from 2014 even after the increase in reinsurance rates,  and because enrollment in Obamacare remains considerably lower than was estimated at the time of its enactment, there is an increased likelihood of reinsurance payments to insurers being higher than originally authorized in 2015.

We can get some sense of the magnitude of the changes announced today.  To do so, I use data embedded in the Actuarial Value Calculator, a document produced by CMS for the purposes of figuring out whether various insurance plans met the standards for bronze, silver, gold and platinum policies.  For an average silver policy, for example, the reinsurance that would have been provided prior to today would have been expected to save insurers about 11% in expenses, and, quite likely, premiums.  With the new reinsurance parameters, the transitional reinsurance program will save insurers selling the same silver policies about 14%.

We can do the same exercise for platinum, gold and bronze policies.  The results are not much different.  The table below shows the results.

Metal Level Original subsidy New subsidy
Bronze 11% 13%
Silver 11% 14%
Gold 11% 13%
Platinum 10% 12%

Two foootnotes

1. This is actually the second time CMS has made the transitional reinsurance program for 2014 more generous.  Originally, the reinsurance would “attach” at $60,000.  If an individual’s claims were below that amount, no reinsurance would kick in. Leter, CMS changed the attachment point to $45,000.

2.  How could I do this computation so swiftly?  I’ve been preparing for testimony before the House Ways and Means Committee on, among other things, the effect of the transitional reinsurance program on insurer rate changes and I’ve been working on a talk on a similar topic for the R in Insurance Conference later this month.  So, all I had to do was plug the new parameters into my model, and out came the results. Be prepared.

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Why net premium increases will often be even larger than you think

I’ve written before that net premium increases for many individuals purchasing policies under the ACA will be higher than gross premium increases.  I’ve gotten some emails expressing puzzlement over this conclusion.  So, in this post I want to explain in some detail why this is the case.

An example

Consider five Silver policies on an Exchange. In 2015, here is a table showing their gross premiums

1. $4,161.55

2. $3,881.27

3. $4,338.10

4. $4019.11

5. $3550.64

So, the second lowest silver policy is Policy 2, which has a premium of $3,881.27. Suppose our individual can contribute $1,000 per year based on their income.  If they had purchased policy 2 their tax credit would have been $2,881.27 and their net premium would have been $1,000.  If our individual purchases policy 4, however, which has a gross premium of $4,019.11, their tax credit is still $2,881.27, so they will end up having a net premium of $1,137.84

Now, suppose the gross premium increases average about 6.33% but are distributed as follows among our 5 insurers.

1. 11.38%

2. -2.57%

3. 7.26%

4. 10.28%

5. 5.29%

The new gross premiums for 2016 are thus as follows:

1. $4,634.99

2. $3,781.70

3. $4,652.87

4. $4,432.30

5. $3,738.41

The new second lowest premium is Policy 2, which has a gross premium of $3,781.70.  Suppose now our individual has essentially the same income such that the amount they are deemed to be able to contribute is still $1,000.  This means the 2016 tax credit is $2,781.70. What if our individual wants to keep his health plan and stick with Policy 4. Maybe our individual likes the practitioners in the Policy 4 network.   The new difference between the new gross premium for Policy 4 ($4,432.30) and the tax credit of $2,781.70 is $1,650.60.

Thus, although the gross premium for the policy has gone up 10.28% (bad enough) the net premium has gone up 45.06%.

So, did I concoct some bizarre set of numbers so that the ACA would look bad?  I did not. The result you are seeing is baked into the ACA.

An experiment

Let’s run the following experiment.  Suppose premiums are normally distributed around $4,000 with a standard deviation of $500.  And suppose the gross premium increase is uncorrelated with premiums and is normally distributed around 5% with a standard deviation of 5%.  Assume there are five policies at issue. We can then calculate for each of the five policies,  the gross premium increase and the net premium increase in the same way we did in the example above. We run this experiment 100 times.

The graphic below shows the results. The horizontal x-axis shows the size of the gross premium increase (in fractions, not percent).  And the vertical y-axis shows the size of the net premium increase. The dotted line shows scenarios in which the gross premium increase is the same as the net premium increase.  What we can see is that for the larger gross premium increases, the net premium increases tends to be larger than the gross premium increases and for the smaller gross premium increases (or for gross premium decreases), the net premium increase tends to be smaller than the gross premium increase. Thus, about half the population will experience net premium increases larger — and sometimes way larger —  than they might think from reading the news.

grossvnetpremiums

 

Is this result an artifact of, say, having our policyholder being deemed by the government to be able to contribute $1,000 based on their income?  Not really.  The graphic below runs the same experiment but this time assumes our individual is poorer and is thus deemed able to contribute only $500.

grossvnetpremiums500

What we can see from the graphic is that the result is even more dramatic.  The poor will see drastic divergences between gross premium increases and net premium increases. Many, for example who have gross premium increases of say just 5% experience net premium increases of over 30%.

And what of the less subsidized purchasers, those who, for example, are deemed able to contribute $3,000 towards a policy?  The graphic below shows the result.

grossvnetpremiums3000

Now we can see that the gross premium increases and net premium increases are clustered pretty tightly together.  Indeed, for the wealthier purchasers, net premium increases more often than not are smaller than gross premium increases.  However, since most purchasers of Exchange policies tend to be those receiving large subsidies, the graphic above is not representative of the situation for most purchasers.

Did I rig the result by assuming that the income-based contribution stayed the same.  No.  Here’s a graphic showing gross versus net premiums first, under the assumption that income-based contributions remain the same and second, under the assumption that income-based contributions wander, sometimes going up, sometimes going down.

grossvnetpremiumsdynamicContribution

 

What you can see is there is not much difference between the yellow points — income based contribution remains the same — and the blue points — income based contribution wanders.

And, although I won’t lengthen this post with yet more graphics, the basic result generalizes to situations in which there are more than 5 Silver policies.  The pattern is the same.

Conclusion

It really is true. Net premium increases will often be larger than gross premium increases, particularly for the poor. The sticker shock some received on seeing the gross premium increase figures recently released at healthcare.gov will, in many instances, be little compared to the knockout blow that will occur when people start computing their new net premiums.

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No, New York Times, “guesswork” is not the reason ACA premiums are rising

The New York Times, whose editorial board has long been a strong supporter of the Affordable Care Act, published an article on its front page yesterday in which the headline read, “Seeking Rate Increases, Insurers Use Guesswork.” And, lest there be much doubt that the article suggested that speculation — the sort that regulators might understandably reject as a basis for premium hikes — rather than hard facts were leading to the frightening premium hikes, here are some quotes selected by author Reed Abelson for publication:

“But many insurers, including those seeking relatively hefty increases below 10 percent, say they are asking for higher premiums because they remain unsure about the future and what their medical costs will be.”

“It’s the year of actuarial uncertainty, and actuaries are conservative,” said Dr. Martin Hickey, chairman of the National Alliance of State Health CO-OPs and the chief executive of the New Mexico exchange. “The safest thing to do is to raise rates.”

Yes, to be sure, there was the suggestion in other parts of the article that higher than expected claims were part of the problem, but both the headline and remaining comments suggest that the high rates of increase were the result of unsupported speculation.

Wrong, New York Times! If you actually read the justifications for the premium increases submitted by insurers and their accompanying actuarial memoranda, you can see there are two dominant themes: (1) higher than expected claims expenses and (2) diminution of federal subsidies to the insurance industry.  You can also see lengthy memoranda containing facts and figures explaining their experience last year and the basis for their trending those experiences into the future. And, while one need not invariably take the insurance industry at its word or at face value, this is an instance where they have to make the best case possible for their rate increases. Regulators will scrutinize insurers’ work. Misstatements or rank guessing would seem to be against the insurance industry’s interest.

So instead of quoting people, who might themselves be guessing, let’s look at what the insurers actually said. I am going to bore you with 17 representative filings from across the nation. I do so because I want to make clear that the evidence is overwhelming. Most of these are contained in or accompanied by lengthy memoranda containing elaborate tables justifying the increases. I’ve attempted to be diverse in my selection of insurers to avoid repetition of, for example, the Blue Cross position or the Aetna position.

1. Blue Cross and Blue Shield of Alabama

BCBSAL proposes an average 28% increase to rates for the products offered in 2015. The main drivers of the need for a rate increase are as follows:

• Single risk pool experience which is significantly more adverse than that assumed in current rates

• Medical inflation and increased utilization as indicated in Section 5: Projection Factors

• Expected increases in the average population morbidity of the Individual Market, also described in Section 5: Projection Factors

• Reinsurance program changes, described in Section 9: Risk Adjustment and Reinsurance

BCBSAL determined that the following items did not contribute significantly to the need for a rate increase:

• Taxes and fees: Minimal changes in the amount needed for taxes and fees, described in Section 10: Non-benefit Expenses and Profit & Risk

• Benefit changes: No changes to offered benefits for 2016

2. HealthNet of Arizona

The projected claims experience was developed using calendar year non-grandfathered 2014 experience. If our rate request is approved, the expected premium for the entire risk pool is $313.91 PMPM. This represents an increase of 24.7% in average premium. 2014 premiums received were $127,867,744. Claims paid were $171,764,569. Since 2014 medical costs are increasing with an annual trend of 5.5%. Prescription drug costs are increasing with an annual trend of 10.3%. Claims costs are 85.1% of premium. Administrative costs are 14.5% of premium. Profit is -4.8% of premium.

3. Cigna Health and Life Insurance Company (Connecticut)

The most significant factors requiring the rate increase are:

Changes in Medical Service Costs: The increasing cost of medical services accounts for the majority of the premium rate increases. Cigna anticipates that the cost of medical services in 2016 will increase over the 2015 level because of prices charged by doctors and hospitals and more frequent use of medical services by customers.

Transitional Reinsurance Program Changes: The federally mandated transitional reinsurance program is in effect for three years (2104, 2015, and 2016). The amount of funding available to issuers under the reinsurance program to offset adverse claim experience decreases each year ($10B in 2014, $6B in 2015, and $4B in 2016). Additional premium is required to compensate for the reduced reinsurance support in 2016.

Morbidity (Risk Pool) Adjustments: The marketplace for non-grandfathered individual plans is affected by provisions of the Patient Protection and Affordable Care Act (the Affordable Care Act) that became effective in 2014, including:
guarantee issue and renewal requirements
modified community-rating requirement
federal premium subsidies for low and moderate income individuals.

The effects of these 2014 changes when coupled with previous regulatory changes and overall utilization experienced in 2014 suggest that it is appropriate to increase the overall claim level assumption reflected in the premiums for individual plans in Connecticut.

4. Aetna Health, Inc. (Florida)

Why We Need to Increase Premiums
Medical costs are going up and we are changing our rates to reflect this increase. We expect medical costs to go up 10%. Medical costs go up mainly for two reasons – providers raise their prices and members get more medical care.
For policies issued to individuals in Florida, some examples of increasing medical costs we have experienced in the last 12 months include:
· The cost for an inpatient hospital admission has increased 8.0%.
· The average cost for outpatient has increased 8.4%.
· Costs for pharmacy prescriptions have gone up 8.0%.
· The use of outpatient hospital services has increased 4.5%.

