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).
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.
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.
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.
A key feature of the Affordable Care Act are the “SHOP Exchanges.” These are markets established by either a state exchange pursuant to section 1311 of the ACA or the federally facilitated market (FFM) pursuant to section 1321 of the ACA in which employers with fewer than 50 full time equivalent employees can purchase health insurance for their workers. They can do so without being subject to either rating based on the projected health of those covered or “experience rating” in which premiums are tied to health expenses in prior years. SHOP exchanges are intended to be a mechanism whereby the burden of providing healthcare can remain where some people (not me) believe it belongs: with the employer.
To date, the key feature of the SHOP exchanges has been their complete failure to attract customers. A GAO report issued in November, 2014, said that only 76,000 individuals—including employees, their spouses, and dependent children— had enrolled in SHOPs operated by a state and, although the data was, amazingly enough, not available from the federal government for the remaining states whose marketplace it operated, enrollment had apparently followed a similar dismal pattern. This is in stark contrast to yet another stunningly wrong forecast of the Congressional Budget Office, which, as late as April 2014, had made forecasts that tax credits under section 45R of the Tax Code would cost $1 billion for 2014, an estimate that implies enrollment by more than a million, persons in the SHOP exchanges.
There have, of course, been multiple explanations of the failure of the SHOP exchanges in 2014. As has been well documented, the computer systems for the Federally Facilitated Marketplace (FFM) simply did not work. Applicants thus had to resort to more primitive paper processes. Second, the transient nature of a tax credit offered to some SHOP purchasers may have been insufficient to attract buyers, some of whom likely feared it would heighten expectations among employees of employer provided coverage that would be difficult to sustain in two years when the tax credit expired. And a variety of other explanations have been offered ranging from insufficient advertising to competition from non-SHOP-exchange markets, to difficulties with use of traditional intermediaries in the new market.
But perhaps, as some have noted, the basic problem is that it purchase of policies on a SHOP exchange at full or close-to-full price just doesn’t make doesn’t make a lot of economic sense when it appears that most employees could otherwise qualify for a taxpayer funded subsidy if they purchased similar policies on the individual exchanges. If small employers have the funds to help their employees more and want to help them meet medical expenses, perhaps the best medicine would be green: cash. Such a choice would have the fringe consequence — perhaps fringe benefit — of pushing more healthy people into the individual exchanges thereby reducing the risk of an adverse selection death spiral. It might also have distributional consequences that many would regard as an improvement. One can thus see the seed of bipartisan support for repeal of this provision.
The rest of this entry explores this proposition using four sample scenarios. Given that employees can purchase policies on the individual exchange that, at least for now, will be subsidized by the federal government in many instances, does it make sense for benevolent employers to provide health insurance or to instead, give workers higher wages, and let them choose to purchase policies that may be subsidized on the individual exchange?
Several factors matter in determining whether it makes sense to SHOP from the perspective of an employer and employee:
1. How much of a subsidy, if any, is the employee entitled to if it purchases a policy on the individual exchange. This may in turn depend not just on the compensation the employer pays the employee but also on the size of the employee’s household and sources of income of other household members. The higher the subsidy, the less generally it is in the interest of the employee that the employer purchase coverage through the SHOP exchange.
2. Would the small employer be eligible for a tax subsidy under section 45R of the Tax Code (section 1421 of the ACA).?These subsidies can range up to 50% of premiums. Generally, the higher the 45R subsidization rate, the greater the possibility that it is in an employee’s interest that the employer purchase coverage through a SHOP exchange rather than provide the employee with cash.
3. How do premiums in the individual market match up with premiums in the SHOP market for comparable policies. Many supposed that SHOP market policies might be cheaper and provide an advantage to employer purchase. But to the extent there are no such savings or, as perhaps is turning out to be the case, SHOP policies are more expensive, the case for having a SHOP exchange option is weakened.
4. To what extent do the preferences of the employer about which plan to select (Metal Levels and Plan Types) match the preferences of the employees. To the extent the fit is poor, that is factor suggesting that benevolent employers do better to avoid the SHOP exchange and instead give their employees cash so they may do as they see fit.
If it turns out that few employees benefit from the existence of the SHOP exchanges or that its distributional consequences are not sensible, the case for simplifying the Affordable Care Act by elimination of this component makes some sense.
Here are the families in the scenarios: Dora, the Dursley family, James and Mary, and Ada.
Example 1: Dora
Consider Dora, a 40 year old single woman making $27,195 per year working for a business Exploration, Inc. , that employs 40 full time equivalent workers and is thus ineligible for any sort of section 45R subsidy. For concreteness, we’ll put Dora in Harris County, Texas (Houston). If Exploration, Inc. goes to the SHOP marketplace for 2015, it will find that the second cheapest silver plan is sold by Blue Cross for $400 per month ($4,800 per year) for a single person age 40. The policy features a $3,000 all-inclusive deductible and a $6,350 all-inclusive out-of-pocket limit. So, if Exploration, Inc. were to purchase this policy, Dora would have health insurance and no additional tax liability as a result.
