Category Archives: Essays

Even the New York Times Acknowledges the ACA Is Collapsing

I don’t post here much now that I am on Forbes Apothecary site.  But I did want to take note of one development.  At long last, and after years of denial and shameless cheerleading, the New York Times has run a lead story acknowledging that the ACA is in deep trouble. Longtime ACA proponents such as Sara Rosenbaum, a professor of health law and policy at George Washington University, have come to the realization that the law is in deep trouble.

“Even the most ardent proponents of the law would say that it has structural and technical problems that need to be addressed,” she said. “The subsidies were not generous enough. The penalties for not getting insurance were not stiff enough. And we don’t have enough young healthy people in the exchanges.”

Frankly, although I take no pleasure in the millions of people who are going to be hurt as a result of the ACA’s implosion, I do have a sense of vindication.  I warned from the outset that, well-motivated or not, the ACA was not designed properly and that it was extremely vulnerable to a death spiral.  I discussed early signs of trouble. And yet people accused me of Chicken Little “The Sky is Falling” syndrome or of not understanding all the brilliant stabilization methods built into the ACA that would let its community rating scheme succeed where so many predecessors had failed.

So, the good news is that people can start to focus on ACA 2.0 rather than pretending that ACA 1.0 is working. It will be a huge fight — already the battle lines are being drawn.  My one plea is for discussion to be based on reality and transparency.  No more magical models that predict whatever the politicians want. No more things like the CLASS Act — remember that — which miraculously let the ACA appear to cost little even when it had zero chance of ever working.  Instead, and perhaps this is the part that is sadly naive in today’s American, let’s have a discussion where we actually listen to each other.

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Obamacare Stability Rests On Shaky Risk Adjustment

Set forth below are brief excerpts from my recent blog entry on Risk Adjustment under the Affordable Care Act that has been posted on Forbes The Apothecary.  To read the rest, you’ll need to go to that site.

What’s interesting, though, is what happened at almost exactly the same time as I released my Forbes blog entry.  New CMS Administrator Andrew Slavitt, whom I noted in the article had actually expressed concern about Risk Adjustment,  told Inside Health Policy, an outstanding trade publication, that some changes to the risk adjustment methodology in the draft Notice of Benefit and Payment Parameters for 2017 may instead be implemented in the 2016 plan year. CMS’ proposal calls for the 2017 risk adjustment to use a blended rate from earlier years and account for patient use of preventative services. I know that may not be the sexiest announcement ever made, but it’s important.  I’m not going to pretend that my blog entry motivated Mr. Slavitt to start looking hard at CMS methodology — although he would be well educated if he started each day with The Apothecary.  But, along with his recent actions taken to reduce the ability of insureds to game the Special Enrollment Period, Administrator Slavitt’s critical attention to Risk Adjustment suggest a willingness to take a fresh look at Obamacare implementation failings. 

The Affordable Care Act originally appeared to promise a choice of plans on the Exchanges across at least two spectra: the amount of cost sharing an insured would have to assume and the degree of choice the individual would have in selecting their healthcare providers.  Although this ability to customize both choice and “metal tier” was generally considered a feature of Obamacare, it has turned out to pose significant issues.  And here’s why: plans with the greatest degree of choice (PPOs) and the lowest amount of cost sharing (mostly Platinum) are magnets for the unhealthy.  So, unless there’s something to neutralize the extra costs to the insurer created by this “magnetic attraction” or unless insurers can simply decline to offer plans with high choice or low cost sharing, the freedom to select a plan in fact becomes destructive.

The choice touted by proponents of Obamacare induces a weakened form of an adverse selection death spiral. The whole system may not immediately collapse, but the system’s physics becomes highly unstable. The plans most attractive to the unhealthy become unavailable. The unavailability occurs either because insurers can’t persuade regulators to let them charge the high rates needed to break even or because all but the sickest insured’s won’t buy them at such a price. The most expensive 20% of individual insureds, after all, cost on average more than 60 times as much per person as the least expensive 50%. The Platinum refugees then migrate to the second most attractive plans —  in our case often Gold or Silver. (Remember Silver plans have low cost sharing for poor families). But then these plans become disproportionately populated by the sick and can also become considerably more expensive.  If there is a point of stability, it is likely to be one in which there is far less choice of physician and far more cost sharing than originally contemplated.  Most people might end up in a Bronze HMO.

The stability of Obamacare likely rests significantly on the arcane and challenging technology of  Risk Adjustment.  Run it poorly in ways insurers can game and look for the market to fall into a Bronze HMO basin of attraction or collapse altogether.  Run it without the strictest safeguards for medical privacy and see a mass rebellion from insureds. Obamacare would have a better chance at stability with a diversity of plans if Risk Adjustment worked considerably better than has so far been the case.