What Else Affects Our Request to Increase Premiums
Several requirements related to the Affordable Care Act (ACA) impact these rates. These include:
· “Keep What you Have” and its impact on the population that will enroll in the plans covered by this filing
· Enhanced network access standards – which limit our ability to control the cost and quality of medical care
· Changes to required taxes and fees
· Phase-out of the Transitional Reinsurance Program which increases rates for plans issued to individuals

5. Humana Employers Health Plan of Georgia, Inc. (Georgia)

Many factors influence this rate calculation. The primary factors include
‐ Population health‐ Expected changes in the aggregate health level of all individuals insured by all carriers in the individual health insurance market.
‐ Claims cost trend‐ Changes in expected claims costs associated with changes in the unit cost of medical services, changes in Humana’s contracts with hospitals, physicians, and other health care providers, and the increase or decrease in utilization of medical services including changes in the severity and mix of services used.
‐ Plan Changes‐ Changes to plan designs due to changes in federal requirements.

6. Wellmark Health Plan of Iowa, Inc. (Iowa)

Reason for Rate Increases The effective average rate increase for these products is 28.7%, varying by plan as listed in the table above. The primary drivers of the proposed rate increases include, but are not limited to:

• Adverse Experience/Risk Adjustment Transfer: The risk of the market is more adverse than what we had assumed in the current rates; which leads to a significant projected risk adjustment transfer payment to other carriers.

• Medical and Drug Inflation: Both increased utilization and increased cost per service/script contribute to projected claims trend.

• Phase out of Federal Transitional Reinsurance Program: As this program phases out over three years, the expected receivables from this program are smaller for 2016 than they were for 2015.

7. CareFirst of Maryland (Maryland)

The main driver of the financial performance of these products and the proposed rate increase is the very significant increase in average morbidity between 2013 (the pre-ACA pool which underwent underwriting) and 2014 (the post-ACA guarantee-issue pool). The allowed claims per member per month (PMPM) increased from $197 in 2013 to $391 in 2014, a much higher and faster increase than anticipated.

8. HealthPlus Insurance Company

The biggest driver of rate change is 2014 claims experience that is more adverse than assumed in current rates. Another driver is due to the lower Federal reinsurance recoveries.

9. Coventry Health & Life Insurance (Missouri)

Why We Need to Increase Premiums
Medical costs are going up and we are changing our rates to reflect this increase. We expect medical costs to go up 9.4%. Medical costs go up mainly for two reasons – providers raise their prices and members get more medical care.

What Else Affects Our Request to Increase Premiums
We offer individuals in Missouri a variety of plans to choose from. We are changing some benefits for these plans to comply with state and federal requirements.
Several requirements related to the Affordable Care Act (ACA) may also impact these rates. These include:
• Changes to our expected projected average population morbidity and its relationship to the projected market average for risk adjustment.
• Changes to required taxes and fees
• Phase-out of the Transitional Reinsurance Program which increases rates for plans issued to individuals

10. Aetna Health Inc. (Nevada)

Why We Need to Increase Premiums
Medical costs are going up and we are changing our rates to reflect this increase. We expect medical costs to go up 10.6%, excluding the effect of benefit changes described below. Medical costs go up mainly for two reasons – providers raise their prices and members get more medical care.

For Individuals in Nevada, some examples of increasing medical costs we have experienced in the last 12 months include:
• Primary Care Physician visits have increased by 124.2%.
• Inpatient bed days have increased by 51.0%.
• Expenses for emergency treatment have increased 22.7%.

What Else Affects Our Request to Increase Premiums
A prominent hospital system in Nevada moved from participating to non-participating in 2014 and is expected to stay that way into 2016. This has an adverse impact on claims costs since the more favorable lower-cost in-network reimbursement rates no longer apply.

Several requirements related to the Affordable Care Act (ACA) also impact these rates. These include:
• Enhanced network access standards – which limit our ability to control the cost and quality of medical care
• Changes to required taxes and fees
• Phase-out of the Transitional Reinsurance Program which increases rates for plans issued to individuals

11. Blue Cross Blue Shield of New Mexico (New Mexico)

[E]arned premiums for all non-grandfathered Individual plans during calendar year 2014 were $84,497,659, and total claims incurred were $105,605,811.

After application of the ACA federal risk mitigation provisions, the total BCBSNM Individual non-grandfathered block of business experienced a financial loss of 17% of premium in 2014.

The proposed rates effective January 1, 2016, are expected to achieve the loss ratio assumed in the rate development.

Changes in Medical Service Costs:

The main driver of the increase in the proposed rates is that the actual claims experience of the members in these Individual ACA metallic policies is significantly higher than expected. After application of the ACA federal risk mitigation provisions, the total BCBSNM ACA block of business experienced a loss of 19% of premium in 2014.

12. Medical Mutual of Ohio (Ohio)

Medical Mutual of Ohio is proposing an overall rate increase of 16.9% for plans effective January 1, 2016. This increase will potentially impact the 37,673 existing MMO members. The rate change ranges from 7.4% to 26.0%, varying by plan, age, change in tobacco user status, change in family composition, and the geographic area where the member resides.
The experience of MMO Individual ACA plans was not favorable in 2014. MMO has paid nearly $167 million claims and only received $114 million in premium. In 2014, MMO lost about $42 million dollars on its individual ACA business alone. With the rate increase implemented for 2015 and proposed for 2016, MMO’s experience is expected to improve, becoming profitable in 2016.
The following items are the main drivers for the proposed rate increase:
1. The transitional reinsurance recovery decreased from the 2015 level and will have a smaller impact offsetting the total claims.
2. The increase in the medical and drug cost is about 6.2% annually. Out of that increase, 40% is due to the change in unit cost, 31% is due to the change in utilization and the rest is due to the change in the mixture of services.
3. We expected the morbidity and demographics to improve in 2016 due to increased penalty of non-compliance, a greater understanding of the ACA law, and a reduction in the amount of pent-up demand for services. This alleviates the rate increase needed based on the experience.
4. There’s no changes in benefit from 2015 to 2016.
5. The administrative cost and commission will decrease $2.51 per member per month. The profit and risk will increase $7.92 per member per month. The taxes and fees will increase $4.51 per member per month.

13. Geisinger Quality Options (Pennsylvania)

Geisinger Quality Options has proposed an overall base rate increase of 58.36% for Individual PPO members renewing in the Marketplace effective January 1, 2016 through December 1, 2016. The overall increase is largely due to the claims experience in ACA compliant individual market plans being much higher than what was assumed in current rates. Other contributing factors include annual claims trend, federally-prescribed ACA fees and reduced benefits in the Transitional Reinsurance Program.

14. Pacific Source Health Plans (Oregon)

This filing requests an aggregate increase of 42.7 percent over the rates approved in our 2015 Oregon Individual filing. The proposed rates are based on PacificSource’s historical Oregon Individual claims experience adjusted for PacificSource’s historical average risk compared to the market average risk, anticipated medical and pharmacy claims trend, expected change in market morbidity from 2014 experience period to 2016 projection period, changes in benefits, and expected state and federal reinsurance recoveries. The proposed rates also reflect changes in the taxes and fees imposed on health insurers for 2016. The range of rate increases is 23.4 percent to 60.4 percent and impacts PacificSource’s 8,216 Oregon Individual members. The variation in rate increases is driven by some changes in benefits i.e. copays, deductibles, OOP max, as well as adjustments to geographic area factors. The overall average impact of benefit changes on the requested rate increase is 0.0 percent.

The increase in rates from 2015 to 2016 is primarily driven by a dramatic worsening of claims experience in 2014 as compared to 2013, and the reduction of expected reinsurance recoveries in 2016. Note that this is the first rate filing where a full year of post ACA experience data was available. This data shows that the overall increase in morbidity from PacificSource pre ACA experience to post ACA market experience is much greater than originally projected in our 2014 and 2015 rate filings. The combined medical and pharmacy annual trend used in this filing is 7.0 percent, which reflects expected changes in costs, changes in utilization, and the impact of leveraging. The primary driver of the annual trend assumption is specialty drug cost and utilization, particularly Hepatitis C drugs. Administrative expenses and margin are budgeted to decline compared to the 2015 rate filing.

Over the calendar year 2014, the Oregon Individual block earned 30.2 million in premium and incurred an estimated 50.0 million in claims, for a raw medical loss ratio of 165.2 percent. Premium and claims expenses are shown before the impact of reinsurance, risk adjustment, and risk corridor. At this time we do not expect risk corridor payments to be made to issuers. After expected risk adjustment and state and federal reinsurance recoveries, we estimate a 2014 loss ratio of 116.5 percent. Combined administrative expenses, commissions, taxes, and assessments were approximately 24.6 percent of premium.

15. Scott & White Health Plan (Texas)

The Scott & White Health Plan is requesting an average rate increase of 32.3% to the Individual HMO Rating Pool. There are 24,294 covered individuals as of January 2015. 10.0% of the 32.3% increase is due to health care cost inflation, 14.3% of the increase pertains to changes in Risk Adjustment and Reinsurance assumptions, 2.7% is due to changes in fees, and the remaining 5.3% is due to actual and expected unfavorable experience.

16. Optima Health Plan (Virginia)

The rate increase is the same for all members in the same plan. Where the 2016 plan is different than the 2015 plan these members will be automatically enrolled into the 2016 plan shown. Premium rates are effective January 1 2016.
Claims expenses were very high in 2014 relative to earned premium. However payments from the federal transitional reinsurance and risk adjustment programs are expected to help significantly.
The federal reinsurance program is only temporary and while it is continuing into 2016 the amount of reinsurance per claim is less than in 2014 and 2015. As such premium rates will be increased to account for this impact. Additionally the risk adjustment program alone does not appear to provide sufficient relief to enable the Company to meet its pricing targets.
It is anticipated that 2014 had some amount of higher claims due to new members having pent-up demand for services and less healthy people tending to be the first to sign-up for ACA-compliant plans given the new rating and underwriting rules. Because of this we do not assume that 2016 will necessarily be as high a claim level as seen in 2014 but some of what has been experienced will remain.
These reductions from 2014 levels will be countered by upward pressure on costs from other sources such as medical trend as described below.
The proposed rate increase is intended to account for expected claims activity in 2016 given historical experience and changes in morbidity as well as any expected assistance from the federal reinsurance and risk adjustment programs. With the proposed rate increase the anticipated loss ratio is 80 percent.
Medical trend for these products is anticipated to be an average of 7 percent per year on paid claims for example after member cost sharing or a total of 14.5 percent over the period from 2014 to 2016. This was developed based on historical experience as well as consideration for information available on general medical inflation trends. Medical trend includes a combination of utilization and costs of services. This increase in cost is included in the calculation of the rate increase.

