• A selection argument for the Medicaid expansion private option

    The following interesting idea arose this morning in email correspondence with Adrianna McIntyre of the Project Millennial blog.* One concern about the ACA exchanges is that some of them will experience adverse selection. This could happen if enough relatively healthy individuals do not comply with the mandate, making the pool of enrollees into exchange plans relatively sicker. That would drive up premiums and the federal liability for subsidies.

    Subsidies reduce the risk and degree of adverse selection, but nobody knows by how much. It probably varies by state, commensurate with variation in the culture of acceptance of the ACA and its mandate. Of course, the higher the subsidy, the more likely an individual is to enroll when healthy. So, another way to reduce adverse selection and its cost is to allow exchange access to people who would be subsidized at an even higher rate. The Medicaid expansion population does the trick. So, there’s a selection-based argument for the Arkansas style “private option.”

    It may be true that would-be Medicaid enrollees are sicker than non-Medicaid enrollees, on average. But that’s not the relevant comparison. What’s relevant is how they compare to exchange enrollees. If they’re healthier, on average, than those who self-select into the exchange, then they reduce the pool’s risk rating, the premiums therein, and the federal liability for subsidies. This is a cost offset to the private option I have not yet seen raised elsewhere.**

    At some rate of health status-based mandate violation, it must be true that the Medicaid population is healthier than those choosing to take up an exchange product. If you think there is a reasonable chance of a high rate of lack of compliance with the mandate in Arkansas or any of the other states considering the private option, that increases its attractiveness because it reduces the difference in cost compared to an expansion of traditional Medicaid.

    * Adrianna, in turn, credits the origins of the thread to an anonymous colleague.

    ** As premiums come down, more unsubsidized individuals are likely to find enrolling in exchange plans a valuable option too. So this doesn’t just benefit the government.


    • The issue that will eventually collapse the system is OOP costs. Those in the lower income brackets who qualify for subsidies still have significant OOP costs compared with their income, have no savings, precarious jobs, and if they don’t show up for work (because they are sick) will lose those jobs and end up on Medicaid anyway. However in the mean time, the insurers will have collected the subsidy dollars. OOP costs for families are even worse.

      How does that compare to before the ACA. The only difference is that there was no mandate, Medicaid expansion, or subsidies for insurers. Since the Medicaid expansion is now state by state,
      – In some states, adults without children aren’t guaranteed coverage. (Same as before)
      – The mandate can cost the working poor their Earned Income Tax Credit.
      – The insurers get guaranteed rent, twice all other Western Countries for a defective product.

      This is rentier economics and does not improve the wellness of our population, especially considering the amount paid.

      However the alternative is efficient delivery ( Medicare or Medicaid for all), lower reimbursement, lower medical education costs, and preventative care. This is inherently deflationary, since much of our GDP growth has been Health System related. If we remove 1.5 Trillion from the health economy what would replace it.

      This is the fallacy of the GDP in modern times. There is more money to be made keeping systems (health,education,military,financial) inefficient, than to improve efficiency. If debt is freely available.

      • You’re aware of the cost sharing subsidies, right?

        • Regarding Cost-Sharing Reductions (Subsidies)

          OOP costs for Single: $2017 – $6050, non-linear from 138% to 400%.
          OOP costs for Family: $4034 – $12,100, non-linear from 138% to 400%

          These are adjusted yearly by HHS based on the insurer’s ability in meeting the Actuarial Values (70% for the Silver Plan). Lower income insured are very sensitive to premium increases, at least it is the reason that they would lose their insurance, whereas the unknown risk of future OOP costs are less imminent. So, if a plan with sicker population requires greater expenditures, the insurer notifies HHS and premium increases and/or co-insurance increases. The numbers above are ONLY the beginning.

          As co-insurance rises, the penalty looks more and more appealing. Or people don’t seek treatment to avoid OOP costs ( which isn’t healthcare). We all know that co-insurance is a deterrent to seek care, and that first dollar benefits is why most people choose Medicare F,G and C Medigap and the current attempts to end those plans.

          Please see this : ( Two Graphs) For each Single on Left – Family of 4 on Right.

          HHS has not released the numbers for Plus-1 plans.

          @100% OOP:
          Single MAGI 138% Income $15,415 Couple $20,878.
          Premium+OOP = $2479 (Single) , $4660 (Family)
          16.08% of Income, 22.32% Income

          @100% OOP
          Single MAGI 199% Income $22,340 Couple $30,260
          Premium+OOP = $4,432 (Single) $7,956 (Couple)
          19.84% of Income, 26.29% Income

          @25% OOP:
          Single MAGI 138% Income $15,415 Couple $20,878.
          Premium+OOP = $967 (Single) , $1635 (Family)
          6.27% of Income 7.83% Income

          @25% OOP
          Single MAGI 199% Income $22,340 Couple $30,260
          Premium+OOP = $2164 (Single) $3419(Couple)
          9.7% of Income, 11.3% Income

          Since there are no price controls, It is very easy to meet 100% OOP.
          Don’t know many with income below 300% that have savings,nevertheless considerable savings, where they might have some equity in their house but that’s it.

          Again, this is just the beginning. Premiums are already rising and OOP costs are not fixed, they are adjustable to allow for insurer, pharma, and provider profit.

