Managing marketplaces requires state regulators to make tough choices

State regulators and insurance companies are key Affordable Care Act stakeholders whose decisions shape the markets and determine plan affordability. There are several levers that regulators and insurers can use to craft localized solutions that fit state‐based needs and values for the 2020 plan year and beyond.1

As insurers and state regulators are reviewing and adjusting submitted plan offerings for 2020, there are a number of decisions that will influence the affordability of the individual health insurance market. Some of these decisions are immediate and short term, while other decisions shift the state's insurance market cost structure permanently. This month's article, Individual Market Health Plan Affordability after Cost Sharing Reduction Subsidy Cuts highlights a core tension in this area.2 The means by which affordability can be obtained in the subsidized and nonsubsidized insurance markets are not aligned.

Affordability matters for all potential individual market buyers, but the pathway to it is dramatically different depending on subsidization. Individuals below 400 percent FPL receive a subsidy based on a benchmark plan (2nd lowest premium silver plan). When that benchmark has a higher premium, the subsidized individuals who buy low‐cost plans are better off as the spread in premiums between the lower cost plan and the benchmark increases. This increased spread accrues to the benefit of subsidized buyers of plans priced beneath the benchmark. However, those who are not subsidized are worse off at higher premium levels. Maintaining nonsubsidized premiums at an affordable level in state markets has been an increasing challenge as premiums accelerated from the systemic underpricing of 2014‐2015; the expiration of federal reinsurance for the 2017 plan year; and systemic overpricing in 2018 as insurers reacted to policy uncertainty by either exiting markets or raising rates. Consequently, subsidized consumers have either benefited or been held harmless while unsubsidized ones have faced higher premiums.

The termination of payments for cost‐sharing reduction (CSR) subsidies handed states a challenge in managing affordability in their individual markets. CSR subsidies reduced out‐of‐pocket expenses for individual market buyers who purchased silver plans on the marketplace and earned between 100 and 400 percent FPL. These subsidies were not explicitly appropriated, which led to the termination of direct federal reimbursement for these benefits in October 2017. Insurers were required to pay the benefits without a direct federal reimbursement. Many states allowed insurers to place the entire cost of CSR benefits onto only silver plans in a practice known as “silver loading.” Silver loading increased affordability in 2018 and 2019 for subsidized buyers who purchased nonsilver plans. Silver loading increased the premiums of only silver plans, which means the benchmark was inflated compared to bronze and gold plans. Nonsilver plans had more favorable to consumer premium spreads in 2018 and 2019 compared to 2014‐2017. Some states allowed or required insurers to engage in the “Silver switcharoo” extension of this schema where the CSR costs borne only by on marketplace silver plans. The silver switcharoo held off marketplace silver purchasers harmless. These steps persisted in 2019 and will continue in 2020. Affordability has increased for subsidized buyers under both schemes; unsubsidized buyers saw plan affordability decreased for states that engaged only in silver loading as silver plans became more expensive to nonsubsidized individuals over and above normal trend premium increases.

States have several levers to manage their markets. Medicaid expansion has been shown to decrease individual market premiums by 11 percent.3 This is an incredibly powerful lever to manage individual market affordability. The Medicaid expansion eligible cohort is a more expensive than average segment of the individual market. Moving this group to Medicaid lowers average claims costs and thus premiums in the individual market. Additionally, Medicaid expansion minimizes the additional premium increases needed to compensate for CSR payment termination as the 100 percent‐150 percent FPL group receives the largest CSR benefit. Smaller CSR increments make plans more affordable for nonsubsidized individuals while decreasing affordability for subsidized individuals. As of May 31, 2019, 34 states have approved and have accepted enrollment into expanded Medicaid that qualifies for the enhanced federal matching rate.4 Two other states, Nebraska and Idaho have accepted Medicaid expansion for the entire eligible population but have not begun enrollment in these programs. Utah and Wisconsin have expanded Medicaid to 100 percent FPL so that all citizens of these states earning less than 400 percent FPL are eligible to receive some financial assistance for medical insurance. Utah and Wisconsin are receiving neither enhanced federal funding nor the rate reduction benefits of a full expansion.5 Other states are also investigating partial Medicaid expansions, which has significant legal and financial implications.6

Another force on premiums is competition, the management of which is a significant challenge for state regulators. The paper in this issue notes counties with low competition in the individual market may have more affordable premiums for subsidized populations. Many papers in a variety of contexts show that insurance monopoly power increases premiums.7, 8, 9 Increased consolidation in the provider side of the health care industry has also led to higher premiums.10, 11 Monopoly provision of goods and services is almost universally negative. State regulators can choose to increase competition in the insurer markets by linking and rewarding participation in other government programs such as a state employee health plan or Medicaid Managed Care contracts to insurers offering plans in the individual market. This will increase competition and lower nonsubsidized premiums.

However, the price‐linked subsidy system of the ACA creates unusual opportunities for improved outcomes for subsidized buyers in a monopolistic market.12 State regulators that prioritize overall enrollment levels and low net of subsidy premiums may wish to maximize the ability of insurers to offer large premium spreads from the benchmark.13 Spread maximization with the intent of increasing affordability for subsidized individuals can occur with the requirement that a monopolist offers a low and high premium silver plan in a rating region as well as mandating a bronze plan with a low actuarial value. Minimizing the premium of the least expensive plan will maximize the spread to the benchmark, which will increase the number of people who are exposed to a low or no cost option.

State regulators have several other levers. Most notably, many states have used Section 1332 waivers to build state‐based reinsurance programs.14 These programs improve nonsubsidized affordability by paying for some high‐cost claims with nonpremium funds. Some states have used a state‐based individual mandate to fund reinsurance, while Maryland intends to reduce bureaucratic friction by using tax returns to enroll individuals in low or no cost insurance.15 States can elect to advertise or not advertise. Advertising has been shown to have a significant effect on information seeking and enrollment behaviors.16 State‐based exchanges have successfully maintained their enrollment levels over the past several years even as enrollment has declined on Healthcare.gov in part due to consistent and persistent advertising and outreach.17 Outside of the ACA framework, states have flexibility on how they regulate short‐term limited duration plans; underwritten plans will pull low‐risk individuals out of the community‐rated, guaranteed issued ACA individual market. High uptake of underwritten plans could increase general premium levels that will potentially increase affordability for the subsidized while decreasing affordability for the remaining nonsubsidized.

The next several years of the Affordable Care Act will be driven by the states. The fundamental structure of the law will shape the policy decisions and implementation of the states. All states will face an environment of guaranteed issued, community‐rated, subsidized private market insurance, available Medicaid expansion for working‐age adults at an enhanced federal cost‐sharing and wide waiver authority that is constrained by law and clear administrative procedures. Within this framework, states will need to find ways to smooth the edges of the law and address issues and populations that are not well served by the law. They have the tools to do so, but the decisions to trade‐off the well‐being of some groups for the gains of others will remain a potent political and policy problem.