17. Security HealthPlan of Wisconsin (Wisconsin)

The biggest driver of the rate change is SHP’s underlying claims experience used in developing the projected index rate. We used SHP’s 2014 individual non-grandfathered, ACA allowed claims as the basis for claim development. The 2014 claims and membership distributions indicate experience is worse than we priced for in 2015 rates. Further, based on a Wisconsin risk score analysis conducted by Milliman, we are projecting no risk adjustment transfer payment. This assumption of no payment results in higher rates in 2016 since we had projected SHP would receive money from the risk adjustment pool when developing the 2015 rates.

Another driver of the rate change is due to the lower federal transitional reinsurance recoveries in 2016. The recoveries assume in 2016 SHP will receive 50% of all SHP’s individual members’ per member per year incurred claims between $90,000 and $250,000. In 2015, rates were priced assuming recoveries to be 50% of claims between $70,000 and $250,000 based on the federal parameters in place at the time of pricing.

The projection of claims from the experience period to the effective period assumes 5.0% annual medical and drug trend. These trends were estimated based on data from SHP, conversations with SHP senior management, Milliman research, general industry knowledge, and our judgment of recent trends.

Conclusion

So, does this sound like “guesswork” to you?  It does not to me.  All of these insurers are lying or mistaken about what is causing their requests for premium hikes? I don’t think so.  Of course, there is “trending” in which insurers approximate how previous increases will continue to the future and this requires some art on the part of insurers.  Of course, insurers may want to present their requests for rate hikes in a way more likely to be approved. But what they have presented is no more “guesswork” here than the work of any insurer in setting rates for almost any form of insurance. It is the sort of actuarial projections that are generally approved by regulators.

Health insurers now have a decent feel what it is going to cost them to participate in Obamacare.  And these insurers have a pretty common perspective: the whopping increase are driven by  greater utilization than expected among those electing coverage  (adverse selection and moral hazard), increases in the cost of medicine, and reduction of federal subsidies.

Exactly what some people predicted.

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Many will experience premium hikes even larger than requested rate increases

Yesterday, the federal government released its list of proposed gross premium increases for health insurers selling policies on the Exchanges. To many, particularly supporters of the ACA, the results released at healthcare.gov were jaw dropping. The median increase requested in New Mexico was 59%. In Pennsylvania, Highmark Health Insurance, the state’s “Blue Cross” insurer requested rate increases on many of its plans over 35%.  In Illinois, Coventry Health Care, an Aetna subsidiary, requested rate increases of over 30% on several of its plans. In Oregon, PacificSource, the state’s third largest health insurer, sought increases of 29% and higher on several of its plans. In short, in many states, very large increases in gross premiums were requested by a diverse set of major and minor players.

Pundits, including me, have pointed out that one should not leap from a view of these numbers to the conclusion that policyholders in the Exchange markets should invariably expect double digit increases.  The only companies in the data released yesterday are those requesting more than a 10% increase.  As Larry Levitt, a top executive at the influential Kaiser Family Foundation, said, “Trying to gauge the average premium hike from just the biggest increases is like measuring the average height of the public by looking at N.B.A. players.”

In fact, however, the math of Obamacare means that many purchasing policies on the Exchange will actually experience larger net premium increases than even the huge ones proposed by many insurers. This is so because of the way the Affordable Care Act computes the net premium paid by policyholders.

Let me take a quick example to illustrate the reason net premiums are going to go up even more than the numbers from healthcare.gov suggest.  Take an individual who has an individual policy for which the gross annual premium is $4000.  And suppose that the premium increase for that plan, as is proposed in many places, 25% up to $5,000.   But suppose that the second lowest priced plan in the state, which was also charging $4,000 goes up only 5% to $4,200.  What happens to net premiums.?  Let’s make our individual a typical Exchange purchaser with an income equal to 250% of the federal poverty level.  In 2015, that individual would be paying about $2,334 in net premiums.  In 2016, because net premiums are pegged to the price of the second lowest silver plan, that individual would be paying about $3134 in net premiums.

In short, the policyholder experiences an increase not of 25% — bad enough — but of 34%, even worse. If the policyholder wants to keep its plan, and perhaps the network of medical practitioners that have developed an understanding of the policyholder’s medical conditions, it is going to require the policyholder to pay 34% more.  To be sure there are complications that might tweak that number a bit, but the basic math is right.

It will be even worse for some.  We know that in some states, a few plans are proposing reductions in their gross premiums.  In our prior example, if the second lowest plan went down by 2%, the net premium of the plan the individual actually purchases will go up to $3414 per month, an increase of 46%.

Or, keep the assumption that the second lowest silver plan goes up by 5%, but have the purchaser have a income not of 250% of FPL but of 175% of FPL.  Policies are supposed to be affordable for them too. Formerly they would have paid $1021 per year in net premiums.  Now, they will pay $,1821 per year in net premiums, an increase of 78%. It turns out that keeping your healthcare plan is going to be an extremely expensive proposition.

So, yes, in some sense the gross premium increases released yesterday by the federal government are unrepresentatively large.  But in terms of what people actually pay, they are, in many instances, unrepresentatively small.  Of course, many people will be unwilling to pay increases of 34% or 46%  or 78%.  But to avoid those increases, they will increasingly need to flock to the second lowest silver plan.  Doing otherwise will prove ever more expensive. And so, the promise of “choice” in healthcare plans contained in the ACA may be fulfilled significantly less than its proponents anticipated when the bill was passed.  The architecture of Obamacare may induce yet more purchasers to converge on Silver HMO plans.

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Government data shows potentially scary ACA premium increases for 2016

Under the implementation of the Affordable Care Act promulgated by the Obama administration, the federal government publishes a list each June 1 of health insurers seeking to increase their premiums by over 10% from one year to the next.  Today, the Obama administration released their data for 2016. There are a lot of insurance plans and a lot of very high requested increases on the list.

My examination of the data this afternoon shows 661 insurance plans in which a rate increase of over 10% is being requested.  And the increases requested by these insurers is often way over 10%.  The median increase requested by insurers on the list it varies from a low of 12% in New Jersey to 59% in New Mexico.  Median means half the numbers are below the median and half are above the median.  Thus a median increase of 32% in Pennsylvania means that half the insurers there on the list are asking for more than a 32% increase in premiums.

An aggregation of the data is also revealing. If one looks at the median increase in each state, the “median of the median” is 19%. Half of the states are seeing median increases of less than 19% and half are seeing median increases of more than 19%.

Most of the analyses of this data thus far have looked at particular states and found them troubling.  Taken as a whole, however, the widespread significant increases should be disturbing to those who were confident that the Affordable Care Act would continue to result in low premiums.

Moreover, the median figures cited above are by no means the maximum increases requested by insurers. Let us start with some heavily populated states and take a look at some representative high increase requests.  In Texas, Time Insurance is requesting a 65% increase. In Florida, Time Insurance is asking for 63% on one of its products; the better known UnitedHealthcare is asking for 31%.  In Illinois, Blue Cross is asking for a 38% increase on one of its plans; Coventry, also a good sized player, is asking for 34% on another.  In Pennsylvania, a Geisinger plan is asking for 58%; Geisinger is a significant player in that state.  The list goes on and on.

The table

The table below shows the data I was able to mine from healthcare.gov on the rate increases.

State Number of plans reporting Median Rate Increase (Conditional on Rate Increase > 10%) Rank
Alabama 14 24 13
Alaska 13 24 14
Arizona 24 20 17
Arkansas 3 21 16
California 0 N/A
Colorado 0 N/A
Delaware 26 16 28
District of Columbia 8 14 38
Florida 13 18 25
Georgia 27 16 29
Hawaii 6 18 22
Idaho 57 19 20
Illinois 16 15 31
Iowa 30 25 11
Kansas 15 35 3
Kentucky 0 N/A
Louisiana 15 18 26
Maine 0 N/A
Maryland 8 30 6
Massachusetts 0 N/A
Michigan 12 15 33
Minnesota 0 N/A
Mississippi 6 26 10
Missouri 13 16 30
Montana 12 34 4
Nebraska 12 15 32
Nevada 25 14 36
New Hampshire 11 44 2
New Jersey 7 12 40
New Mexico 3 59 1
New York 0 N/A
North Carolina 17 26 8
North Dakota 3 18 23
Ohio 15 14 34
Oklahoma 8 28 7
Oregon 23 20 18
Pennsylvania 51 32 5
Rhode Island 0 N/A
South Carolina 10 24 12
South Dakota 18 17 27
Tennessee 12 14 35
Texas 22 26 9
Utah 31 19 21
Vermont 0 N/A
Virginia 19 14 37
Washington 24 13 39
West Virginia 14 19 19
Wisconsin 12 18 24
Wyoming 6 23 15

Caveats

All of that said, the figures should not be misinterpreted.  The following caveats must be considered.

1. The data only lists those insurers that requested an increase of more than 10%.  There are many plans that requested increases less than that amount.  So it is incorrect to say that the average or median increase in insurance prices is going to be 19%. If a lot of big insurers are requesting increases less than 10%, the average increase will be less than 19%.  On the other hand, if the big insurers are over 19% and it is mostly small insurers that are submitting rate increase requests of under 10%, then the 19% figure is too low.

2. The data is not weighted by the number of policies sold by an insurer.  With all respect to small insurers (and small states), in the grand scheme of things it does not matter much if a small insurer in a small state is raising its rates 40%.  Of course it will affect the people involved, but it is not a good bellwether of the performance of the ACA.  On the other hand, if a big insurer in a big state, like Scott & White in Texas, is requesting increases (as is the case) of 32%, that is a very big deal. Until we have an estimate of the number of policies sold by each insurer, a secret that seems to be more tightly guarded than many diplomatic communications, it is hard to know perfectly what the numbers in the list actually mean.

3. The data for some important states is missing.  We have no data for New York and California, for example, and no data from about seven other states. Does that mean that there are no insurers there requesting more than a 10% increase, that the data is just delayed, or is there another explanation?  Until this mystery is resolved, it’s hard to know fully what the numbers published today imply.

4. Ask does not equal get. All we have right now are the rate increases requested by insurers.  There now follows a review process in which the reasonableness of the rate increases are examined.  If the federal government or, in some instances, the states find the rate increases unreasonable, then they do not go into effect.  Of course, insurers who see their rate increases denied, may decline to sell the policies, which results in less competition and leaves many insureds without any continuity in coverage. Yes, it is possible that some insurers are bluffing and requesting pie in the sky.  The risk in calling that bluff by denying or modifying a rate increase is that the insurer may pull out.

5. I basically did this analysis by hand because CMS has not released the data in a form (such as Excel, CSV, JSON or others) that would facilitate machine analysis.  I tried to do the work carefully, but I am an imperfect human.  I am doubtful, however, that any errors materially affect the conclusions here.

 

 

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The Cons of the ACA

Recently, I was honored to speak before the PIAA, a group of insurance professionals, at the organization’s annual conference in Las Vegas.  The idea was that I would speak on the problems with the ACA and Ardis Hoven, M.D., past president of the the AMA, would speak on positives about the ACA.  I thought the format worked well and I appreciated the high level of discussion and civility of Dr. Hoven.