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If United is losing money, what about big insurers who charge less?

Earlier this week, United Healthcare, the nation’s largest health insurers, told its shareholders that it would be pulling back on efforts to market its Obamacare plans for 2016 and might pull out of the market in 2017.   Eternal optimists about Obamacare have been quick to note that United, although a large insurer generally, “only” covers about 540,000 people on the Exchange.  This is about 6% of those who enrolled in 2015.  In fact, however, United’s announcement should be a cause for great concern, not just for the half million plus,  but for a large number of people purchasing coverage from other insurers who likewise may become intolerant of continued financial losses.  To quote Katherine Hempstead,who heads the insurance coverage team at the Robert Wood Johnson Foundation,  “If [United] can’t make money on the exchanges, it seems it would be hard for anyone.”

This entry is about a little experiment.  Although United may not be one of the biggest players on the Exchanges, the various Blue Cross insurers most definitely are.  And so, what does United’s situation suggest about the vulnerability of Blue Cross insurers?

It turns out that there are 38 markets for which we have data on which Blue Cross and United compete for Silver plans, the most common metal level purchased.  By market, I mean they both sell the same kind of plan type (HMO, EPO, POS, PPO) in the same rating area of a state.  (This looks only at states that use and thus have their data made available at So, if Blue Cross sells at least one HMO plan in Georgia Rating Area 7, and a United company likewise sells at least one HMO product in Georgia Rating Area 7, I treat the two insurers as competing against each other.  And, if Blue Cross’s premiums tend to be lower than United’s in the competing markets and United is losing money, that might be some evidence that Blue Cross is vulnerable.

The chart below shows the result of the experiment.  I calculated the median silver premium for Blue Cross companies in the 38 competing markets and the median silver premium for United companies.  I then divided the Blue Cross median by the United median.  I used a 40 year old adult individual as the basis for the computation, although prior research shows that little turns on the choice of age. The chart shows a histogram of the results.


What we can see is that the histogram is skewed to the left: on balance, Blue Cross tends to charge less than United.  Sometimes, as in three rating areas in Kansas and two ratings areas in South Carolina, it charges less than 3/4 of what United charges.

Does this prove that many Blue Cross insurers place themselves in financial jeopardy by continuing to sell?  Hardly.  There is a lot more to profitability than premiums even when metal tiers and plan types are the same.  Blue Cross may have struck better deals with medical providers.  Blue Cross may run a more efficient operation.  Blue Cross may be able to attract a healthier risk pool.  Blue Cross is raising its rates.  Claims experience in 2016 may be different than experience in 2015.  And, in some markets, Blue Cross charges more.  In Virginia Rating Area 10,  Blue Cross’s median is 1.27 times that of United’s. I get it.

But still.

I’d feel a lot better about other insurers’s prospects if they tended to charge more than one that was encountering financial difficulties.  And, yes, perhaps the ACA can shrug off the possible departure of United.  We can trot out the words “blip” and “outlier.”  But I am not ready to join some academics and advocates in the eternal Obamacare sunshine with a chorus of “nothing to see here.”  Maybe there’s not much difference between United’s situation and that of other large insurers. Maybe, it’s just that United’s directors and officers found the courage to sound the warning sooner.

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Prices rising, choice declining for 2016 Obamacare

Data released yesterday at shows the beginnings of an adverse selection death spiral that threatens the stability of the system of insurance created by the Affordable Care Act.  The data shows that, on plans using the “federally facilitated marketplace” created under the ACA, PPO plans that continued from 2015 to 2016 increased gross premiums an average of 16% and Gold and Platinum plans increased 15% and 21% respectively.  HMO plans, by contrast, increased a lesser 8% and Bronze and Silver Plans increased a lesser 12% and 9% respectively.  We should thus expect to see in 2016 relatively fewer people purchasing plans that give them a greater choice in physicians or that provide greater protection against medical expenses.

The tables below summarize the big picture.  The first table shows the mean change in gross premiums between 2015 and 2016 for plans that persisted over that timespan when grouped by metal level.  As one can see the more generous Gold and Platinum plans increased at rates considerably higher than the less generous Catastrophic, Bronze and Silver plans.