Suppose that in lieu of paying $4,800 in premiums to buy health insurance for Dora, Exploration just raises Dora’s wage by $4,800 . Call this her gross “in lieu compensation.” Assuming Dora is in the 15% marginal tax bracket, she would actually receive $4,080 of in-lieu compensation from her employer. If Dora then went to the federally facilitated marketplace for Texas, Dora would find that she could purchase an essentially identical policy from Blue Cross with the same deductible and out-of-pocket limit for $363.60 per month or $4,363 per year as a gross premium. But, at least until a decision against the Obama administration in King v. Burwell throws the nation into chaos , Dora would be eligible for a small subsidy from the federal government of $15.22 per month since the second cheapest silver plan in her area (a “Blue Advantage Silver HMO”) costs $250 per year. Dora’s net premium would thus be about $4,181.
Thus, to be in almost exactly the same position as would have been had Exploration purchased a policy on the SHOP exchange, Dora would be out a net of $101. Maybe, at least for Dora, its marginally in her interest if her employer goes SHOPping.
But this small negative sum may well be offset by a benefit Dora receives as a result of Exploration not going to the SHOP exchange and not buying health insurance for its employees: freedom. Freedom could help Dora in a variety of circumstances.
Suppose, for example, that Dora is in great health, has some money saved up, and just wants a Bronze policy to cover her against catastrophic medical expenses. Now Dora can go to the Exchange and pick up a Blue Cross Bronze “Blue Advantage Bronze HMO” policy for just $191.03 per month gross and about $176.03 per month after her subsidy. After she pays this net premium and her taxes on the $4,800 she got from her employer, she’ll have about $1,970 left in her pocket. If her medical expenses for the year end up being $4,970 or less for the year she’s come out ahead relative to where she would have been under the hypothesized Silver policy purchased by Exploration.
Or, suppose Dora isn’t in such good health and doesn’t like the risk created by a silver plan. She wants a platinum plan. She could obtain the “UnitedHealthcare Platinum Compass 250” plan with a deductible of just $250 and a out-of-pocket limit of $1,500 for a gross premium of $328.91 per month or $3,947 per year. The net premium for the policy after consideration of subsidies would be about $3,764 per year. She could buy this with the extra compensation she received from Exploration Inc. and still have $316 left over. If her medical expenses ended up being very low or somewhere between $1500 and $6,350 she will end up ahead.
Example 2: The Dursley Family
Vernon Dursley is the 40-year old Vice President Grunnings, a small drill manufacturer in Potter County, South Dakota. His family consists of his 40-year old wife Petunia and his young son Dudley, who is diabetic. Grunnings employs 15 individuals full time who have an average annual wage of $23,000. Dursley himself earns $90,000 per year. If Grunnings went to the SHOP exchange operating by the FFM for South Dakota, it would find a Bronze plan, “Sanford Simplicity-$3,000” available at a gross premium of $716.05 per month to cover the Dursley family. Because, however, Grunnings employs fewer than 25 people and pays a low annual average wage, it is eligible under section 45R of the Tax Code (section 1421 of the ACA) for a federal tax credit for one third of the amount of such purchases. Thus, the amount Grunnings would save by not purchasing the policy — at least with respect to Mr. Dursley — is $477.37 per month or about $5728 per year.
Giving Mr. Dursley $5,728, will not, however, be enough to enable him to purchase comparable coverage for his family on the FFM for individual policies for South Dakota. He is not eligible for a subsidy because his income is more than 400% of the applicable federal poverty level. First, the Dursley’s marginal tax rate is likely to be 25%. Thus, he will not net $5,728 from the Grunnings bonus; he will net $4,296. The least expensive Bronze policy for the Dursleys would be the “Dakota Reserve 6000” for $558.58 per month or about $6,703 per year. Thus, the Dursleys would be about $2,407 worse off if Grunnings failed to purchase a SHOP policy.
The underlying reason that the Dursleys do better if Grunnings SHOPs is that that Mr. Dursley is a well compensated employee of a company that is eligible for a tax credit if it goes to the SHOP exchange. Thus, even if premiums in the individual market are a little lower for comparable benefit packages as they are in the SHOP market, that benefit ends up being overwhelmed by the differential tax treatment.
Example 3: James and Mary
This example is somewhat more complicated but it is also quite important.