Here’s what I had to say. Since you can’t use footnotes or hyperlinks in a speech, I’ve provided a few additional annotations here to show the source of some of the information.

The Speech

I’m here to talk about the architecture of the ACA and its problems.

The ACA takes a bold risk.  It places our economy and our health on an metaphorical aircraft whose ability to fly is challenged by history. It proceeds on the assumption that, whereas almost all community rating systems in health insurance have crashed in ugly adverse selection death spirals, the craft engineered by the Obama administration and its consultants is so sophisticated that it will avoid such a fate.  Many will tout what they see as the success of the ACA thus far in reducing the number of uninsured and the absence of many catastrophic failures as evidence that the ACA flies.  But we have not seen turbulence. It is an open question whether, long term, the ACA can survive in its present form.

Let us now talk about how the ACA flies.  It uses a variety of mechanisms to keep it aloft.  The problem is that almost every one of them has the potential for being undermined.

Individual Subsidies

The ACA depends desperately and in perpetuity on taxpayer funded policy subsidies provided directly to the insured. There is a premium subsidy based on household income. And there is another effective premium subsidy achieved through what is termed a “cost sharing reduction program” but this really amounts to people getting gold, platinum or diamond — my term — policies but only having to pay the silver price.  These subsidies have been crucial to the touted success of the ACA.  They have brought low risk individuals into the pool. Without the subsidies, the insurance market would need to depend solely on risk aversion to achieve price stability and escape the death spiral.  Prior experiments relying only on risk aversion alone have been notoriously unsuccessful.

For better or worse, the subsidy has had an immense effect. A recent study conducting by Avalere shows that 83% of Exchange enrollees have incomes at 250% or less of the federal poverty level for their households. The take up rate among those eligible for ACA exchange policies falls from 76% for those earning 100-150% of FPL down to just 16% for those earning 300-400% of FPL. Take up then plummets to 2% for those earning more than 400% of FPL and who are thus ineligible for subsidies.

This elasticity in the demand for health insurance is precisely why the forthcoming Supreme Court decision in King v. Burwell is of such great importance.  If the Supreme Court issues a square holding that the federal government lacks authority to pay the premiums where the state itself has not directly established an Exchange, and neither Congress nor the states does anything to fix the matter, expect insurers in those states rapidly to stop offering individual health insurance on the Exchanges. Indeed, clause IVB in the contracts those insurers negotiated with the federal government precisely in anticipation of King v. Burwell would permit those insurers not just to exit the market next year but to cancel existing policies midstream.

A side point, but one that might trouble this audience.  Every insurer that I know of is accepting payments from the federal government for cost sharing reductions.   But those payments are almost certainly illegal. Congress never appropriated any money for Cost Sharing Reductions.  So, under the law as written, insurers who want to play in the Exchanges are really supposed pay for cost sharing reductions themselves.

Of course, to my knowledge, that’s not happening. The money now landing in insurer’s bank accounts is coming from a fund set up for tax refunds that is, by law, dedicated exclusively to that purpose.  That, I believe is unlawful and, should another party ever control the Executive branch and want to look for a villain or want to extort various favors from someone whom they have over a barrel, might it not chase insurers for receipt of diverted funds?  There is a 1938 Supreme Court decision saying the Government can recover funds paid illegally and a 1990 Supreme Court decision saying that a claim of estoppel can not lie against the federal government.   So, before insurers become accessories or before they count as money on their balance sheets that they might have to pay back, they might want to look at these cases.

Reinsurance subsidies

There are also less visible features of the ACA that are designed to improve the probability of the airplane staying aloft. The ability of the ACA to fly also depends substantially for 2014, 2015 and 2016 on premiums subsidized by free specific stop loss reinsurance given to insurers who agree to risk their capital in untested Exchange markets.  It is, however, a form of support that is going to flame out after 2016.

How much support does it provide? If you use the data from the 2016 draft actuarial value calculator produced by CMS, you can compute that the subsidy will still be about 3% of premiums for 2016.  It was higher in 2014 and 2015. How will the ACA continue when prices increase at least 3% more just due to the elimination of this single subsidy.  The naive might think that 3% is not all that much.  And, without taking adverse selection into account, I would expect the market to shrink only by about an equal percentage.  But if history and economics tells us anything — and it does — because of adverse selection, the actual price increase will be greater and the resulting decline in enrollment will be greater.

I would not expect Congress to do any sort of mid-flight refueling of reinsurance subsidies, to continue my airplane metaphor. The policy justification for specific reinsurance subsidies seems rather thin.  If reducing the overall risk to insurers was the issue, aggregate stop loss, perhaps available at an actuarially fair price, rather than free specific stop loss reinsurance would make more sense.  And if the government, and, derivatively, the insurance industry, was fearful of there being no market for reinsurance where the risk involved was so untested, Congress could have made a guess and established a fair price and reinsurance facility itself. Moreover, if uncoupling household income from the ability to obtain medical care was a primary goal of the ACA,  why would Congress not just increase individual premium subsidies instead of sending that money to enrich, sorry guys, insurance companies?  This form of corporate welfare helps people at 350% of federal poverty level or even people at 1000% of FPL buying unsubsidized policies on the Exchange as much as it helps the person earning 150% of FPL who might desperately need more assistance. If one accepts major premises of the ACA, one might seriously question why such is the case.

Risk Corridors: The Free Derivative

The ACA depends somewhat for 2014, 2015 and 2016 on another form of subsidies for the insurance industry.  It indirectly subsidizes premiums by providing insurers with a free financial derivative: risk corridors that reduce the amount of capital prudent insurers might otherwise need to stockpile or aggressive state regulators might require them to stockpile. This reduction occurs because Risk Corridors reduces the probability of insurers losing substantial amounts of money via participation in the Exchanges. To use a finance term, Risk Corridors reduces Value at Risk, which is a decent estimate of the amount of money participating insurers need to keep in more liquid and probably less lucrative investments.

If you run the computations — ask me how — it looks as if Risk Corridors reduces the amount insurers need to charge for Exchange policies by a little less than 1%.  Again, you might say, in what I suspect would be a deprecating tone, big deal. And, I agree that, taken by itself, the ACA is unlikely to crash based on a 1% increase standing alone.  But it’s all cumulative and the problem with death spirals is that once you find yourself in their clutches they are a bit like a black hole, very difficult to escape.

Insurers may not have to wait until 2017 for Risk Corridors to disappear.  They are already in grave trouble.  Congress also never appropriated any money for Risk Corridors. And this wasn’t an accident. The statute, as written, depends on assessments on insurers based on a formula to magically equal payments out to insurers based on a formula over the 3-year span of the program.  We are already seeing, as many predicted, however that such an assumption was unwarranted.  Due perhaps to loss leader pricing and the predictable propensity of consumers to pick precisely those plans that were charging too little relative to actuarial risk, it appears that, on balance, at least after what I would hope would be clever but lawful accounting, that few insurers are making enough money under Obamacare policies to provide any funding to the many insurers who gained volume at the expense of profitability. So, when the Obama administration suggested it might lawlessly raid other government accounts to fund Risk Corridor deficits, Congress responded in section 227 of the Cromnibus bill by walling off the plump Medicare Parts A and B trust funds and CMS operating accounts as a source to repay obligations created by the Risk Corridor program.

Might deficits in early years of Risk Corridors be funded out of profits in later years as the Obama administration has suggested? The omens aren’t good. According to a review of 2014 industry filings by Standard & Poors, Risk Corridors will likely collect less than 10 percent of what industry is expecting to be reimbursed. 14% of insurers will likely pay into Risk Corridors.  56% expect money out. The absence of Risk Corridor money will be fatal to some insurers.

Already, we are seeing the death and near death of some less well capitalized insurers, particularly the co-ops capitalized, I might add, not so much by private investors but by $2.4 billion from the taxpayers in a less well publicized cost of Obamacare. Low premiums are not of terribly great value if they end up bankrupting private insurers on whom the success of Obamacare depends.

Individual Punishment

Thus far, I have spoken of the carrots to get even people of low risk to participate in the Exchange marketplaces.  Obamacare is fueled, however, not just by subsidies but by punishment. Obamacare chose a different punishment model than for programs such as Medicare Part B or Medigap.  In those programs, and in some Republican proposals for Obamacare reform, if you don’t select insurance when you are first eligible, you just pay a lot more for insurance if you elect coverage later.  No commerce clause problems, no tax. Obamacare, by contrast, increases administrative costs by potentially assessing  a penalty each year if you don’t have coverage. The ability of this punishment to stem a death spiral depends on the size of the punishment and the number of people who are subject to it.  And what I now wish to suggest is that even without its formal repeal, the Individual Mandate was weak to begin with and has been further enfeebled by administrative moves taken in response to political uproar.

Consider, for example, a slightly fictionalized version of one typical American. According to the Kaiser Foundation Calculator, a 45 year old non-smoking person making $48,000 per year would expect to pay $3,742 on average for a Silver Policy.  Suppose, however, that the individual considers themselves to be only 30 in health years. The individual thus considers its average expenses that would be covered by insurance to be $2,941.  Would the $746 difference in tax created by the mandate be sufficient to get that person to purchase an Exchange policy.  Not if that person was risk neutral.  $746 in tax is less than the $801 excess in medical expenses.

Alternatively, eliminate $3,000 from the person’s income. Now, because the premium the individual would have to pay is more than 8% of household income, the individual is exempt from the individual mandate. There are a significant number of uninsured people thus exempted from the mandate on grounds that they are simply too poor to purchase Obamacare.

But there’s more to make sure, as the CBO recently confirmed, that only one in six of the uninsured will actually be subject to the mandate.  There is the absurdly expanded hardship exemption. There’s the health sharing ministry exception mostly for evangelical Christians. And there’s the peculiar 3 months off exemption (26 USC § 5000A(e)(4)).

In short, one of the reasons Obamacare will have difficulty flying is that we are afraid of our inability accurately to determine whether people can really afford insurance and at what price.  For now, though, if one wants to rely on sticks, the stick is actually too weak and hits too few people.

The Employer Mandate

Another key component of the ACA has been the employer mandate.  Or, at least it was supposed to be a key component.  In fact, in what a lot of people, including me, think is a very dangerous precedent that will, one day, bite ACA proponents in the proverbial behind, the Obama administration simply decided, without any apparent discretion, to delay enforcement of the law for one year and, for the current year, to apply the statute only to employers with more than 100 employees, even though the number the statute picks is 50. If a change to the tax code is so complicated that it takes mid sized businesses with financial advisors 5 years to understand it, perhaps that’s a sign there is something more fundamentally wrong.