MetalLevel percent change
1 Bronze 12.1
2 Catastrophic 8.1
3 Gold 15.2
4 Silver 9.4
5 Platinum 20.9
mean change in premiums between 2015 and 2016 for 6,699 persistent plans

The second table shows the mean change in premiums between 2015 and 2016 for plans that persisted over that timespan when grouped by plan type.  As one can see the PPO plan, which offers the greatest choice of doctor, increased at a higher rate than other types of plans.  EPOs, which are similar to HMOs but restrict visits to specialists less, increased in gross premiums at a rate far higher than HMOs.

PlanType percent change
1 POS 12.3
2 HMO 8.3
3 EPO 12.2
4 PPO 16.5
mean change in premiums between 2015 and 2016 for 6,699 persistent plans

The third table combines the first two and shows, for each combination of metal level and plan type, the mean percentage increase in gross premiums between 2015 and 2016.

1 Catastrophic 1.9 5.8 6.9 14.8
2 Bronze 11.2 10.9 12.0 16.2
3 Silver 5.8 8.8 12.5 14.5
4 Gold 9.4 16.6 17.1 19.7
5 Platinum 12.2 25.6 7.5 25.9
mean change in premiums between 2015 and 2016 for 6,699 persistent plans

Premium increases are only part of the story, however.  Some types of plans are not available at any price any longer.  The table below shows the percentage of rating areas in 2015 and 2016 containing each type of plan.  Notice that the percent of rating areas containing any PPO has dropped significantly between 2015 and 2016; HMOs and POS plans have dropped as well, though EPO plans have become more prevalent.

PlanType AVG2015 AVG2016
1 HMO 92.6 88.6
2 EPO 78.3 82.5
3 POS 83.7 75.4
4 PPO 92.5 76.7
percent of rating areas having at least one of these plan types

We can also consider the prevalence of competition. The table below shows the percentage of rating areas in 2015 and 2016 containing at least two of each type of plan. Notice that with PPOs, the percentage of rating areas with competition has declined, although it has increased somewhat for HMOs, EPOs and POS plans.

PlanType AVG2015 AVG2016
1 HMO 71.3 72.5
2 EPO 66.5 74.0
3 POS 48.2 50.6
4 PPO 76.0 61.0
percent of rating areas having at least two of these plan types

The same analysis can be done on the metal levels of the plans available.  The table immediately below shows for 2015 and 2016  the percentage of rating areas in which there is at least one plan of the specified metal level.  Platinum plans have declined sharply in prevalence since 2015.  Now only just over half of the rating areas have even a single platinum plan available even if one were willing and able to pay the higher premiums.

MetalLevel AVG2015 AVG2016
1 Catastrophic 74.3 72.2
2 Bronze 91.8 88.1
3 Silver 91.1 89.7
4 Gold 90.9 88.5
5 Platinum 92.7 53.2
percent of rating areas having at least one of these metal levels

When it comes to competition, the picture is even worse for platinum plans.  In only about a third of the rating areas can one choose between platinum plans.

MetalLevel AVG2015 AVG2016
1 Catastrophic 33.5 30.3
2 Bronze 82.5 82.4
3 Silver 85.7 84.6
4 Gold 73.0 73.4
5 Platinum 44.9 34.6
percent of rating areas having at least two of these metal levels

Finally, since it seems to be the PPO plans whose prevalence is declining most, we can show the extent of that prevalence according to the metal level of the plan. The table below shows that the Platinum PPOs, the plan probably most helpful to the chronically ill that the ACA was supposed to help greatly, is diminish significantly in prevalence but that Gold and Silver PPOs are diminishing as well

PlanType MetalLevel AVG2015 AVG2016
1 PPO Catastrophic 85.8 71.1
2 PPO Bronze 94.9 81.6
3 PPO Silver 94.9 81.6
4 PPO Gold 94.9 81.6
5 PPO Platinum 89.5 53.5
percent of rating areas having at least one of these Platinum plan types


The data shows that platinum plans and PPO plans are shrinking in prevalence and that the gross premiums for such plans are going up. One might say that this development is not so awful since it leaves in place a market for more basic plans: HMO plans for example or silver and gold plans.  Perhaps the government should not be subsidizing individual’s choice of doctors or fostering plans, such as platinum plans, that fail to deter excess medical consumption.  Such is not, however, the promise of the ACA or, I suspect, the desires of many of its proponents.

