States seeking to reduce their uninsured populations must beware a Catch-22

NOTE: This is a joint post by three of my colleagues and myself:
David M. Anderson, Charles Gaba, Louise Norris and Andrew Sprung

State policymakers have been prolific and creative in putting forward measures to strengthen their ACA marketplaces. Measures enacted since 2017 or in progress now include reinsurance programs, which reduced base premiums by an average of 20% in their first year in the first seven states to implement such programs; new or renewed state-based exchanges, which capture insurance user fees that can be used for advertising and outreach; state premium subsidies to supplement federal subsidies; and state-based individual mandates, which can provide funding for all of the above.

Policy makers must recognize, however, that these choices entail tradeoffs — and not just in budgetary constraints. Specifically, built into ACA marketplace architecture is a pricing dynamic that bedevils state attempts to improve ACA marketplace performance: reductions in premiums for unsubsidized enrollees tend to raise premiums for subsidized enrollees. Because premium subsidies are designed so that enrollees pay a fixed percentage of income for the benchmark (second cheapest silver) plan, premium increases also increase subsidies — and tend to increase the difference, or "spread," between the benchmark plan and cheaper plans.

This dynamic has been intensified by "silver loading," insurers' response to President Trump's October 2017 cutoff of direct federal reimbursement to insurers for the Cost Sharing Reduction (CSR) subsidies they are required to provide to low income marketplace enrollees who select silver plans. Most state insurance departments responded by allowing insurers to price CSR into silver premiums only. As a result, bronze plans are available at zero premium to more than half of subsidized enrollees, and gold plans cheaper than the silver benchmark are available to a substantial minority. Notwithstanding Trump's avowal, days after the CSR cutoff, that "Obamacare is finished," silver loading has probably boosted ACA marketplace enrollment by about 500,000.

The negative effect of reductions in unsubsidized premiums, for example via state reinsurance programs, confronts states with a Catch-22: If they take actions that reduce unsubsidized premiums, subsidy amounts will decrease and after-subsidy premiums tend to increase for a substantial number of enrollees. But if states don’t take action to reduce unsubsidized premiums, people with income above 400% of the poverty level are increasingly priced out of the market. Huge premium increases in 2017 and 2018 rendered ACA-compliant plans unaffordable for millions of people who did not qualify for subsides. Unsubsidized enrollment in ACA-compliant plans was halved from 2016 to 2019. In many states, reinsurance programs have provided substantial relief to the unsubsidized, while sometimes reducing discounts and likely depressing enrollment of the subsidized.

Many of the states with relatively low uninsured rates have sidestepped the Catch-22 by various means. Massachusetts, which leads the nation with a 97% insured population, adds generous state supplements to federal ACA subsidies, rendering discounts from the benchmark unnecessary. Vermont and California also add state subsidies to the federal (California's state-funded subsidies launched in 2020). Minnesota and New York have exercised an ACA option to create a Basic Health Program for lower income enrollees who would otherwise be in the marketplace, providing Medicaid-like coverage at much lower cost to enrollees with incomes up to 200% of the Federal Poverty Level. Washington, D.C. expanded Medicaid eligibility to 210% FPL. In these states the uninsured rate ranges from 3 to 7%, compared to 9% for the U.S. as a whole.

The most successful interventions to date acknowledge in one way or another that ACA marketplace subsidies are inadequate to the task: too many prospective enrollees find the coverage on offer unaffordable. The Kaiser Family Foundation estimates takeup of marketplace offerings among the subsidy-eligible at below 50%, and takeup among those ineligible for subsidies is lower still. To ease the way for the latter group, California offers limited subsidies to some enrollees with income above the ACA’s 400% FPL eligibility cutoff, and Washington state plans to do so starting next year.

Short of putting up their own money to improve subsidies, states looking to improve marketplace affordability might consider taking regulatory action to intensify silver loading effects — effectively increasing federal subsidies. Silver loading is far from reaching its full potential. Thanks to the added value of CSR for low income enrollees, silver plans on average offer more comprehensive coverage than gold plans. Yet gold plans are usually still significantly more expensive. Mandating that insurers price plans in accordance with the real actuarial value, as actuaries Greg Fann and Daniel Cruz have proposed, would provide consistent relief to enrollees with incomes above 200% FPL, who qualify for either negligible CSR or no CSR.

Unless and until subsidies are enriched on the federal level by other means, policy makers seeking to increase marketplace affordability nationally should resist efforts in Congress to restore direct federal reimbursement to insurers for CSR. In the absence of federal legislation to improve ACA subsidies, silver loading is a vital resource, enhancing affordability regardless of whatever other measures are taken.

State-based subsidy enhancements can be partly funded, ironically, by states picking up the federal ACA taxes that Congress has shed. Several states have instituted individual mandates. A bill introduced in New Mexico would institute a state version of the repealed user fee paid by insurers offering plans on the exchange. This kind of legislative judo may be states' best tool for wriggling out of the pricing Catch-22.