At any rate, the employer mandate is, for lack of a more sophisticated term, stupid. If it actually works, it keeps people off the individual exchanges, which is exactly what should not be happening. The employer mandate perpetuates both symbolically and literally the counterproductive tie between a poorly functioning and lumpy labor market and something as important as health.  It puts the employers’ decision as to what sort of coverage best suits the employee ahead of the ability of the individual to choose.  The tax deductibility of payments helps the wealthy more.  The lack of portability between jobs decreases the sort of continuity of care that might improve health. It is everything a good liberal should hate.  (Indeed, some have had the courage to note the many flaws with the current law.) And so I wonder if King v. Burwell comes out against the government, whether the employer mandate, which has barely made it on to the Obamacare Aircraft, might be abortively deplaned with eager Republicans and Democrats in need to save face actually coming together on this issue.  Indeed, if I were a Limbaugh-style Republican who wanted Obama to fail, I would actually insist on the employer mandate continuing as a way of starving the individual exchanges of healthy people who might stabilize their prices and of helping high income voters more.

Conclusion

One’s perspective on the ACA can’t be whether it helps insurers or whether it helps the medical profession.  In fact it shouldn’t even be on whether more people have health insurance.  The positive factor to be considered is whether it has improved health.  I will concede that, on balance, it probably has — slightly. Many medical interactions are beneficial and, although supply of medical practitioners has not increased much, there are 2-4% more such interactions thanks to the ACA.   In any event, whether the ACA marginally improves health is not the exclusive test.  These programs have to be paid for and they come at a heavy price.  The CBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.

If you forget about Medicaid expansion and take the net increase the uninsured as a result of the ACA and divide that by the cost of providing coverage to them, it turns over 10 years to average with premium subsidies, cost sharing reductions, the 3Rs, and administrative costs about $7,600 per person.  And in addition to racking up our already bloated deficit, there will be be taxes, fees and subsidies that have their own perverse incentives. Some have estimated the cost of providing a currently uninsured person an additional year of a quality life at over $200,000 possibly over $1 million. That’s enough that we have to look hard at whether there might be some better and simpler alternatives.

As we move forward  ought to be looking not at Obamacare vs. The Bad Old Days Where Evil Insurers Deprived Sick People of Coverage but rather to a variety of alternatives ranging from, yes, Bernie Sanders Single Payer plan to, better,  libertarian plans to use market mechanisms more effectively  to perhaps better yet, lots in between.  Yes, Obamacare has gotten off into the air, but if they would honestly call “Mayday,” it is my hope that a variety of people would try to help out.

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Yes, you can pick your health plan or your doctor for now, but prepare to start paying a lot more for the privilege

Much has been written about the general issues associated with higher premiums for plans purchased on the various Exchanges under the Affordable Care Act. The fear is that higher premiums will price individuals out of the market — at least lower risk individuals — and result in a spiral of premium increases. Supporters of the ACA counter, however, that increases in gross premiums — the amount insurers say they charge — does not matter much because the amount most individuals pay under the Affordable Care Act does not depend on gross premiums so much as it depends on one’s income. Recent studies, after all, suggest that about 87% of purchasers receive tax credits to purchase plans that depend solely on their income.

The truth, however, about the effect of premium increases under Obamacare is more complex. Basically, increases in gross premiums for basic silver plans can have a non-linear and frightening effect on increases in the net premiums Americans pay to persist in plans that are more generous either because they afford greater choice in selecting one’s doctors or because they require less cost sharing by insureds. The remainder of this blog post explains why.

Let’s start with a simple example drawn from real life to illustrate the general idea. Data taken directly from healthcare.gov shows that in my home city of Houston (Harris County, Texas), the gross premium for the second lowest silver plan (an HMO plan) is about $250 per month for a 40 year old individual. If that person’s net income is $25,000, under 26 U.S.C. § 36B their net premium can be computed as  $143 per month for that second lowest silver plan; the remainder is supposed to be paid via a $107 tax credit from the federal government. (Mathematica notebook containing the analysis available on request)  Suppose, however, the individual does not want an HMO plan but wants a PPO plan so they can have greater choice of doctors. The cheapest one in Harris County has a gross premium of $338 per month or about 35% more. But, because the tax credit stays constant at $107, the net premium is $231. This means that the right to select one’s own doctor costs our hypothetical individual 57% more in the amount they actually pay.

The situation is similar if one is willing to accept an HMO plan but one wants the plan to pay a higher percentage of expected medical expenses. The second least expensive gold plan in Harris County is $297 per month or 18% more than the second lowest silver plan. Again, however, because the tax credit remains the same, there’s a problem: the actuarial value of the gold plan is actually just 14% higher than its silver counterpart, but because of the way subsidies are calculated, the cost is 33% higher. Only two types of people would likely be willing to incur this “double payment” to get a better plan: people who are unhealthy for whom a small improvement in a plan might mean a great deal or people who are just extremely risk averse.

The situation persists for the few platinum purchasers. If one goes from the second lowest silver plan all the way to the second least expensive platinum plan, it turns out that the net premium increases a whopping 138%. And this is true even though the while the gross premium goes up by 79% to $448 per month and the actuarial value of the policy goes up only about 29% and the gross premium goes up “only” by 79%. One can imagine that the only people of this income level willing to incur this high a premium increase in exchange for only somewhat better coverage would be those who expected to use the coverage extensively — exactly the people that force insurers to increase future prices.

Some of the same mathematical logic that drives the disproportionate increases in net premiums in a single year applies in a similar way to premium changes over time. Let us consider our same individual and project forward to 2016. Imagine that they purchased that PPO silver plan in 2015 and wish to continue in it. To do the computations, we’ll have to make a few assumptions: (1) that the federal government’s expected contribution from income increases for 2016 at the same rate it increased for 2015 and that the federal poverty levels for 2016 likewise increase at the same rate that they did in 2015. Suppose further that the gross premium for the second lowest silver plan and the gross premium for the increases by 4% but the gross premium for the gold HMO plan or the silver PPO plan increase by 8%. If our individual’s income again increases by 10%, the net price of the more generous policy jumps by 13.5%. The effect is non-linear.

And what if we start talking not about individuals, but about families?  Consider, now, the family of four with two adults each age 40. We’ll give the family an income of $50,000 per year. Again, for concreteness, I’ll place them in Harris County, Texas. The gross premium for the second lowest silver plan (an HMO) is $748 per month. But with a tax credit of $456, the net premium for that policy is $292 per month. If the family wants to purchase a silver PPO, the cheapest one will feature a gross premium of $1013. Since the tax credit stays the same at $456 per month, this means the net premium is $557 per month, an increase of 91% just to get more choice in picking doctors. Or, if the family wants to purchase the second cheapest Gold HMO, that will cost $890 gross and $434 net. This is an increase of 49% just to get a plan with 14% richer expected benefits. Now, whom do you suppose might pay such a disproportionately higher amount?

The diversity of metal levels and of plan types has always been touted as a benefit of Obamacare. It is supposed to distinguish the ACA from  administratively simpler (“one size fits all”) regimes such as single payor plans. But the existence of premium subsidies pegged to the price of the second lowest silver plan means that the present diversity of plans may be a short run phenomenon or that the diversity may exist only on paper. There may technically still be gold plans or PPOs, but very few may be purchasing them. Assuming Obamacare lasts a few more years, we may effectively see the demise in the marketplace of Gold and Platinum plans and, even more likely, the demise of Gold and Platinum PPO plans. Choosing one’s doctor may, as a practical matter, become a sensible option only for the few wealthy purchasers that do not depend on subsidies.

Might this all be just sort of bug that would be easy to fix if only Congress were more cooperative? Actually, not. The high marginal costs of more generous policies is a fundamental feature of Obamacare’s architecture. It is one  that is simply becoming more apparent as the program matures. Once you tell people that government will essentially buy you an HMO silver plan if you contribute some amount based on your income – but will pay no more – the net costs of buying anything more generous than that inevitably look very high.

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Insurers run risk accepting illegal cost sharing reduction payments

In a set of letters addressed this week to Treasury Secretary Jack Lew and Health and Human Services Secretary Sylvia Burwell, Congressman Paul Ryan and Fred Upton, acting as chairs of various House committees, ask a very good question: where has the Executive branch found the authority to pay $2.7 billion to the insurance industry under the  guise of the “cost sharing reduction” program that is part of the Affordable Care Act?  That program, contained in section 1402 of the ACA and sometimes called the “Section 1402 Offset Program,”  was intended to permit lower income households purchasing “Silver” health insurance policies on the Exchanges set up by the ACA to get policies that not only had subsidized premiums but also provided greater benefits.  Purchasers receive plans at the “Silver” price but that actually have cost sharing similar to more generous Gold or Platinum policies.  The federal government would pay insurers for the expected difference in costs.  Congress, so far as anyone can tell, never appropriated any money to pay for this cost sharing reduction program, however. If true, this means that insurers still wishing to sell in the Exchanges needed to recoup losses on cost sharing reduction policies not from the federal government but, presumably, by charging other policyholders more.

The Ryan and Upton letters, coupled with the complaint in a lawsuit filed by the House of Representatives against Lew, Burwell and others last year, set forth what appears to be a persuasive argument: Congress never appropriated any money for this program. Thus, the Obama administration’s payment of billions of dollars to insurers for cost sharing reductions out of funds intended for tax refunds is not, as the executive branch has asserted through Secretary Burwell in May of 2014, a matter of “efficiency.”  Instead it is a diversion of funds intended to cover refunds of taxes into a program having nothing  to do with refunds. It is no more appropriate than paying for cost sharing reduction by raiding the Indian Health Service appropriation on the theory that it too was significantly affected by the ACA.

The Illegality of the Cost Sharing Reduction Payments

I have another question, though.  It starts with an assumption. Assume, for the moment, that there is no good answer to the question posed by Congress and that the Obama administration is acting unlawfully. Assume that by contracting with insurers to pay money and by then paying them money pursuant to the cost sharing reduction program, high level Obama administration officials are violating, in a fairly obvious way:

  1. Article I, section 9 of the Constitution (“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law”);
  2. The “Purpose Statute,” 31 U.S.C. § 1301 (“Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law”); and
  3. The Anti-Deficiency Act, 31 U.S.C. § 1341(a)(1) (“An officer or employee of the United States Government or of the District of Columbia government may not— (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation; (B) involve either government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law …“).

Assume, then  that the General Accounting Office is dead on when it recently wrote: “Agencies may incur obligations and make expenditures only as permitted by an appropriation. … The making of an appropriation must be expressly stated in law. 31 U.S.C. § 1301(d). It is not enough for a statute to simply require an agency to make a payment.” Assume that the District of Columbia Circuit got it right when it recently cited constitutional scholar Joseph Story for the proposition that “If not for the Appropriations Clause, `the executive would possess an unbounded power over the public purse of the nation; and might apply all its monied resources at his pleasure.'” Assume, even, that what is going on is a criminal offense under 31 U.S.C. § 1350:

An officer or employee of the United States Government or of the District of Columbia government knowingly and willfully violating section 1341(a) or 1342 of this title shall be fined not more than $5,000, imprisoned for not more than 2 years, or both.

