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“It’s unbelievable how much you don’t know about the game you’ve been playing all your life”.
– Mickey Mantle
The game of baseball underwent a 21st-century change when advanced analytical computations changed the way players were valued. Important measures in the individual health insurance market went through some radical changes as well in 2014.
Unlike baseball, the changes in the individual health insurance environment are the direct result of reengineered markets. The ACA changed the rules in ways that make the resulting dynamics paradoxical and issuer incentives hazardous. I was recently asked to discuss these paradoxes in a Society of Actuaries commemorative publication celebrating the ACA’s 10th anniversary. I noted the core comprehension challenges, ”Most Americans have a surface-level understanding and in turn believe that ACA dynamics are directionally logical”, but “traditional aims (e.g. lowering costs) do not always align with market success…Readers of this article will learn to appreciate the ramifications of the unique dynamics and the non-instinctive actualities that are foundational to ACA mechanics…A sharp reduction in subsidy funding can be dangerous and severely curtail financial incentives for eligible individuals to enroll…Attempts to improve the current framework are fruitless when the underlying mechanics and resulting challenges are not well understood.”
Most industry stakeholders do not appreciate the unique dynamics in the ACA individual markets. This is explainable; the mechanics are convoluted, nonintuitive and unlike any other health insurance marketplace.
Most industry stakeholders do not appreciate the unique dynamics in the ACA individual markets. This is explainable; the mechanics are convoluted, nonintuitive and unlike any other health insurance marketplace. The mechanics alone are not particularly hard to learn, but a larger challenge is unlearning what is known own about other markets and passively deduced. Also, the individual market is relatively small. A Chief Actuary responsible for a balanced business portfolio is concerned about overall financial results. A couple of margin points on a small line of business is not going to make much difference, and his/her time is not spent focused on mastering peculiar dynamics in markets. Accordingly, individual markets are not optimized and the status quo is accepted.
For policy-minded stakeholders, part of the challenge involves our willingness to accept the illogical consequences and political calculus in the ACA framework, “something we have not only been reticent to do, but something we don’t really understand because the underlying unique dynamics are so convoluted and counterintuitive to all we know about health care markets and costs.” Jon Walker puts it this way, “The more states try to make the exchanges work well and keep insurance premiums low, the more their low-income residents end up needing to pay for insurance.”
States that have reduced premiums through the rate review process or implemented reinsurance waivers have discovered that their higher-income citizens benefit from lower premiums, but premium subsidies are reduced in the process, increasing the premium costs for lower-income individuals. This potentially repels healthy, price-sensitive low-income consumers and worsens risk pool morbidity, which of course raises premiums in the long-term. A holistic perspective is a necessary prioritization as various population groups are impacted in different ways by state action, and disparate population impacts have implications for the morbidity mix of the “single risk pool” and future premiums.
Regardless of political persuasion, the paradoxical misalignment of market performance and purported intentions are difficult to digest. The market struggles peaked in President Obama’s final year, while President Trump’s actions, enhanced subsidies from defunding of Cost-Sharing Reduction (CSR) payments, in particular, have added new life to markets. The overwhelming measurable dynamics demonstrating market improvement are of course counter to the general sentiments expressed in the public sphere regarding market status. Despite the noise, it’s important for states to understand that the current federal dynamics benefit consumers and there is less appetite for federal legislative change; the ACA should not be viewed through a temporary federal lens with expected market adjustments on the horizon; improvements in states’ markets are going to originate from state actions, and fortunately, there are real opportunities for states emerging from recent federal action.
Almost every public discussion regarding a solution for ACA individual markets ends with the same wrong answer. As was stated in a recent Congressional hearing, “the first step to reducing health insurance costs is to reduce the cost of health care.” The relationship of health insurance premiums to health care costs is naturally logical, but it’s not accurate for most consumers in ACA markets. Reducing the cost of care doesn’t help them. It often makes things worse. As net premiums are related to income, the real solution is appropriate pricing between the plan that determines the government subsidy and the plans that consumers purchase. We have had ACA markets for 7 years; how have we still not learned this?
Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” The challenge many of us face in understanding the ACA individual market is we know too much about other health insurance markets. We extrapolate that knowledge across markets and we consequently “know” things that are not true. Learning ACA dynamics is not hard; unlearning what we already know is. To demonstrate, consider the electric car. Tesla is widely known as the world leader in all-electric automotive manufacturing; it’s less well-known that Tesla struggled for a long time in developing its product. The struggle was not due to a lack of intellectual capacity, but a reliance on learned knowledge of existing technology. It wasn’t until Tesla was willing to unlearn and scrap what it knew about how engines work that it could clearly see the vision of the new technology.
I have been a health care actuary for 26 years. Different markets have different touchpoints, but I have never seen a market that is like the ACA individual market where the premiums consumers pay are unrelated to everything that we know about how health insurance works. While many relationships are nonintuitive, “the premium subsidy calculations in the individual exchanges represent perhaps the least transparent aspect of the ACA.” Regulators need to approach the market from a perspective that ensures compliance and protects consumers; unlike other markets, this involves more than building on traditional methods. As issuers have responded to the ACA in ways that harm consumers that are not related to traditional regulatory concerns, traditional regulation focused on traditional measures neither ensures compliance nor protects consumers.
The uniqueness of the market itself requires a different perspective; regulators’ new considerations are not strictly limited to address non-compliant issuers’ response. In early 2014, I wrote “state insurance departments have historically balanced their responsibility to guard against insurer solvency with rate review processes focused on consumer protection assuring that premium rates are not excessive or changing too much from one year to the next. With the federal government subsidies affecting net premiums, states should understand the new complexities of the subsidy mechanics and the impact of the rate review process across the population…The results show that the rate review process benefits higher-income individuals but actually increases net rates on low-income individuals.”
The ACA has inherent challenges, and states have to balance the disparate rate review impact on various groups of consumers. The development of Metalball raises the stakes; it doesn’t make optimizing markets and ensuring compliance any easier, but with its prevalence across the country, Metalball provides states with opportunities to achieve significant progress improving market compliance for the benefit of all its stakeholders. It’s a game we can all win, but the players and the umpire need to first understand how it’s played.
About the Author
Greg Fann, FSA, FCA, MAAA, is a Consulting Actuary with Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.