• Exchange subsidies: Not ready for prime time.

    The following is a cross-post. The original is at The Washington Post, courtesy of Ezra Klein.

    If you’ll join me on a journey deep into the wonky weeds, I’ll reveal a few things about health insurance exchange subsidies that suggest that they are not ready for prime time. That doesn’t mean they are bad policy. It just means that between now and 2014, they need some work.

    As anyone reading this blog knows, a key piece of the ACA’s reform of the non-group market will be the 2014 establishment of state-based health insurance exchanges. Premiums for exchange-based plans will be subsidized for those who qualify for exchange coverage and have incomes below 400 percent of the federal poverty level.

    How those premium subsidies (officially, tax credits) vary by income and grow over time is established in the law, naturally. In particular, the government pays the difference between an individual’s income-based contribution and the premium of the second-cheapest silver plan. Clear enough. But the law is vague and/or confusing in other respects relevant to the subsidies. That fact is no trifling matter, as state authorities are beginning to lay the statutory and regulatory foundation for exchanges. It’s hard to traverse a confusing terrain with an incomplete map. But as I’ll show, the exchange subsidy map definitely has a few holes.

    Hole number 1: Subsidies might be far lower than expected. The ACA requires state exchanges to include Medicaid managed-care plans and to facilitate enrollment into them. This is sensible because individuals may move in and out of Medicaid eligibility, and the exchange is a natural choice to help manage that. Moreover, one-stop shopping for insurance plans is part of the purpose of exchanges. So, bundling Medicaid and non-Medicaid plans into one exchange is good, right?

    Not so fast. Some health policy experts see a problem. It’s expressed by Urban Institute’s Stan Dorn just after the 54:30 mark in the video of a recent Alliance for Health Reform and Commonwealth briefing. Dorn sketches out what happens when a Medicaid managed care plan turns out to be the second-cheapest (in premium) silver plan, and thereby drives subsidy levels. Medicaid has premiums well below commercial plans because it reimburses providers at much lower rates. But if subsidies are based on a low Medicaid premium, then those who are ineligible for Medicaid would receive a subsidy inadequate to cover the non-Medicaid plans for which they are eligible. In short, the required individual contributions would be much higher than expected. Nobody outside of Medicaid-eligible individuals could find decent coverage without paying a lot more than designers of the law expected or wanted.

    Hole number 2: Subsidies might not be available to children who need them. Some employers do not offer health insurance plans with dependent coverage. Parents who work for such employers may be ineligible for exchange-based coverage themselves, but may seek child-only policies in the exchange. According to a recent Robert Wood Johnson Foundation/Urban Institute brief, such policies must be offered, but it is unclear how federal subsidies will be calculated for them. One uncertainty, among many, is whether or not the premium contributions parents make to their employer plan count toward fulfilling their premium responsibility to qualify for exchange subsidies.

    Hole number 3: Subsidies might erode over time. The law is incredibly complex in how it characterizes the manner in which premium subsidies will grow over time. If you want the hairy details, CBO has them. At issue is what proportion of the second-cheapest silver plan the government pays. That proportion varies by income and changes over time. In fact, it may erode over time, so individuals end up paying more and more of their premiums. (Critics of the Republican plan for a voucher-based Medicare should find this familiar.)

    What drives the erosion is how government subsidy contributions are indexed. The indexing formula changes in 2019 if total government spending on them exceeds about 0.5 percent of GDP. If that happens, and some think it will, subsidies will erode, as illustrated by Jed Graham.

    Conclusion: Clearly the problems above threaten the spirit and purpose of the exchange subsidies. The point of the subsidies is to make coverage affordable. If it fails to do that for the reasons above, or any others, the individual mandate cannot work.

    I was among those who thought that a 2014 start date for subsidized exchange coverage was a political liability. It provides too many years for the law to be attacked, weakened,or possibly repealed before its main feature kicks in. However, given the issues I’ve outlined above (and there are many others), it is clear that moving too quickly would have been a disaster, too. The exchange subsidies are not ready for prime time.

    To the extent that fixing these problems will require new legislation, that may not happen until after the 2012 election, if at all. No improvement to the law would pass today’s Congress, particularly ones that will cost more.

    So, perhaps I was wrong about the 2014 start date. In this political climate, it may be a blessing that exchanges don’t begin until then, though certainly not for those who could use a bit of help obtaining health insurance. Such individuals have already waited too long.

    Acknowledgment: Brad Flansbaum provided key background for some portions of this post.

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    • The eonomics of subsidies is that they tend to raise the price of the item they are subsidizing, not by the entire amount of the subsidy but by some portion of the subsidy. This is basic micro-economic theory.

      By subsidizing premium there will be a tendency for health insurance premium to rise in price as supplier try to take some of that subsidy rather than have it all accrue to the subscriber. See this post here for a simple for effective analysis.

      http://dismalpoliticaleconomist.blogspot.com/2011/06/economics-of-health-insurance-companies.html

      • Presume a competitive market. If subsidies are bid competitively and the difference between the bid and the winning, lowest subsidy is the OOP premium, how do the subsidies drive premium higher?

        If the market is not competitive and/or subsidies are set administratively (a la Ryan or Medicare Advantage), then, yes, I see how premiums could rise.

    • There is a different question about the subsidies that I have long puzzled over. Why are they phased out so abruptly? Using the handy calculator on the KFF site, I plugged in a number of scenarios. If I were a 45-year old in a family of four earning $93,699 in 2014, I would receive a $5,344 subsidy to purchase a policy costing $14,245. If I were to earn one dollar more — $93,700 — I would receive no help in purchasing that $14,245 policy. I am not someone who worries greatly about marginal tax rates, but the subsidy schedule seems to create some serious disincentives. Could the schedule be designed to phase out more slowly or is there a rational behind the approach adopted by the ACA?

    • Regarding Hole #2, I’ve been arguing for at least 15 years that one of the most difficult tradeoff issues regarding children’s health care is the existence of the “family plan” that bundles children together. We are just now beginning to see the unraveling of the concept as we’ve pounded our heads against the wall regarding SCHIP and now are beginning to deal with new provisions in the ACA. The most efficient (supply side AND demand side) way to deal with implementing the ACA will be to layer new subsidies regarding numbers of children in families (we already do this in the tax code with dependent deductions) on to the design of insurance plans and hasten the phase out of “family” plans. This will make SCHIP crowd out problems better, it will make actuarial analysis of health care for children better, and it will improve the efficiency of markets for insurance for adults. The provisions in the ACA regarding coverage of “children” to age 26 is just going to exacerbate these market inefficiencies.

      In short, I agree with you, Hole #2 is a big deal, but even bigger than you suggest it is.
      Jim