James is a 60 year old worker in medium health working for Peaches Unlimited in Peach County, Georgia. He’s married to his 60 year old wife, Mary. His household makes $50,000 per year. Peaches, which has 30 full time equivalent employees, has considered going to the SHOP Exchange and providing Bronze coverage for its employees and spouses, paying for all of the employee’s premium expenses and for half of the spouses. When it does so, it finds one plan: “BCBSHP Bronze Pathway X Enhanced 5000 30 6600 Plus” a POS (point of service) plan from the Georgia Blue Cross/Blue Shield carrier. The premium attributable to a 60 year old couple is $14,652. But Peaches will only pay half the premium for spouses, so, if Peaches were to purchase this policy, the annual incremental cost attributable to James and Mary would be $10,989. For this, James and Mary would get a plan with a $10,000 deductible for medical expenses, an additional $1,000 deductible for drugs, and a $13,200 out-of-pocket limit. If they wanted the policy, however, James and Mary would have to cover half of Mary’s premium, which would add an additional $3,663 to their costs. So, if we are to compare apples to apples, we need to see what James and Mary’s financial position would be if they shopped instead on the individual exchange.
Suppose that Peaches gives James and Mary $10,989 in in lieu compensation. They would likely have a marginal tax rate of 15%, which would make their after-tax additional compensation about $9,341. If James and Mary try to acquire a matching plan, the closest it looks they can come is the Humana Bronze 6300/National POS – OpenAccess plan, which has a gross premium of $1,181 per month or a hefty $14,177 per year. The net premium, however, will be only $5,578 after premium tax credits are received. Thus, James and Mary will be able to take the $9,341 in after-tax compensation they received, pay $5,578 and have $3,762 left over. But it’s better than that. James and Mary won’t have to pay $3,663 for half of Mary’s policy. So, in fact they will be $7,426 better off and Peaches no worse off if Peaches does not go to the SHOP exchange. For a couple making $50,000 that is a lot of money.
How has this happened? It is the result of three factors coming together: (1) James and Mary being eligible for a large subsidy from the federal government due to their age and the consequent high cost of a silver policy; (2) Peaches having too many employees to be eligible for any sort of tax benefit from the government; and (3) the high price of SHOP policies in Peach County relative to individual policies. As shown here, when these factors come together, employees should prefer a situation in which employers give them cash, not expensive health insurance policies. Moreover, if Peaches does not go to the SHOP exchange, James and Mary are no longer wedded to the likely small number of plans Peaches wants; they can pick any plan that best meets their needs available in the individual exchange.
Ready for one more?
Example 4: Ada
Ada is a 30 year old programmer at Babbage Enterprises , a small tech firm in Allegheny County, Pennsylvania. It has 10 employees but their average wage is $75,000 per year, making Babbage ineligible for any section 45R tax credit. Ada is single and makes $100,000 a year. It believes employees should have the best health care available. Babbage, which has a CEO with recurrent heart problems, could go to the SHOP Exchange and purchase a Platinum PPO for its employees — the “UPMC Small Business Advantage Platinum PPO $250 $10/$25 – Premium Network” for which the cost of adding Ada would be $353.94 per month or $4,247 per year. For that Ada would receive a plan that had a unified $250 deductible and a unified $1,250 out-of-pocket limit.
But what if Babbage instead provided Ada with $4,247 in additional compensation? Ada could go into the FFM for Pennsylvania and find a policy similar to the UPMC one listed above. She could get the “UPMC Advantage Platinum $250/$20 – Premium Network” for a gross premium of $391.75 per month ($4,701 per year )with a unified $250 deductible and a $1,500 out-of-pocket limit. Ada would have to dig into her own pocket to do so, however. Because Ada is in likely in the 25% marginal tax bracket, she will net only $3,185.25 from the additional compensation. And, because Ada’s income is well above 400% of the federal poverty level, she will receive no advance premium tax credit to help pay for the policy. Thus, Babbage’s decision not to purchase on the SHOP exchange will end up costing Ada about $1,516 if she wants a comparable policy.
Ada is worse off largely because she gets no subsidy and because, by receiving cash instead of health insurance, she loses the current tax advantage offered by the latter. Thus, it is the wealthy individual who is hurt by having to go to the individual market.
All of the above is hardly a proof. There are lots more scenarios to be considered. But my initial conclusion is that the SHOP exchanges tend to be most useful only for the wealthy who would not get a premium tax credit were they to go to the individual exchange. Also since my preliminary research indicates that, on balance, SHOP policies are at least as expensive as individual policies and because the employer purchasing a SHOP policy generally ends the ability of the employee to get a subsidized policy on the individual exchange, the option to purchase in fact may hurt employees and their families.
So, we have to ask.: If we are going to keep some version of Obamacare, why not help stabilize the individual exchange pools by bringing some additional people into them: the generally healthy people who work for small employers.? So long as the market works and those employers pass on to their employees what they would have spent on the SHOP exchange for health care, most except the wealthiest are likely to be better off. Although one answer to this provisional suggestion is that doing so will hurt the federal budget — more people will get section 36B tax subsidies — there may be many who share the preference for a simpler Obamacare, and one that helps breaks the peculiar stranglehold that employer provided health insurance has had on this nation since the government distorted the market after World War II.