Moreover, we are in a dynamic situation.  Think about next year when the insurer subsidies are supposed to disappear and when the chronically ill people who were in platinum and/or PPO plans migrate into the next best thing, a gold plan or, if one is available, a POS or EPO plan.  Suddenly those plans become vulnerable to adverse selection pressures.  And for 2017 we might thus expect to see yet further shrinkage of PPO and platinum plans and greater pressures on everything but the basic Bronze and Silver HMO plans.  When that happens, the adverse selection death spiral will not only start biting wealthier purchases or those with chronic conditions, but mainstream America. Private health insurance is fragile. It generally does not well withstand the sort of underwriting regulation imposed by the ACA.  The conceit of the ACA proponents was that they had engineered a system — the “three legged stool” so strong that it could resist the almost invariable pressures of adverse selection.  If I am right, and regardless what one thinks about the motives of those proponents, we are beginning to see that the engineering was just not good enough.

Caveats and further research

The computations shown above are based on the number of plans and not weighted by the number of enrollees.  This is largely of necessity since the federal government has not been releasing enrollment figure by plan in a clear way (although it may be possible to tease the figures out of rate review submissions filed and collated on  Although enrollment weighting will likely decrease the average mean premium (less expensive policies tend to be purchased more), it is not clear that enrollment weighting will have much effect on relative premium increases.

The figures are also not computed yet on a state-by-state basis, something that I hope to present in a later post.  They also contain only data for states whose plans are described in material available at  Data for states such as California and New York, which have their own exchanges, is not included here and might alter the numbers somewhat.

Finally, I present gross premiums here; as I have discussed at length elsewhere, net premium increases may well be higher, particularly where the purchaser wishes to retain a gold or platinum plan or a PPO plan whose premiums are rising even faster than those of the silver plans and the second lowest silver plan. The situation is worst where, due to some willingness on the part of a new entrant to take risk,  the second lowest silver plan drops in price, thereby decreasing subsidy levels, but other silver, gold and platinum plans increase in price.


Programming for this work was done in R using data from and is available on request from the author. Packages used include data.table, tidyR, htmlTable and dplyr. There is a lot more work to be done mining these databases.

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Choose your doctor? Not anymore in Obamacare’s Houston

The data is not fully out yet, but, if my home area of Houston, Texas (Harris County) is representative, PPO plans that offer the greatest choice of doctors and that provide low cost sharing are extinct, as are POS plans that also offer more choice of medical practitioners. Platinum plans of any sort are on their way to its extinction.

In 2015, there were 19 PPOs available in Harris County, 12 from Blue Cross Blue Shield and 7 from Cigna Healthcare.  In 2016, according to the preliminary data available on and released Sunday, there are none.   Nor does the matter improve my considering POS plans, which also offer a greater degree of choice of doctor than does an HMO.  In 2015 there were17 such plans in Harris County, 10 from Aetna and 7 from Humana.   Those are gone too in 2016.  So, basically, it is no longer true in Harris County that you have a choice of doctor if you purchase an Obamacare plan.  You get what the HMO or EPO gives you.

Platinum plans are now almost extinct. In 2015, there were three platinum plans available in Harris County, an HMO and POS offered by Humana and and EPO offered by United Healthcare.  According to the preliminary information released Sunday, only the Humana HMO survives. Thus, you can get a plan that has minimal cost sharing, but no longer one that offers great choice of medical practitioners. The Humana POS and the United EPO are gone.

Notice what's missing from the list of plan types?
Notice what’s missing from the list of plan types?

And it’s going to cost you a lot to put yourself in a pool in which cost sharing is low.  In 2015, the gross premium for the Humana Platinum HMO (32673TX0640030) was $448 for an individual age 40 (non-smoker). In 2016, the gross premium for the same Humana plan was $551, an increase in gross premiums of 23%.

Net premium increases — the thing the insured actually pays — are likely to rise a similar amount for the one remaining platinum plan.  The second lowest silver plan — the baseline for computation of subsidies — has increased in price by $34, from $222 in 2015 to $256 in 2016.  Consider an individual eligible for a $150 subsidy in 2015.  If they purchased the Humana Platinum HMO in 2015, their net price would be $298.  If they purchased the same policy in 2016, yes, their subsidy might grow by $34 but their net price would still be $367, an increase of 23%.

All of this is the very predictable consequence of a design flaw in the ACA.  It heralds an unraveling of the Obamacare market. Who is willing to pay the extra cost of a PPO: generally people who value a long term relationship with their physician.  And those people are disproportionately less healthy than others.  Hence, the PPO pool tends to be populated by people who are expensive to treat.  Although insurers could, in theory, compensate for this by raising premiums to very high levels, in fact that does not work for long because, with premiums yet higher, only the least healthy of the least healthy persist, and the pressure on premium grows. Insurers, seeing the handwriting on the wall, thus kill off these plans before they technically implode.

It is the same problem with platinum plans.  The people who most want low cost sharing tend to be the people who most have high costs.  These plans are thus difficult to sustain where plans with lower cost sharing are available.  The complex ecology of health insurance does not permit them to survive.