The Problem for Insurers Receiving Illegal Payments

Now, perhaps no one has standing directly to challenge the billions in unauthorized expenditures on cost sharing reductions. Perhaps the Obama Justice Department is unlikely to bring criminal charges against its cabinet officials under 31 U.S.C. § 1350 for knowing and willful unlawful diversion of federal funds.   But, here’s the question.

Might not insurers receiving these unappropriated funds pursuant to the cost sharing reduction program be civilly and, potentially, criminally liable when it is plain that the payments are unauthorized?

If I were an insurance company, whose balance sheets often go through life with a bullseye painted on them and whose executives are seldom the subject of public adulation, I would be concerned about the potential for serious liability.  To be sure, the Obama administration is unlikely to pursue the matter; but any political constraints against revenge/just desserts by some future administration against Obama cabinet officials who engaged in the diversion might not protect insurers and, potentially, their executives. They might well be painted as conspirators or possibly accessories in receipt of patently unauthorized funds.

If insurers could at one time claim ignorance of the problems with the payments as a defense, that time appears to have expired. This is not an instance of trapping insurers by forcing them to look through, every time they get a federal dollar, the maze of federal appropriation statutes. We now have (a) the well publicized House lawsuit, (b) the now publicized letter of the Congressman to Secretaries Lew and Burwell and, perhaps most tellingly, (c) insurers’ deliberate insertion in their 2015 contracts with the federal government provisions excusing them from a remaining duty of performance (subject to state law) if cost sharing subsidies are not available to enrollees.  Since the most probable basis for such a discontinuation of cost sharing subsidies would be a finding that their payment was unlawful,  insurers thus sure look like they are on notice that there is a very serious question as to whether these payments are authorized by law.

I hope some courageous attorneys and auditors working for insurers receiving hundreds of millions of dollars under the cost sharing reduction program and who may well have duties to shareholders are busy researching both the legality of the continued receipt of funds. I hope they are also urgently researching whether any notice of potential illegal receipt needs to be provided — now — to shareholders.

Some initial legal research

Here’s what those researching civil and criminal liability are likely to find.  First, they are going to find many cases, including United States v. Wurts, a 1938 decision of the Supreme Court, authorizing the government to recover benefits paid in error or  without authorization.   There the issue was whether the government could recover a tax refund wrongfully paid even in the absence of a specific statute authorizing recoupment.  The court said that the government had inherent power.

The Government by appropriate action can recover funds which its agents have wrongfully, erroneously, or illegally paid. ‘No statute is necessary to authorize the United States to sue in such a case. The right to sue is independent of statute,’

And Wurts, although an older case, is cited today. A 2005 case, for example, cited Wurts in an effort by the government to recover payments wrongfully made to Medicare providers.  A 2003 case relied on Wurts to recover interest wrongfully paid by the government to a taxpayer.

The insurance industry will not be able to defend against their repayment obligations by asserting, “but the Obama administration told us these payments were authorized.” Such an “estoppel” claim will fail. The key case here is a United States Supreme Court case from 1990, Office of Personnel Management v. Richmond, 497 U.S. 1046. It held that so-called “equitable estoppel” does not lie against the government, even in circumstances far more sympathetic than those that would be presented in a suit against large insurers.  In OPM, the Court wrote:

Extended to its logical conclusion, operation of estoppel against the Government in the context of payment of money from the Treasury could in fact render the Appropriations Clause a nullity. If agents of the Executive were able, by their unauthorized oral or written statements to citizens, to obligate the Treasury for the payment of funds, the control over public funds that the Clause reposes in Congress in effect could be transferred to the Executive. If, for example, the President or Executive Branch officials were displeased with a new restriction on benefits imposed by Congress to ease burdens on the fisc (such as the restriction imposed by the statutory change in this case) and sought to evade them, agency officials could advise citizens that the restrictions were inapplicable. Estoppel would give this advice the practical force of law, in violation of the Constitution.

What this means, at a minimum, is that insurers should be very concerned that, given certain political developments, they may well be forced to give the cost sharing subsidies back.  Publicly traded insurers at least, then need to be concerned about whether they have a duty to shareholders — right now —  to warn them that their financial statements may not reflect this contingent liability.  At the very least, these insurers need to look at the size of these cost sharing payments relative to other assets and income to see if a repayment obligation would materially affect their financial statements.

Insurer liability for criminal conspiracy?

But perhaps it gets worse. An aggressive prosecutor might think about criminal liability.  Could the insurers receiving these funds be seen as conspiring with federal government officials to violate 31 U.S.C. § 1350?  There is, after all, a general federal conspiracy statute, 18 U.S.C. 371:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

To be sure, the “conspiracy” at issue here is not exactly a classic conspiracy in which one person robs a bank while the other serves as driver of the get-away car. Moreover, there has been no effort at concealment by the insurance industry that they are receiving these funds.  If this is a conspiracy or an abetting, it is one occurring in plain view. Nonetheless, there are cases that should trouble insurers.

Consider United States v. Mellen, 393 F.3d 175 (D.C. Cir. 2004). There a government employee conspired with a government vendor to divert tens of thousands of dollars of electronic equipment to her home. Among those indicted for this unauthorized diversion was the employee’s husband, an employee of the federal Environmental Protection Agency.  The husband, though not particularly active in his wife’s crime, except for giving a stolen laptop to his son from a prior marriage, was nonetheless convicted for conspiracy based on this lesser participation and knowledge that the goods were stolen.  As now-Chief Justice Roberts phrased it in upholding conviction on a federal conspiracy charge:

Here, a jury could have concluded that Luther was in charge of the couple’s finances, that he understood the way government purchasing works, and that he knew the nature of his wife’s work. It would not take a rocket scientist to deduce that the electronic equipment Luther was himself using was stolen—an EPA employee with procurement training could do that.

Moreover, Roberts said, the defendant could not avoid liability by attempting not to investigate whether the goods were stolen.

[G]uilty knowledge need not be proven only by evidence of what a defendant affirmatively knew. Rather, the government may show that, when faced with reason to suspect he is dealing in stolen property, the defendant consciously avoided learning that fact.

Although the issue of cost sharing reduction payments is not exactly equal to the domestic situation at issue in Millen and receipt of stolen property, there is enough similarity to give pause. If the property is stolen (the payment is unauthorized) and the defendant has reason to suspect he is dealing with stolen property (unauthorized payment) and stealing of government property (making an unauthorized payment under 31 U.S.C. § 1350) is unlawful, those with even minor acts in furtherance of the transaction may be held liable for criminal conspiracy.  Although the crime is not a strict liability one, actual knowledge that the goods are stolen (payments are unauthorized)  is not required.

The law says that faced with suspicion — perhaps the sort generated by the House lawsuit here and the insurer’s own contract — conscious avoidance of learning of the provenance of the money may not prove an adequate defense.  Insurers at this point likely have some duty to perform some legal research. How much suspicion of a crime is required? Some courts say one needs to believe it to a “high probability.”  Maybe that’s not met here — at least not yet.  But if I were an insurer or an insurance executive I would hate for my fate to rest on that thin reed.

Let’s take one more case: United States v. Kozeny, 667 F.3d 122 2d Cir. 2011), the appeal of a conviction against a Frederic Bourke Jr.  for conspiracy to violate the Foreign Corrupt Practices Act.  The case involved bribes paid to government officials in Azerbaijan in connection with the privatization of the state oil company there. Again, I would hardly contend that this case is on “all fours” with what is going on with cost sharing reductions, but it is still instructive and disturbing.

Here’s why Kozeny should trouble insurers taking cost sharing reduction payments. One of the issues in the case was whether the trial judge had erred in giving the jury an instruction under which it could find Bourke guilty of conspiracy if he “consciously avoided” knowledge that his business partner was paying bribes to Azerbaijani officials.  The appellate court upheld the giving of the instruction, saying it had a factual predicate.  Here’s the kind of evidence found sufficient for a conscious avoidance instruction leading to a conspiracy conviction. The quotes below occurred in meetings between Bourke, his attorneys, and other investors.

  1. “I mean, they’re talking about doing a deal in Iran…. Maybe they … bribed them, … with … ten million bucks. I, I mean, I’m not saying that’s what they’re going to do, but suppose they do that.”
  2. I don’t know how you conduct business in Kazakhstan or Georgia or Iran, or Azerbaijan, and if they’re bribing officials and that comes out … Let’s say … one of the guys at Minaret says to you, Dick, you know, we know we’re going to get this deal. We’ve taken care of this minister of finance, or this minister of this or that. What are you going to do with that information?
  3. What happens if they break a law in … Kazakhstan, or they bribe somebody in Kazakhstan and we’re at dinner and … one of the guys says, ‘Well, you know, we paid some guy ten million bucks to get this now.’ I don’t know, you know, if somebody says that to you, I’m not part of it … I didn’t endorse it. But let’s say [ ] they tell you that. You got knowledge of it. What do you do with that? … I’m just saying to you in general … do you think business is done at arm’s length in this part of the world.

One wonders if there have not been parallel conversations amongst insurers. There may well have been speculation between insurers and their attorneys (that becomes unprivileged at some point) as to whether the cost sharing reduction payments don’t come unlawfully from unappropriated funds.  There may well have been speculation that the motivation for the payments was political — making sure Obamacare succeeds — rather than strict conformity with the law.

Conclusion

To be sure, it can’t be the case that any time an insurer or other party investigates whether payments from the federal government have been appropriated or not, the insurer can’t take the money without fear of criminal liability. No one would do business under those circumstances. But, at some point, insurers can’t resemble ostriches on  receipt of funds where there has been considerable warning that the payments are unauthorized. And, if their own investigation yields conclusions similar to that of the House of Representatives in their lawsuit, insurers who continue to accept funds do so at considerable risk. In the mean time, at a minimum, it would be prudent for insurers to place cost sharing reduction funds in some sort of segregated account so that there would be no issue of returning the money when some court authoritatively holds that the payment of these federal funds, without an appropriation from Congress, however much it helped Obamacare, however much Congress should have included an appropriation for them, was nonetheless illegal.

 

 

 

 

 

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Comparable SHOP policies are more expensive than individual ones: Why?

One of the ideas behind employee group policies and one of the purported virtues of employer sponsored health insurance is that the marketing and other overhead costs are lower.  Instead of selling 200 policies to 200 persons, the insurer sells one policy to an employer.  And one reason employer sponsored health insurance has often been supposed to be lower priced than comparable individual policies is that individuals who are gainfully employed tend not to have at least some of the expensive chronic or acute conditions such as certain forms of cancer or serious heart disease.

These assumptions predict that if one looks at policies sold in the individual exchange and the SHOP exchange under the Affordable Care Act that are sold in the same county, from the same issuer, have the same marketing name, have the same metal level, the same plan type (PPO, HMO, etc.), the same deductible and the same out-of-pocket limit, the SHOP premiums should on balance be lower than the individual premiums.  Apples to apples, they should at least be no higher. Indeed, lower potential premiums are one of the key reasons for the existence of SHOP exchanges.

When I examine the data available from healthcare.gov, however,  I find that the opposite is true.

