The 46th President of the United States assumed office after serving eight years as vice president to the 44th president and four years out of public service. Upon return to the executive branch, President Joe Biden has repeatedly said that he wants to “build on the Affordable Care Act”, the 44th presidential administration’s signature domestic legislation which reshaped individual health insurance markets and brought forth new challenges. The premium dynamics of the law are mathematically convoluted and often elusive, complicating assertation of which policies realistically “build on” the law. This is the first in a series of papers to provide policymakers and policy staff with actuarial clarity of market dynamics as they advance policies with financial implications for consumers of individual health insurance.
Albeit in a small wonkish universe, my fifteen minutes of fame was seven years ago. I wrote the first of many articles about the unique details of the Affordable Care Act (ACA) market dynamics, and it was highlighted by Forbes and received more attention than I expected. The premise of “Implications of Individual Subsidies in the Affordable Care Act” was straightforward:
(1) The ACA reshuffled individual health insurance premium rates and increased them beyond a level which most people would be willing to pay.
(2) Premium subsidies were necessarily a key component of the law, with the intention of making ACA markets more attractive by neutralizing high premium levels.
(3) The distribution of the subsidies was unbalanced and would contribute to limited and skewed marketplace enrollment.
The first two findings were easily understood and properly communicated. The more controversial third finding required algebraic comprehension, and public education was diminished by a deliberate lack of transparency from the ACA’s architects. I performed some simple math, displayed results in easy-to-follow tables, put some words around the nonintuitive implications, and submitted for publication. The volunteer exercise changed the trajectory of my career from a tactical, behind the scenes number cruncher to a visible public informant communicating the mathematical dynamics of health insurance policy.
Summarizing my initial insights, Forbes concluded, “One of the presumably unintended consequences of this misguided law is the fashion in which it encourages some young adults to become uninsured. These are the very young people that the Exchanges need to sign up for coverage if they are to avoid a death spiral…Millennials should be up in arms over how Obamacare is treating them. Greg Fann's numbers simply help prove my point. Let's repeal this lemon law as soon as possible and replace it with a patient-centered plan that is more efficient, equitable and effective.” Forbes referred to me as an actuary who had “cranked the numbers” and mathematically demonstrated that young adults would not qualify for subsidies as their premiums were considered “affordable” according to the arbitrary ACA definition.
The ACA has an age problem. The law is grossly unfair to young adults. This was ignored during the law’s implementation and it was mitigated but not directly addressed with President Trump’s regulatory actions. It is a blemish that we continue to disregard; rather than target the problematic structural issue with each policy update, we have attacked the problem by inefficiently increasing premium subsidies across the age spectrum, although the formula changes ironically do not always reach the young adults who have been most harmed by the law. Our response to inherent challenges has been unoriginal, repeatedly “adding more government funding which only further conceals the inherent structural issues from public understanding”.
A broad subsidy increase is what President Trump implemented in 2018, it is what California executed locally in 2020, and it is likely the prescription President Biden will follow, with perhaps a pretense of claimed originality. “Larger subsidies are needed”, we will continue to hear; without a directional shift, we should expect a blunt hammer infusing more federal money into ACA marketplaces with scant attention to structural framework changes and little analytical dissection of the disparate impact on the broad mix of potential individual consumers. As I learned of President Biden’s first proposed action regarding the ACA in the COVID relief package and watched the immediate public miscommunication of its implications, I could hear 2013 calling. It was a déjà vu moment, and it was clear that “the numbers” needed to be cranked again.
In the Age/Income Weeds
An insurance law’s financial impact on various subpopulations is something that actuaries are expected to study and comprehend, while such peculiarities may commonly exceed the ‘need to know’ detail of non-technical professionals. With the ACA, I disagreed with this general supposition. I subtitled my article “What Stakeholders Need to Understand” because I believed that the dynamic variances in consumer value propositions were extreme enough to impact enrollment results and challenge the law’s long-term sustainability. Seven years later, we hear the echo of my call from prominent ACA academics, “These dynamics are complex. They are confusing. And they shape the distributional consequences as well as the operational mechanics of most of the ACA individual market now and under most plausible reform plans. We need to understand these mechanisms well.”