When the Obama administration releases its data in a form that is more susceptible to in depth analysis, we’ll be able to see if Harris County is representative or an anomaly.  Although the trend may  be stronger or weaker in other areas, I predict it will not show there is much special about the Houston, Texas area in its vulnerability to a death spiral.

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Winter is coming?

For the past year or so, ACA proponents have gloated over the fact that markets have not yet collapsed in a death spiral and that enrollment in Exchange plans has grown to 9 million.  There are at least four recent developments, however, that suggest the ACA is in greater trouble than many realize.

Enrollments Way Lower Than Projected

The first piece of troubling news comes from CMS itself: Notwithstanding the full implementation of the individual mandate, CMS is projecting anywhere from 9.4 million to 11.4 million people enrolled in the Exchanges, an increase of 3-25% over its figure for 2015.  And, while ordinarily growth rates of this nature might please insurers, the projections on the basis of which Obamacare was enacted asserted that 21 million would be in the Exchanges by 2016.  Thus, while the Exchanges were running at 70% of original projections in 2015, they are now projected to run at just 45 – 52% of projections for 2016.  Moreover, between 0.9 million and 1.5 million of the enrollees for 2016 are projected to come  not from the uninsured but from those already holding off-Exchange individual market policies.

The new projection
The new projection
The premise on which the ACA was enacted
The premise on which the ACA was enacted

The reduced enrollment in the Exchanges has several ramifications. First, it likely means the pool in the Exchanges is less healthy on average than expected. Second it means the significant overhead expended in establishing the Exchanges and running them is spread over a lot fewer people. And third it means that Obamacare was essentially passed on greatly exaggerated assertions of its benefits.  Does the extraordinarily elaborate and expensive apparatus is establishes make sense when the a far lower than projected number of people gain health insurance of quality? One also must wonder how the dilution of the individual mandate through various “hardship exemptions” may have lowered the number of people enrolled on the Exchanges.

[[Added 10/20/2015]] For an excellent analysis of this issue, look also at Brian Blase’s recent article in Forbes. (

Footnote 1: CMS is now “unable” to make projections for the SHOP Exchanges.  Are we now prepared to call them a bust?

Footnote 2: It is not clear whether the CMS enrollment projections took into account the very substantial gross and net premium that appear to be coming (see below).

More Coops Closing

The second piece of disturbing news is that at least four more coops insuring a significant number of people on the Exchanges are going out of business.  They are as follows:

Health Republic Insurance of Oregon (10,000 members; $50 million startup “loan”). By the way, Dawn Bonder, CEO of Health Republic, was quoted in The Oregonian just a month ago as follows: “We are strong and we are sticking to our plan, which has always been slow and steady growth. We’re very financially stable,” Bonder said. “We see a long,healthy life in front of us.”

Colorado HealthOP (83,000 members; $72 million in startup “loans”).  According to the Denver Post, this comes after the coop increased its enrollment seven-fold and captured 39% of the market in Colorado by cutting rates in 2015 (notwithstanding losses the year before).

Kentucky Health Cooperative (51,000 members; $146 million in federal loans, with a $65 million “emergency solvency loan” in 2014).  Again, this coop managed to capture 75% of the Kentucky Exchange market by offering insurance at lower prices.  Before shutting down, it had requested a 25% increase in premiums for 2016.  By the way, anyone remember those stories about how Kentucky was the success poster child for the ACA? It looks like its success may have been built primarily by selling insurance at cut-rate prices hoping that most of the losses would be bankrolled by the federal government.

Tennessee Community Health Alliance (27,000 members; $73 million in federal startup loans).  How had this coop captured market share?  Apparently by charging premiums so low that, as reported by The Tennessean, it had to request a 32% increase for 2016 and was granted/directed — get this — to offer premiums at a 45% higher rate.

Many of the coops blame their failure on the Cromnibus law enacted in December of 2015 that prohibited use of non-appropriated funds to pay for the federal Risk Corridors program that, on paper, was supposed to have the federal government backstop up to 80% of losses.  Given the magnitude of insurer losses thus far, the federal government is thus able to pay only 12.6% of the obligations created on paper by this program.  If one assumes, however, that the coops are correct in blaming Risk Corridors rather than mismanagement for their failure, this would confirm the suspicions of many that insurers priced their policies deliberately low in order to bring in business, relying on the federal taxpayer to cover their losses. I would also not be surprised to see some sort of legal action relating to coops who, notwithstanding Cromnibus and the handwriting on the wall persisted in booking Risk Corridor receivables at full value until very recently.

