• Of benchmarks and vouchers

    This is very wonky, but incredibly important. If you want to really understand vouchers, read and understand this post.

    I’ve written that premium credits (aka, subsidies or vouchers) in the ACA exchanges are tied to the premium of the second cheapest “silver” plan. That’s true. That’s how they harness a market signal, taking advantage of competitive bidding. Since potential enrollees pay anything above the subsidy with their own money, plans have an incentive to keep their premiums low, which, in turn, keeps the subsidy low — because it is tied to premiums (through the second cheapest silver plan).

    More recently, I’ve also written that ACA’s exchanges’ subsidy levels might erode after 2017. That is, they might not keep up with premium levels. Anybody see a problem? How can subsidies erode if they are tied to premiums? They can’t be based on premiums and still not keep up with them? Or can they?

    What’s missing here is the idea that premiums set the benchmark for subsidies, but not the subsidies themselves. Put another way, the actual subsidy is some fraction of a benchmark; the government only pays a share. It matters what the benchmark is. It also matters what the government share is. The consumer pays the rest. For example, the government might pay 90% of the benchmark and you pay 10% (making up numbers here, for illustration only).

    Now, if the benchmark is a premium or some function of premiums (e.g., the second cheapest silver plan in exchanges, the average premium in Medicare Part D) then we have a market signal driving subsidies. Premiums are set in the market and they also set the benchmark for subsidies. Still with me?

    But that’s not all that drives subsidies. The government fraction (90% in the example above) does too. If that fraction falls over time, then the subsidy erodes, even if the formula for the benchmark never changes. This is exactly what might happen in the ACA exchanges. The benchmark stays tied to the second cheapest silver plan’s premium, which will grow over time with health care costs. But the fraction of the benchmark the government will pay might fall after 2017. (Jed Graham thinks this is a near certainty.)

    In contrast, in Medicare Advatnage (MA), the benchmark is an administrative price. It is not tied to bids or premiums. There is no competitive bidding in MA. Subsidies to plans are no higher than the benchmark and are lower if plans bid below it (the difference is split between the plan and government). Historically, MA benchmarks have grown to a level above a market rate. That’s how MA plans get overpaid.

    Under Rep. Ryan’s “Path to Prosperity,” there is no benchmark. Subsidies to plans are set to a level initially and indexed to overall inflation. That’s how they will erode.

    I am sure this is unbelievably wonky detail to many. But, trust me, this is where all the action is on vouchers/subsidies. It only matters how they’re set and what they can be used for. That drives government and out-of-pocket spending. If you can’t answer the questions about how they’re set and what they’re for, if you don’t know how they grow or erode over time, you don’t know anything important about them.

    Share
    Comments closed
     
    • This is a really fuzzy area for me – thanks for explaining!

    • You say that plans have an incentive to keep their premiums low (at the “silver” plan rate) but what happens when I can’t buy a policy at the “silver” rate? There could be only one insurer at the silver rate which does not cover my region. Will I have guaranteed access to the silver plan rate or will the “free market” be free to charge me whatever it wants?