SHOP policies are on average 8% more expensive than  apparently identical individual policies.

That’s the key finding.  The rest of this post tries to figure out why this might be the case. I’ll tell you the statistical ground I traversed in this effort. But I will confess that at the end of the day I am not quite sure why it is that SHOP premiums sure appear to be higher.

It’s not a matter of outliers skewing the mean.  The median premium ratio between comparable SHOP and individual ratios  — the “SHOP/individual ratio” — is 1.08. 10% of the comparable policies are more than 21% more expensive on the SHOP exchange. And even the lowest 10% are just 2% cheaper on the SHOP exchange than on the individual exchange.

The figure below shows the distribution of SHOP/individual ratios among the 12,689 comparable policies in the dataset. As can readily be seen, most policies are more expensive on the SHOP exchange. (A SHOP/individual ratio greater than 1 means that the median SHOP policy was more expensive than the median comparable individual policy).

nationwidePremiumRatioHistogram

Breaking down the data to gain insight

The state in which the policy was sold and the issuer might affect the SHOP/individual ratio.  Unfortunately the effects of these potentially separate variables are extremely to tease apart because no issuer sold in more than one state.   The table to the left shows the results. It shows significant variation in median SHOP/individual ratios across the combination of issuer and state.   On the top end, Minuteman Health,  which sells in New Hampshire has a ratio of 1.31 and Health Alliance Medical Plans, which sells in Illinois has a ratio of 1.25 Montana Health CO-OP has a ratio of 1.2. On the bottom end, CommunityCare, which sells in Oklahoma has a ratio of 0.76 and CoOpportunity Care, which sells in Iowa, has a ratio of 0.86.

 

StateIssuermedianRatio

The best I can do to tease out whether it is the state in which the policy is being sold or the issuer in the state that is responsible for the variation is to look at those states in which all  the issuers have SHOP/individual ratios greater than the median of 1.08 and none have a lower one.  Two states show up: Montana and Texas.  This suggests some regulatory issue or special market condition in those two states that is leading SHOP premiums to be unusually high or individual premiums to be unusually low.  Unfortunately, the finding is not particularly robust and I will confess to having little idea what this special factor might be.

We can see if the metal level and the plan type end up affecting the SHOP/individual ratio once the issuer and state are controlled for.   Multivariate linear regression shows the impact of Metal Level and Plan Type to be quite small.  The greatest effect was shown by POS plans, which reduced the SHOP/individual ratio by 0.03.  Everything else had a smaller effect. Basically, SHOP plans tend to be more expensive than comparable individual market plans without regard to metal level or plan type.

An adverse selection theory?

Let me at least explore one other reason SHOP premiums might generally be higher.  There are several buffers against adverse selection — the proclivity of persons with accurate knowledge of higher risk to select greater amounts of insurance coverage — in the individual market.  A key one of these are the premium subsidies, which mean that many individuals, even those of relatively low risk, pay less for insurance than their expected cost of health care. There’s the individual mandate that likewise coaxes individuals, even those of low relative risk, to purchase insurance.  There’s an open enrollment period. An individual can’t easily wait until they get sick and then by insurance in the middle of the year.  In theory, they only can purchase insurance outside of the open enrollment window if they qualify for “special enrollment” by virtue of a small set of non-medical changes in their life circumstances.

The SHOP market may be more vulnerable to adverse selection problems.  There’s no employer mandate that applies to small employers that tend to be eligible for SHOP policies. Although there are some tax credit subsidies, they tend to be less lavish than those bestowed on individuals and they apply only to some small employers.  For other small employers there really aren’t any of the sort of “special deals” that might make it a good deal for even those whose employees and dependents are low risk. Finally there is no limited open enrollment period. On the contrary,  under 45 C.F.R. § 155.725(b), “[t]he SHOP must permit a qualified employer to purchase coverage for its small group at any point during the year. ”  Thus, an employer can wait until someone they care about — say the CEO’s daughter — gets really sick and then decide it would be prudent to have a employee group health plan.

What we may be seeing in the SHOP exchanges is an insurance world in which even the mild protections against adverse selection contained on the individual exchanges do not exist.  And the result is predictable: higher prices and very few buyers.

Conclusion

So, what do we do with this finding?  What do we do about the fact that SHOP policies tend to priced higher than comparable individual ones?  Standing by itself, I am not sure one can draw much of an affirmative policy implication out of the result, particularly where we don’t yet have a good handle on causation.  I do think it argues for thinking about imposing some adverse selection controls — such as limited open enrollment periods — if we are going to keep SHOP alive.

I also think, however, that the findings disclosed here have kind of a rebuttal value.  They mean that proponents of SHOP exchanges should have a difficult time grounding an argument to preserve that additional complexity of Obamacare on grounds that it saves money. Although there are, to be sure, exceptions, and although there may be other reasons to induce small employers to purchase health insurance for their employees, right now it does not look as if the price is right.

 

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Is there an answer to the House lawsuit on the ACA other than standing?

Many have been concerned that the architecture of health insurance without medical underwriting created by the Affordable Care Act was inherently unstable and that, sooner or later, the markets it created would contract due to serious adverse selection problems. Although various creative bolsters from the Obama administration have delayed that forecast from yet materializing, except perhaps for the most generous of ACA exchange plans, as it turns out, the more immediate threat to Obamacare may come not from its inherent architectural deficiencies but from technical flaws now being unearthed by program detractors.

One of these flaws has been much in the news: the failure of the premium tax credits section of the ACA (section 36B of the Internal Revenue Code) to extend to policies sold in states that did not establish an exchange pursuant to section 1311 of the Act.  There are approximately 34 such states. In 2014, they covered about two-thirds of those enrolled in individual health plans through the Exchanges.  The Supreme Court is likely to decide this term in King v. Burwell whether the Obama administration’s determination to extend tax credits to persons in those 34 states is lawful.  A decision against the Obama administration, which appears to be the prevailing prognostication,  will throw major parts of the ACA  into turmoil because only the sicker insureds with incomes that now qualify them for policies are likely to purchase those policies at full freight.  Insurers, knowing of that proclivity, are going to be very leery of selling such policies; adverse selection would seem inevitable.  It remains to be seen whether legislative action at the federal level — revision of section 1311 of the ACA — or at the state level — grudging creation of exchanges — would return those markets to equilibrium following a decision expected by many in King v. Burwell.

Another flaw, however, has not received much attention — until late. It is the apparent failure of Congress directly to appropriate money for another critical part of Obamacare that keeps premiums low: the cost sharing subsidies created by section 1412 of the law and now codified at 42 U.S.C.  § 18071.  The idea of this provision is that poorer purchasers can purchase a policy for “Silver” prices that ordinarily would have 30% cost sharing, but receive a policy that provides anywhere from “Silver plus” (27%) to “Platinum-plus” (6%) levels of cost sharing.  This way, lower-middle-class people can get a policy that they might be able to afford without much of its purpose being undone by hefty deductibles and copays.

Cost Sharing Reductions
Cost Sharing Reductions

 

For the reasons I outline below, it appears clear that Congress at least strongly contemplated that provision of these extra benefits to the poor would come not from higher prices for policies paid by wealthier purchasers on the individual exchange.  Instead, the federal treasury would pay the insurers for the extra costs they incurred in offering these more generous variants of the policy.  It appears that the Obama administration has been making such payments to insurers, even if the amount of the payments — potentially in the billions —  has not been made clear. (see 3:29:36 of this CSPAN video and the comments of CMS administrator Marilyn Tavenner).

In the lawsuit captioned United States House of Representatives v. Burwell, however, filed November 21, 2014, the plaintiff demonstrates with some care how Congress never actually appropriated any money for the cost sharing subsidies that sweeten Obamacare coverage. Presumably, insurers should thus have to cover themselves the resulting extra expenses created by higher utilization and lower deductibles and copay. Presumably insurers should do so out of revenues they receive from customers paying the full price. Gross premiums for everyone would thus need to be higher: probably 10-15% higher to cover the shortfall.  And if insurers neglected to take those extra expenses into account, well, tough on the insurers one supposes.  Such a lack of empathy would not be without recent precedent.  Congress just hurt the insurers badly in section 227 of the Consolidated and Further Continuing Appropriations Act, 2015 (“Cromnibus”) by apparently cutting off a creative funding arrangement the Obama administration had undertaken to make payments to/bailout the insurance industry through the Risk Corridors subsidy program.

The complaint
The complaint

Incomplete funding of Risk Corridors is middling potatos, however, compared to non-funding of cost sharing. I would not be surprised to see an increase of 10-15% in gross premiums result if such cost sharing payments were found unlawful.  An increase of (1) 10-15% resulting from the absence of appropriations for cost sharing subsidies, (2) perhaps 3% from whatever premium increases  are likely to result from  the “Cromnibus” decision not to permit circuitous funding of Risk Corridors deficits and (3)  perhaps another  7% from  increases in premiums that will result from the ACA-required phaseout of the Transitional Reinsurance provision under which the federal treasury covers insurers for insureds with large losses all adds up to a gloomy future for the Affordable Care Act. And that’s true even if, as its proponents claim, the cost curve is being bent. One reason insurance premiums are as low as they in the Exchanges is that, behind the scenes, the government is heavily subsidizing them in a variety of ways.

This cumulative projected increase can not be dismissed by asserting that the increase in premiums resulting from court-barred federal subsidies would affect only those earning more than 400% of the Federal Poverty Level and thus ineligible for Obamacare subsidies. Yes, it might appear that the net premium for others under section 36B really relates only to their incomes and not to the gross premium for insurance.

But the appearance of a limited effect is misleading in at least two respects.  Increases in premiums resulting from court decisions and statutory reductions will matter more broadly.  First, the subsidy only covers the cost of the second lowest silver plan in the rating area.  The many people wanting a plan more expensive than that — a Silver PPO in many parts of the country or even a Gold or Platinum HMO — will be affected.  Indeed, their net premiums will go up by a higher percentage than the increase in the gross premiums because the denominator of the increase calculation will not be the old gross premium but the (smaller) old net premium.  Second , to the extent that insurers attempt to compensate for the premium revenue shortfall by raising premiums on employer-sponsored insurance, under Revenue Procedure  2014–37 (page 363), which purports to implement section 36B, such a move would trigger increases in percentages of income that individuals have to pay as the net premium for even the second lowest cost Silver Plan.

So, what’s the answer?  We haven’t seen the literal answer in court to the complaint by the House of Representatives and, of course, there’s a very serious issue as to whether this is the kind of dispute that belongs in a court anyway.  Bet the house that the Obama administration will raise issues called “standing” and “political question doctrine” in an effort to get the case dismissed.  But, if those objections fail, is there an answer to the core of the House of Representative’s complaint on this point?

Congress intended that the federal treasury fund cost sharing

One answer might be that Congress at the time of the ACA’s passage clearly intended that payments for cost sharing reduction come out of the federal treasury and not through insurers charging higher prices.  The evidence on this point seems rather compelling.  Here is at least some of it.