          My math is that the insurer gets, from premiums, coinsurance, and the subsidies at least $5000 for a 25% OOP Single Insured to $25000 per Family of 4 (100% OOP).

          The costs are just too high, in comparison with other successful democracies, and especially for the outcomes we get. They are enforced for profit. And they artificially skew the GDP, which has the appearance of being positive. This is the definition of a rentier situation.

        • If there are co-pay differences, providers will be under even more pressure than they currently are to waive co-pays, a practice that, generally speaking, is unlawful. Also, this turn for the exchanges will have political consequences many experts aren’t considering. It’s not only those with lower incomes who must rely on individual policies, as an increasing number of workers don’t have group insurance. This is particularly true of the nearly old. For us (yes, that includes me), the exchanges looked like a way out of the health insurance hell that we face. Each year I am faced with a confusing array of choices of higher premiums, higher deductibles, lower coverage, and so forth, and must make an uninformed decision. With the exchanges, especially the minimum national standards for health insurance (essential health benefits), I expected guidance for making an informed decision. It’s not to be. My first big disappointment came with the minimum national standards: there aren’t any. Except for the political stunt regarding birth control pills, the administration has essentially punted, and the “essential health benefits” have become the lowest common denominator. The Medicaid private option simply confirms that the exchanges will essentially be the dumping ground for mostly low income folks, many with high risk, leaving those like me in essentially the same position as we are today. I suspect this will adversely affect support for ACA.

    • Given that private insurance is almost always more expensive than Medicaid, wouldn’t moving people raise overall costs, even without this issue? Perhaps I’m foolishly assuming the goal is to reduce healthcare spending (without sacrificing quality) rather than benefiting one payer at the expense of another.

      I wonder if additional means testing of Medicare would have related issues.

      Might it be advantageous for those who would have to pay more to move to exchanges or other private insurance (even if unsubsidized)? How would that effect the remaining pool, especially if we assume the higher income types are healthier? Might it raise the average cost of Medicare, putting political pressure on the program?

    • “This could happen if enough relatively healthy individuals do not comply with the mandate, making the pool of enrollees into exchange plans relatively sicker.”

      To be taken as a question and not as a suggestion: You discuss subsidies as one method of reducing adverse selection.

      What would happen if each insurer in the exchanges were permitted to have a range of deductibles without any cost shifting from one deductible to the other? Would that significantly lower the price for healthy people and the young (mentioned in your next paragraph) making the exchange more attractive?

    • The subsidies are very high in relation to the premiums IF the family can qualify for the subsidies.
      The law states that if employer-sponsored insurance is offered, and the employee’s cost for self-only coverage is less than 9.5% of his household income, the insurance is affordable, and the family does not qualify for the excange and its subsidies. This holds true, even if the employee had to pay 20% of his income for family coverage.
      For the family, if employer-sponsored coverage was not avilable, this same family could qualify for subsidies of about 85-90% of the premium on the exchange.
      Even refusing the employer-sponsored coverage is not an option, for the law states if the employee is eligible, not if he takes up the insurance.
      Don Levit

    • The title: “An argument for…”

      OK, just an argument, but a small one. I prefer an argument for economies of scale.

      The Mcaid population receives significant financial support. They bring dimension, not dollars. They may be healthy, but since they dont pay median freight–not nearly (the job of the feds), the benefit seems more likely to accrue to xchange critical mass and administrative function.

      Using federal dollars to lower private premiums, no?


    • A lot of good points here.

      One quiet sentence above is rather scary…..”If a health plan experiences higher costs, they can apply to HHS for higher premiums, more co-insurance, etc.”

      That’s just great……no pressure on the insurer to cut their profits, and no pressure on hospitals to cut their prices.

      America will try absolutely anything in the insurance markets before it tries price controls on providers.

      We are installing a vast bureaucratic apparatus to coax or force healthy persons to buy insurance……..rather than force hospitals to accept lower payments from insurance companies.

      The ACA outlawed any insurance policy with annual or lifetime limitis.
      This was done with good intentions, but it was exactly the wrong approach. Instead there should have been a ban on balanced billing.
      If a person has cancer and their policy has a $100,000 limit, then the providers should have been forced to accept $100,000 and not drive the family into bankruptcy.

      This would of course require price controls on cancer drugs. (Doctors are not the villains, they often accept what the family can pay them and no more, and have done so for many decades.)

      But once again, Americans will try anything before they try price controls.

      • @Bob”If a person has cancer and their policy has a $100,000 limit, then the providers should have been forced to accept $100,000 and not drive the family into bankruptcy.”

        I wonder how long the insurer would survive?

    • “** As premiums come down, more unsubsidized individuals are likely to find enrolling in exchange plans a valuable option too.”

      Is there any evidence that premiums are going to come down?

      I will admit to an absence of sufficient information to have an informed view. From what I can see, ACA requires a lot of people who currently rationally forego health insurance to insure (so average premium ought to go down) but also mandates a lot of people be covered who currently are not (so premiums go up) and mandates a lot of coverage that used to cap out instead be theoretically infinite.

      Insurers are fairly competent at pricing anticipated future costs into current prices. What have premiums done since the passage of the ACA?

    • A related solution is to take advantage of all available opportunities to expand Medicaid’s coverage of relatively unhealthy individuals. This can ease adverse selection pressures by removing these individuals from the private market. This phenomenon was a focus of my dissertation work: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2033424