The referenced ACA sustainability concern embedded in the misunderstood dynamics was always legitimate, and actuaries were indeed asking “Is the individual market sustainable?” through 2017. The more troubling aspect, however, in 2013 was not sustainability but that some of the assurances of ACA architects did not align with the mathematical dynamics, something not lost on those of us who had done the math. In fact, I proclaimed in 2016, in language painstakingly rephrased by pacifying editors, that “it was the repeated misperceptions of the legislative impact that initially piqued my interest in writing about the program details”.
My consternation with the false narrative peaked after reading a conversation in the October 2013 edition of Health Watch, the same Society of Actuaries publication where my article appeared and a journal with a proud tradition of objective truth rather than political hyperbole. Grace-Marie Turner of the Galen Institute had explained the ACA’s challenge with enrolling young adults. David Cutler, a Harvard economics professor and one of the ACA’s three key architects, challenged her assertion regarding the anticipated skewed enrollment.
Grace-Marie Turner: About two-thirds of the uninsured are under age 40. Because they are generally healthier and are less likely to be major users of health services, their premium contributions are needed to help keep insurance costs down for everyone else.
Yet the incentive structures in the law work at cross-purposes with this goal and could well undermine its success. The former director of the Congressional Budget Office, Douglas Holtz-Eakin, found in a study published earlier this year for the American Action Forum that, “Across all markets, the ACA will dramatically increase the cost of insurance for the young and healthy individuals and small employers.” He found that “the ACA regulations lead to a 149 percent average increase in the cost of insurance for this population.”
The survey also showed that fewer than half of young people will sign up for insurance if premiums rise by 30 percent.
Ezekiel Emanuel, a key architect of the president’s health plan, writes that he is worried that young people will be “bewildered,” and they may “forgo purchasing health insurance and opt to pay a penalty instead.”…The fact that the administration has been working so hard to convince sports heroes to help promote enrollment in the ACA insurance shows the significant concern about reaching this group.
David Cutler: I don’t think it will have a huge impact because it will be offset by the subsidies. Many young men have relatively low incomes. Thus, the premium they face will not be the full amount, but rather the amount net of the subsidy. Put another way, the ACA has limits on the share of income that people will pay for health insurance. These limits are sufficiently low that the price will not be a prohibitive factor in determining whether to buy coverage or not.
Mr. Cutler’s simplistic response lacks the necessary rigor to communicate ACA dynamics. As referenced by Forbes, many young adults did not qualify for subsidies as ACA rules considered their inflated premiums to be “affordable”. If there is no subsidy, they do indeed pay the inflated “full amount”. I explained the pervasive disinformation in “Implications of Individual Subsidies in the Affordable Care Act”:
The technical nature of the mechanics has been overlooked in public forums, and the impact of these subsidies is frequently generalized and misrepresented. A methodological understanding of how the subsidies work is required to understand the transition from gross premium to net premium, which is needed in order to model consumer behavior and develop reasonable enrollment and financial projections.
The resulting impact of the premium subsidies on net premium rates is not intuitive, and generally not well understood. While a technical analysis is required to understand the different impacts to different people, the natural inclination is to generalize and believe that the premium subsidies will have uniform and directionally appropriate effects across the eligible population, as most government entitlement programs are intended to do. However, the following sections will illustrate that the subsidies will primarily benefit older people. This reality is either unknown or overlooked when reliance on premium subsidies is the automatic explanation of why there is no reason to be concerned that young people may choose not to enroll in the individual exchanges.
Of course, this assessment was forward looking at the time. We had logical models and premium relationships that could be understood, but we did not have real marketplace experience. The next few sections discuss initial ACA market results and the implications that regulatory changes have had on market development.