  1. In discussing premium tax credits and cost sharing reductions, Section 1412(a)(3) of the ACA says that the “The Secretary [of HHS], in consultation with the Secretary of the Treasury, shall establish a program under which— the Secretary of the Treasury makes advance payments of such credit or reductions to the issuers of the qualified health plans in order to reduce the premiums payable by individuals eligible for such credit. “
  2. Section 1412(c), captioned “(c) PAYMENT OF PREMIUM TAX CREDITS AND COST-SHARING REDUCTIONS” states in subparagraph (3) “COST-SHARING REDUCTIONS.—The Secretary shall also notify the Secretary of the Treasury and the Exchange under paragraph (1) if an advance payment of the cost-sharing reductions under section 1402 is to be made to the issuer of any qualified health plan with respect to any individual enrolled
    in the plan. The Secretary of the Treasury shall make such advance payment at such time and in such amount as the Secretary specifies in the notice. “
  3. Section 1313(a)(6)  of the ACA , captioned  “APPLICATION OF THE FALSE CLAIMS ACT” states:  “Payments made by, through, or in connection with an Exchange are subject to the False Claims Act (31 U.S.C. 3729 et seq.) if those payments include any Federal Funds. Compliance with the requirements of this Act concerning eligibility for a health insurance issuer to participate in the Exchange shall be a material condition of an issuer’s entitlement to receive payments, including payments of premium tax credits and
    cost-sharing reductions, through the Exchange. ”  This provision makes little sense if cost sharing reductions were not paid for by the federal government.
  4. Section 1332 of the ACA addresses the possibility of states getting a waiver from many of the provisions of Title I of the ACA and says that in such event “the Secretary shall provide for an alternative means by which the aggregate amount of such credits or reductions that would have been paid on behalf of participants in the Exchanges established under this title had the State not received such waiver, shall be paid to the State for purposes of implementing the State plan under the waiver. ” Why would the State receive such funds for cost sharing reduction if the ACA did not contemplate that the federal government would already be paying for them?
  5. Section 6055 of the ACA requires issuers of “minimum essential coverage” to provide information on the amount of any cost sharing reductions received.  This provision makes no sense if insurers were just supposed to absorb the reductions and pass them on to other customers.
  6. Section 10104(c) of the ACA addresses limits on use of federal funds to pay for abortions.  It says no qualified health plan may pay for abortion services with  “[a]ny cost-sharing reduction under section 1402 of the Patient Protection and Affordable Care Act (and the amount (if any) of the advance payment of the reduction under section 1412 of the Patient Protection and Affordable Care Act).”  This prohibition would hardly seem necessary if cost sharing reductions were supposed to be absorbed internally by the insurer.

But perhaps it takes more than intent in a bill

My assumption, however, is that plaintiff House of Representatives will concede that the ACA certainly authorizes payments for cost sharing reductions and may indeed have contemplated that they would be made, but that it takes more than authorization for the executive branch. The House will argue, however, that to actually to make the payments: the Executive branch needs money. And it needs the money to be  in the right account via a formal appropriation by Congress.  The House will likely cite “The Purpose Statute,” 31. U.S.C. §1301 in support of this assertion.  This statute reads: “Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law. ” It will likely also cite 31 U.S.C. §1341(a)(1), the Antideficiency Act in support. It says “An officer or employee of the United States Government or of the District of Columbia government may not make or authorize an obligation exceeding an amount available in an appropriation or fund for the expenditure of obligation.”

These statutory citations are indeed foreshadowed by several paragraphs on the House complaint during which it recites the requests of HHS for appropriations to pay for Cost Sharing Reductions ($4 billion) and asserts that no such appropriation was ever made.  The plaintiff notes that, by contrast, Congress did appropriate funds for the first cousin of Cost Sharing Reductions, advance premium tax credits through a standing appropriation under 31 U.S.C. § 1324 for tax refunds due individuals.

Or maybe not

I would expect two rejoinders to this argument.  The first is a technical and statutory one: apparently the Secretary has at one time asserted that appropriations for premium tax credits also covers cost sharing reductions.   The second is that any law restricting the executive’s power to spend money in this fashion is itself unconstitutional.

A statutory rejoinder?

Although acceptance of this first statutory argument would avoid the turmoil sure to erupt if cost sharing subsidies are judicially prohibited and the difficulties of constitutional adjudication, it strikes me, at least initially, as a loser. Although premium tax credits have a similar objective to cost sharing reductions, the two programs are not identical.  They could operate independently. There are many who are entitled to premium tax credits who are not entitled to cost sharing reductions.  If similarity of objective means that funds between programs are transferrable, an awful lot of Congress’ “Power of the Purse” has been evaded.

It’s also possible, however, since we haven’t seen the defendant’s response to the complaint that there’s some more authorization somewhere for the spending. If so, the House of Representatives is going to have egg on its face.  I assume, however, that  the House wouldn’t have been so foolish to file this lawsuit if it had not its homework carefully and failed to find even a needle-in-a-haystack explicit authorization for the spending.

A constitutional rejoinder

The harder question — and the one that would make House of Representatives v. Burwell a case about far more than the ACA — is the constitutional one.  Under what circumstances does the President have authority to spend unappropriated funds? Much ink has been spilled by scholars on this issue over the decades . Tahere are some older Supreme Court cases (Hooe and Sutton and Bradley) that indirectly suggest that the limits created by the predecessors to these statutes are real and permissible.  There’s also a thorough review of the then-existing literature by the Clinton-era Department of Justice in a memo of its Office of Legal Counsel from 2001 (2001 WL 36175929). Perhaps more relevant will be two cases which, though not binding on the Supreme Court, will likely have some precedential force.

West Point: Excellent views, historic buildings
West Point: Excellent views, historic buildings

Consider first Highland Falls-Fort Montgomery Central School District v. United States, 48 F.3d 1166 (Fed. Cir. 1995), a case decided by the Federal Circuit in 1995.  It involved a statute, the “Impact Aid Act” designed to help certain categories of schools: (1) “section 237″ school districts whose property tax base was reduced by the presence of a lot of non-taxable federal property in the area, (2) school districts that had to educate children of workers on federal property, and (3) school districts that had incurred a substantial increase in the number of attending children.  Highland Falls, which sits near the West Point Military Academy, was an example of the first kind of district.  It should have received money pursuant to the Impact Aid Act since West Point apparently ate up apparently 50%  — and a beautiful 50% at that — of the property in the district .  But Congress, instead of allocating a lump sum for all payments to be made under the Impact Aid Act, split up the money with specific appropriation for each of the three categories of hardship it identified. And, apparently, the amount of money allocated to the category against which Highland Falls was claiming was short whereas the amount of money Congress had allocated to two other categories was more complete.  So, Highland Falls wanted the Department of Education (DOE) to transfer money from the more fully funded accounts to the one that would benefit it.

The court in Highland Falls refused to direct such a reallocation of appropriated funds.  Here’s what it said when DOE declined to do so:

Section 1341(a)(1)(A) makes it clear that an agency may not spend more money for a program than has been appropriated for that program, while § 1532 provides that an agency may use money appropriated for one program to fund another program only when authorized to do so by law. It is undisputed that, in each of the relevant fiscal years, Congress appropriated specific amounts to pay for § 237 entitlements. It also is undisputed that, in each of the relevant fiscal years, in order to fund § 237 entitlements at 100% levels, it would have been necessary for DOE to use money appropriated by Congress for entitlements under other sections of the Act—squarely in contravention of § 1532. The approach DOE followed was consistent with this statutory landscape.

As noted above, in order for DOE to fund § 237 entitlements at 100% in accordance with § 240(c), the agency would have had to transfer money from other sections’ appropriations to fund § 237. If DOE had followed such an approach, it would have been spending more money than Congress had appropriated for § 237 entitlements, in violation of § 1341(a)(1)(A). In addition, it would have been depriving at least one other section’s program of funds expressly appropriated for it by Congress. Put another way, it would have been “raiding” one appropriation account, for example § 238 or § 239, to credit another, § 237, in violation of § 1532.

Now, this is not a square holding on precisely the issue in the House of Representatives current lawsuit. It’s not a case where — as here — the Executive branch undertook a reallocation and someone wanted to challenge it.  Nonetheless, the language of Highland Falls is supportive of the House’s point.  Having decided, apparently, not to allocate funds for Cost Sharing, the executive branch can’t raid a related fund to help pay for it.

Also relevant will be Eastern Band of Cherokee Indians v. United States, 16 Cl. Ct. 75 (1988). There an Indian tribe sought money to equalize funding of its schools relative to local schools.  There was a federal statute that was supposed to provide such money.  But Congress had declined to appropriate funds for this special “set aside.”  The tribe asked that money be used from other accounts controlled by the Secretary of the Interior to make the statutory payments.  The court upheld the government’s decision not to do so.

The Set–Aside Fund was not funded in fiscal year 1986, the year of plaintiffs’ request. Plaintiffs argue that the Department of Interior could have applied funds from other accounts. However, the Anti–Deficiency Act, 31 U.S.C. § 1341(a) states that a United States officer may not authorize expenditures “exceeding the amount available in an appropriation or fund for expenditure or obligation.” Thus, the officers of the Department of the Interior could not grant the plaintiffs’ request for funding. Penalties for violating the Anti–Deficiency Act are codified at 31 U.S.C. §§ 1349 and 1350. The court thus finds that the plaintiffs have failed to state a claim upon which relief may be granted as funds are not available to satisfy plaintiffs’ claim.

Again, not a case 100% on point, but still one that, at least in dicta, reinforced the House’s claim here that the executive can not dip into one pot of money, even if related and even if efficient, to pay bills for another program. And that is true even if Congress has earlier expressed its intent that such a program be funded.

MRE Beef Stew
MRE Beef Stew

And there is, on the other hand a case involving a disappointed bidder and military purchases of diced turkey (with gravy) and beef stew: Southern Packaging and Storage Company, Inc. v. United States (D.S.C. 1984). There, a district court found that, although the  purchase from a Canadian company violated the “Buy-American” provision of the Department of Defense Appropriations Act there was no violation of the anti-deficiency statute because the amount spent on combat rations — even Canadian-sourced ones — did not exceed the overall Congressional appropriation.

There is, in addition, lots of non-judicial authority on the subject, ranging from death-match law review articles by Professors Sidak (1989 Duke L.J. 1162 (1989)) and Stith, (97 Yale L.J. (1988)),  to summaries of the law from the United States General Accountability Office to a memorandum from the Clinton-era Justice Department.

Conclusion

So, there is a lot more to be said on this subject and we have not yet had the benefit of Secretary Burwell’s research and argument.  But, at least for now, provided the House can overcome the substantial justiciability questions, it looks like it may have a strong case on the merits. Of course, the House ought, like all of us, to be careful what it wishes for.  One wonders what reaction many Americans will have to a House legal victory when they find that they can no longer afford the health insurance they purchased due to what they may well regard as a “technicality.”

 

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Exploring the likely implosion of the Affordable Care Act