There will surely be lots of finger pointing over the failure of these coops: Democrats pointing to the “evil” Cromnibus bill as the source (although many Democrats voted for the legislation) and Republicans pointing to the inherent flaws in the ACA as the root of the problem. In the meantime, however, in many states, one of the sources of lower-priced insurance has been eliminated, meaning that many will be seeing substantial increases in gross premiums.

The fall of the PPO?

One of the promises of the ACA was that it would continue to offer choice to consumers and that they would be able to keep their doctor.  Not so in many states.  Plans that offer greater degrees of choice in selecting one’s provider appear to be in some trouble, closing in the shadow of an impending adverse selection death spiral. In Florida, for example, zero PPOs will now be available on the Exchanges in 2016.  In Texas, the state’s largest insurer, Blue Cross and Blue Shield, has announced that it lost so much money on individual PPO plans that it will no longer sell any in 2016. This development means 367,000 people will have to find other types of plans. In Illinois, Blue Cross is continuing PPOs for now, but only with narrower networks than had been available under a plan that had served 173,000 individuals.

I suspect this is just the beginning of problems for PPOs sold on the individual market in an era when insurers can not medically underwrite.  Between 2014 and 2015, PPO premiums went up at a far higher rate than other plan types.  We will shortly have the data to see whether this trend continued in 2016.


We don’t have all the information yet, but if ACA proponents like Charles Gaba are correct, we are looking at some substantial gross premium rate hikes in the United States, and extremely high rate hikes in some states.  What Mr. Gaba has done is to go state by state through various filings and do what no one else has tried: correlate premium rates with actual enrollments.  Although I do not always agree with Mr. Gaba, I must praise him for a very worthy and time consuming enterprise. The fact that some insurer is charging an astronomical premium for insurance doesn’t mean as much when few people are buying their product as it does when an insurer is getting a large share of the business.  Unfortunately, the federal government does not publish in any place I can discover insurer-by-insurer breakdowns of enrollment.

The research suggests gross premiums will go up 12.45% nationwide once enrollment weighting is taken into account.  Statewide figures range from a high of 41.4% in Minnesota, 39.0% in Alaska, and 30% in Hawaii to lows of 0.7% in Maine, 0.7% in Indiana and  3.5% in Connecticut.  Among the bigger states, the estimates are 4% for California, 15.8% for Texas, 9.5% in Florida, and 7% in New York. As I have noted on this blog and in testimony before a Congressional committee, net premium increases — which is what really matters to purchasers — can often be considerably greater than these figures, particularly for poorer individuals, but also can be lower.


More to come

We will, of course, see what plays out.  But for those who thought the brilliant engineering of Obamacare had forever slain the adverse selection dragon, beware. Dragon eggs can hatch.

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Is Minnesota the canary in the coal mine?

We will have a fuller picture in a few weeks when the federal government is supposed to release the premiums and plans available on, which serves about 34 states, but if Minnesota is representative, there are signs that the ACA is entering a dangerous phase. That state has posted its rates for 2016 already. It’s not pretty. Gross premiums for policies sold on its Exchange will go up between 14% and 49%.  Net premiums will go up more than this or less than this depending on the income of the subscriber.

The table below shows the average rate increases for 2016 among the insurance carriers selling on MNSURE, Minnesota’s health insurance exchange. The data is simply copied from its website.


The spreadsheet shown below indicates gross and net premiums for a 40 year old individual residing in Minneapolis, earning $25,000 per year and selecting a silver plan.  The rate increases contained there make the simplifying assumption that each insurer applied its average rate increase to the listed plans.  We don’t have actual plan-by-plan data that would enable us to provide a better estimate.  Here, the net premiums assume that the individual is deemed able under to contribute about $136 per month to the premium.  As one can see the the net premiums go up between 2015 and 2016 by -7% for a few of the Medica plans to up to 36% for the more expensive Blue Cross plans.


If we reduce the income of the purchaser, the net premium increases can grow.  Here, we take our same 40 year old but cut his income down to $18,000.  The individual is (somehow) supposed to be able to contribute about $62 a month for a policy. Now the net premiums for the silver plans swing more dramatically, going from -15% for one of the Medica plans to 61% for one of the Blue Cross plans.


Is Minnesota representative?  Not entirely.  It is probably at the high end of premium increases in part because its premiums were unusually low in 2015.  But if other states experience rate hikes anything like Minnesota, we will see healthier individuals search out alternatives or start to be more creative about hardship exemptions in the event they decide that insurance under the ACA is just too expensive. Either way, there is beginning to be a significant risk of the exchange markets unraveling.