The ACA’s First Decade
The ACA had a rocky start with operational and financial up and downs. While the operational challenges associated with exchange implementation are well known, the more significant risk to the law’s sustainability was financial. Administrative costs are around 15% of insurer premiums and claim costs averaged 99% of premiums in the first three years, resulting in billions of dollars in losses, market exits, and corporate insolvencies. Young adult enrollment proved to be a risk pool challenge; “the 18–34 demographic represented 28 percent of the market at the end of the 2014 open enrollment, short of the 39 percent targeted expectation”. Today, marketplace enrollment is about 35% of the Congressional Budget Office’s 2012 projections.
As President Obama’s presidency came to an end in 2016, ACA markets were at their lowest point and repeal of the law appeared imminent with the election of President Trump. When legislative repeal did not materialize and markets continued to struggle, the new president began reshaping the market environment through regulatory channels. Following a legal recommendation from the Department of Justice, President Trump enhanced federal funding and converted cost-sharing reduction (CSR) payments to insurance companies into funds available to subsidized enrollees to offset premiums. This regulatory change directly lowered consumers’ net premiums. Government data indicated that the “Percentage of Enrollees” with access to premiums of ‘$75/month or less’ clearly increased from ~70% in 2015-2017 to ~80% in 2018-2019. Insurer participation in markets increased and benchmark premiums declined for three straight years. Public sentiment for the law improved amidst the reduced costs across all income categories and more flexibility for those harmed by the law to procure non-ACA coverage.
Despite the dramatic market improvements which extended into 2021, the media and purported supporters of the ACA remained uncannily silent about the regulatory changes and revitalized market dynamics. Public discussion instead centered on dissection of phantom repeal plans and a court case related to constitutionality of the individual mandate while Congress did nothing to address what should have been an easy constitutional remedy. Market improvements could have been even stronger with objective communication, but electoral interests exceeded ACA transparency and health insurance consumers remained largely unaware of ACA market revitalization. In October 2020, Washington Post health reporter Paige Cunningham mused “If Biden wins, it will be interesting to watch Democrats flip back to applauding improvements in the ACA marketplaces instead of ignoring them.” More generally, I had hoped both sides of the political spectrum would facilitate further market improvements by bringing needed public recognition to the clear beneficial reality of the ongoing ACA market transformation and the new opportunities for states to optimize their local markets.
The reticence to applaud ACA improvements has always been tied to the underlying politics. How do we explain markets improving significantly under President Trump when he supposedly “attempted to sabotage the ACA at every turn, jeopardizing coverage for millions of Americans and causing premiums to skyrocket”? Of course, he was doing none of those things and premiums were declining, but market destruction was the continuous message we heard from the media, Congressional Democrats, and on occasion, President Trump himself. For virtually every measure, the public portrayal of ACA market direction was the opposite of reality.
Disinformation has harmed ACA markets in many ways; we need to flip the script and be transparent with stakeholders. A proper understanding of the ACA requires a systemic cognitive change from ascribing policy implications based on politics to seriously seeking to understand policy implications. That understanding is not realized by listening to tiring political rhetoric; it is achieved only by doing something that many of us find less familiar, less pleasant, and less exciting, and that is doing some basic math. It is the necessary path forward as we consider the efficacy of future changes to ACA formulas.
At the beginning of the Biden presidency, the really good news is that ACA markets are stronger and more popular than they have ever been. As costs are lower and consumers have more options, it is easy to understand why. The better news is that ACA markets will continue to improve if left alone; the bad news is the political temptation to disrupt markets may be too great, and unintended adverse consequences are never far behind.
To avoid such consequences, we need to do a little homework and study what shockingly has not been the easy guide to ACA construction and modifications. ACA dynamics are not difficult to follow, but we really do have to do math; not a lot of math, but some math. Our inability to understand ACA dynamics has never been because we were unwilling to do numerous math calculations; it has always been that we were unwilling to accept any math at all, and instead rely on ascribed political intent despite objective clarity revealing the opposite. It has been too easy to find comfort with company, which is why most of what we have read about the ACA is consistent and familiar while also inaccurate. In my continued interest in objective accuracy seven years later, I am updating “what stakeholders need to understand” and combatting the “lack of transparency” aspirations of ACA apologists by illustrating specifically what we need to know. Let us not concern ourselves with the political rhetoric of who says they want to “build on the ACA”; let us look at the numbers and the value propositions offered to consumers in the proposals they put forward. Fortunately, this is all too easy to do.