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Backstop argument shouldn’t rescue Obama administration in House lawsuit

A recap of where we are in House v. Burwell

The hottest issue in the law of Affordable Care Act at the moment is whether the Obama administration had constitutional authority to pay insurers billions of dollars for the “Cost Sharing Reduction” provisions when Congress did not appropriate any money for that program.  Those who believe the Obama administration has acted illegally got a boost  recently from United States District Court Judge Rosemary Collyer, who ruled that the House of Representatives had standing to sue Obama administration officials for these sorts of payments.

But it was not just that Judge Collyer ruled in favor of standing that creates the tempest; it was what she said in her opinion. As I noted in a recent blog entry, in resolving the standing issue, Judge Collyer appeared to reject the Obama administration’s main defense. Instead, she wrote:

An appropriation must be expressly stated; it cannot be inferred or implied. 31 U.S.C. § 1301(d). It is well understood that the “a direction to pay without a designation of the source of funds is not an appropriation.”

And that would seem to be precisely what we have here. It is very clear that there is no clear direction from Congress to pay insurers for the cost sharing reductions.  Indeed, as Judge Collyer notes:

On July 13, 2013, the Senate Appropriations Committee adopted S. 1284, a bill appropriating monies to HHS and other agencies. An accompanying report stated that “[t]he Committee recommendation does not include a mandatory appropriation, requested by the administration, for reduced cost sharing assistance . . . as provided for in sections 1402 and 1412 of the ACA.

To be sure, Committee reports are not the same thing as the law. Nonetheless, to the extent they are relevant, here they are highly unsupportive of the notion that Congress intended to spend money on this program.

Moreover, Judge Collyer rejected the argument that the Obama administration could spend money on cost sharing reductions because, unlike in other areas of the ACA, Congress had not explicitly forbad it. Wrote Judge Collyer,  “The absence of a restriction, however, is not an appropriation. ”

Looking at a fallback argument

And, so, what’s left?  And here is where we get to an argument that is just too perfect ” It was articulated recently by Professor Nicholas Bagley of the University of Michigan on his Incidental Economist blog and has been attributed as well by a big proponent of the ACA to Professor David Super of Georgetown University.  I’m going to quote it here, leaving Professor Bagley’s hyperlinks intact so that you can get a sense of at least some of the authorities on which he relies. (Obviously, his blog post (like mine) is not a brief or a law review article, and I am by no means contending that his links were insufficient).

Even without an appropriation, health plans still have a statutory entitlement to cost-sharing payments. What that means in non-legalese is that Congress has promised to pay them money—whether or not there’s an appropriation. And health plans can sue the government in the Court of Federal Claims to make good on that promise. (Congress has undeniably appropriated the money to pay court judgments.)

Now, before we go further, note that this may not exactly be a legal argument.  That is, Professor Bagley could well be right that the lawsuit is kind of pointless if the insurers get paid in the end, but  the House could still be right that the Obama administration acted unconstitutionally by paying insurers without compelling them to go through those extra hoops. But this ignores, of course, the expressive value of the lawsuit which is that the Obama administration is acting lawlessly in implementing the ACA. (It is consistent, though, with some people’s view that, whatever its merit and whatever the importance of the principles at stake, the lawsuit is, in today’s political environment, misguided because cutting off cost sharing reductions is going to anger a lot of people and Republican fingerprints are all over the lawsuit).

Whether Professor Bagley is making a legal or pragmatic argument,  (or both), however, I think it is just a little too perfect.  It assumes its own conclusion.  If it were true that a beneficiary of a federal program — here, poor little insurance companies — could recover in the Court of Federal Claims when Congress failed to appropriate any money for their welfare program, then there would be far less point, really, in Congress ever making appropriations. It would change the Constitution to say something like, “The Executive may draw money from the Treasury except where prohibited by Congress.”  The presumption would have changed from giving Congress the power of the purse,  which is what I thought the Constitution meant, to giving those powers to the President, which I thought was kind of more like a monarchy.

Moreover, there is a decent reason that  we separate passage of a bill from funding of its programs.  And it is well illustrated by the ACA.  Consider the cost sharing reductions.  They were enacted in March, 2010 when the ACA passed.  But they were not to take effect until January 1, 2014. It could well be that, between passage and effect, budgetary priorities shift.  Perhaps we need more money for relocating refugees than we did at the time the original legislation was enacted, or perhaps we became more concerned about an ever growing multi-trillion dollar national debt. But Congress thought, if we ever do have the money, this cost sharing reduction program is a pretty good idea.  And so, the solution is to say, as we have, and as Judge Collyer did, that passage of a bill, generally speaking, is different than appropriation of funds. Congress can enact laws and then not fund the “promises made therein” at least for some period of time.  I do not think Congress had to formally repeal cost sharing reductions in order to put the program on hold and then reenact the program when money became available.

Now, I can imagine Professor Bagley at this point rejoining, “but Congress did appropriate the money by creating a permanent appropriation for judgments rendered in the Court of Federal Claims. ” But if that were true, Congress would have to, each time it did not wish to appropriate funds for a program it has enacted, create an exception to the permanent appropriation for judgments rendered in the Court of Claims.  In addition to converting one provision of the US Code into a trash compactor for discarded legislative ideas, such a requirement would seem to violate the whole idea, at least of Judge Collyer, that  “the absence of a restriction … is not an appropriation. ”

Does Slattery v. U.S. mean that Bagley is actually right? (No)

I will confess that my own above arguments were more thoroughly persuasive to me until I looked at Slattery v. U.S., 635 F.3d 1298 (Fed. Cir. 2011), which involves the Tucker Act. There, the Federal Circuit abrogated a prior doctrine announced in Kyer v. U. S., 369 F.2d 714 (Ct. Cl. 1966),  under which, if there was an agency of the United States, such as army post exchanges (PX) that operated without use of appropriated funds but on the basis of other revenues, there was a jurisdictional bar against the Court of Federal Claims hearing the case and thus no ability of the plaintiff to recover absent a seldom-obtained explicit consent to suit from the otherwise sovereignly immune United States.

Slattery itself involved a claim by the shareholders of a bank against the FDIC which, apparently, did not receive federal funding but which is a federal instrumentality.  Supposedly, in the course of coaxing the bank to have another failing bank merged into it, the FDIC had created contractual assurances that the method of accounting and capitalization standards for the assuming bank would be, for lack of a better term, fairly mellow.  Later, in apparent violation of the contract, the FDIC imposed stricter standards and the bank ran into problems as a result. The court held that the fact that the FDIC did not receive an appropriation did not prevent the Court of Federal Claims from hearing the case.

We conclude that the source of a government agency’s funds, including funds to pay judgments incurred by agency actions, does not control whether there is jurisdiction of a claim within the subject matter assigned to the court by the Tucker Act. The jurisdictional criterion is not how the government entity is funded or its obligations met, but whether the government entity was acting on behalf of the government. … Thus we confirm that Tucker Act jurisdiction does not depend on and is not limited by whether the government entity receives or draws upon appropriated funds.

So, one might be tempted to run with this language and say that, indeed, the insurance companies can sue in the Federal Court of Claims for the money the government “should” have paid them  under the cost sharing reductions (except of course that the Obama administration has paid them.) The fact that no money was appropriated doesn’t matter.  But, I don’t think this is quite right.  For one thing, Slattery is about jurisdiction, not about the merits. All it is really saying is that the fact that the federal entity was not funded by Congressional appropriations does not, in and of itself, create an automatic bar to the court hearing the case.  It does not say that, if the federal agency was acting way outside its authority that the federal government must pay the claim out of the permanent appropriation.  Moreover, in the Slattery case itself, the basic idea was that the FDIC had not honored the deal under which it persuaded one bank to take on a problem bank, not that the FDIC had no authority whatsoever to assist with bank mergers.

Moreover, if you look at the language of Slattery very carefully, the issue is “whether the government entity was acting on behalf of the government.”  Here, I say, it sure looks like the Treasury was not acting lawfully in paying insurers for cost sharing reductions out of money that was supposed to go for tax refunds. And so, it may well be that the Treasury was not acting on behalf of the government but on behalf of the extra-legal objectives, however meritorious or well intentioned they may have been, of the President.  Thus, although as a lawyer for HHS I would certainly be citing Slattery a lot, it does not address the issue in the current case.

And one more thing

Could we also think for a bit about how strong the insurers’ claims in the Court of Federal Claims would really be?  My heart bleeds for insurance companies perhaps more than most, but I have trouble working up a great deal of sympathy here. Insurers surely  became aware at some point before the beginning of 2014 that Congress had not appropriated any money for the cost sharing reduction program.  They would certainly be aware of a problem if the court rules in this case that payments to them are illegal!  And, yet, knowing this, they would seek to sue for making contracts with limited cost sharing available to policyholders at discount prices?  Its not quite the same thing as suing to enforce a contract  where you knew the money to pay you had been embezzled, but it is not that far off either.



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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.


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 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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