A Good Start for President Biden
As President Biden settles in his office, the unbalanced subsidy distribution is no longer a secret limited to the actuarial world; at least most of us do not think it is. Almost everyone regards unbalanced subsidy allocation as the ACA’s largest flaw. Many of us generally and defensively summarize the challenge by stating “the ACA is not perfect; we always knew it would need adjustments”. A more specific recognition is that “we need to extend premium subsidies to a broader income base”. Bottom line, we are aware that subsidy eligibility is income-based and that equity challenges arise at higher incomes.
But once again, “the natural inclination is to generalize and believe that the premium subsidies will have uniform and directionally appropriate effects across the eligible population”. While the income-based inequity is well understood and not unfamiliar, the age-based inequity is often approached with more opaqueness. In fact, when people boast about what the ACA has done for young people, what do they say? You know the backhanded answer. They tellingly steer discussion away from ACA markets and highlight an escape option from ACA markets that is limited to young adults under age 26. The escape option is of course discriminatory and only available to young adults whose parents have other health insurance, which may or may not provide a reasonably good value. It is wholly incongruent to describe the ACA as beneficial to young adults because it significantly raised their premiums and then allowed some of them to escape to other markets unregulated by the ACA; that is equivalent to a farmer explaining how useful his fence is by only assuring us that he always leaves the gate open.
To properly assess the impact and equity of ACA policy changes, a holistic consideration requires a matrix-based age/income analysis within ACA markets. We are about to dive into the math you were warned about; it is nothing more than elementary calculations, but there are a lot of numbers to digest. This would be a good time to take a stretch/coffee break.
As discussed, it is imperative to realize that the ACA’s impact was extremely varied for different subpopulations; future policy development should consider holistic impact, and the best way to do that is to measure the impact across the most volatile characteristic of ACA value propositions, and that is net premium levels which vary by age and income. This analysis approach is not new. When research was performed to assess Republican bills to repeal the ACA, this is precisely what was done. KFF noted “Adults age 50-64 with incomes below 200% of the poverty level would see the biggest loss of coverage under the AHCA – a 150% increase in the number of uninsured in 2026 relative to current law.” Of course, the ACA represented the ‘current law’ baseline at the time, and the obvious problem with this analysis was that the ACA did not provide a reasonable baseline comparison. After all, it was the ACA’s resulting premiums that created market instability and necessitated contemplation of a more sustainable model. Convoluted ACA premium results were hardly a sensible base comparison for reasonableness. In this paper, we compare ACA premiums for the population susceptible to ACA premium challenges relative to an equitable unsubsidized pre-ACA environment, meaning that “differences in rates reflect material differences in expected costs”.
We first establish that the ACA was primarily beneficial to people with chronic medical conditions and individuals with incomes below 200% of the Federal Poverty Level (FPL). Most individuals with chronic conditions can obtain insurance coverage at premium levels less than their known costs. Those with incomes below 200% of FPL can procure generous insurance benefits at very low prices. A previous study illustrated the attractive low premiums and consumer satisfaction with the lower income population.
The policies implemented under the Trump administration and those proposed by President Biden do not attract those in groups already advantaged by the ACA; these individuals already have substantial price incentives to maintain ACA coverage. Trump and Biden policies primarily impact coverage decisions for the healthy population with incomes above 200% of FPL, and President Biden says he intends to fill remaining gaps of subpopulations poorly served by the law. Unfortunately, those gaps and the underlying ACA dynamics are not well understood, and such policies will likely be constrained by the ACA’s inefficient structural framework; the unique exception is state implementation of Section 1332