The Tip of the ACA Iceberg

Casual observers of a recent Congressional hearing that included Seema Verma as its only witness might have mistaken the administrator of the Centers for Medicare and Medicaid Services as the administrator of the Center of Short- Term Limited Duration Plans. She faced repeated questions about so-called Short-Term Limited Duration (STLD) plans, which are state-regulated health insurance plans not under her purview. Actually, I am being generous. She was asked (also a generous euphemism) about “junk plans”, a disparaging term sometimes used by those who believe STLD plans are a continuous threat to the individual marketplaces constructed by the Affordable Care Act (ACA).

STLD plans are not the cause of problems in ACA markets. They never were the problem and they never will be. In a vacuum, STLD plans are inefficient and unattractive. Administrative costs are high relative to other health insurance products as benefits are limited and acquisition expenses are spread over a short time. They have traditionally appealed to people who face a short-term gap in health insurance coverage. STLD plans have experienced recent growth as they are relatively attractive (compared to ACA options) in the longer-term for the minority of ACA-eligible consumers.

In response to this growth, President Obama took action in 2016 to limit the duration of these plans to three months, essentially making them less efficient and less attractive (or more “junkier” if you prefer) than they previously were. President Trump reversed this action, and the politics of STLD plans has become massively oversized relative to the small number of people covered by them.

The inherit, limited attractiveness constrains potential STLD plan growth. In addition to being much less efficient than ACA products (measured as the ratio of claims to premiums), the majority of ACA consumers benefit from generous premium subsidies, not allowing off-markets alternatives to reasonably compete with products in ACA markets. As the ACA design impact had an unbalanced impact across its eligible enrollee base, some ACA consumers receive no subsidies and have had their premiums skyrocket. This imbalanced impact is an ACA deficiency, and while the ACA has reduced net premium costs for many people, the increasing interest in off-market options is an indication of the ACA’s inability to serve all people without access to employer or government plans.

STLD plans provide reasonably priced coverage for individuals who do not have practical ACA solutions.

Despite its substantial taxpayer funding, the unbalanced design of the ACA’s mechanical framework has caused some previously insured people to become uninsured. STLD plans provide reasonably priced coverage for individuals who do not have practical ACA solutions. Michael Bertaut, a Healthcare Economist at Blue Cross Blue Shield of Louisiana, indicates that 80% of his company’s STLD applicants are uninsured. This suggests that STLD plans are doing less to impede ACA markets than they are to reduce the uninsured rate. ACA and STLD plans can and do peacefully co-exist, and the limited higher-income demographic interested in STLD plans has little appreciable impact on the larger ACA market.

A deeper assessment of STLD criticism would likely reveal little concern over STLD plans themselves, but their visible indictment of ACA markets. STLD plans have existed for over forty years; their criticism has only become prominent since the ACA was implemented and its markets began to struggle. As the ACA has been politically tenuous and thought to be at risk of repeal since its inception, some of its ardent supporters prioritize minimizing public criticism of its limitations.

An alternate perspective is that knowledge of ACA shortcomings is helpful and can promote innovative market redesign (which states can do) to target populations disadvantaged by the ACA’s mechanical structure. Simply put, targeted ACA market improvements will allow the ACA to reach a broader population, while allowing STLD plans to remain active and serve their limited intended function. Unexpected STLD growth serves notice of a problem in ACA markets; a sports analogy illustrates the varying perspectives.

Targeted ACA market improvements will allow the ACA to reach a broader population, while allowing STLD plans to remain active and serve their limited intended function.

Imagine you are the athletic director at your favorite university. You have responsibility for the school’s varsity soccer team. The university supports the team with athletic scholarships, paid coaches and staff, and travel expenses. The school also features a less attractive, club soccer team that is entirely student-led and student-funded. In contrast to the varsity team who plays in the football stadium, the club team plays on an intramural field that is infrequently mowed and has no spectator seating.

Some recent unfortunate developments have occurred within the varsity squad, and several of the better players have surprisingly left the team and begin playing club soccer. Do you acknowledge and address the problem within the varsity team under your leadership? Or do you attempt to solve your problem by banning club soccer, disparaging its student leaders, and leave students with the limited option of playing varsity soccer or not playing soccer at all? If I was president of the university, you would not be allowed to select the latter option.

Just as the club soccer team was not the source of the underlying varsity team problem, STLD plans are not the source of the problem in ACA markets. STLD plan growth is like the tip of an iceberg; while not the problem, the tip of an iceberg provides visibility of where a problem lies. I suppose you have some choices when approaching an iceberg (I’m not speaking from experience here). You can attempt to completely blow it up and hope you are successful; that seems like a bad idea. You can simply observe the iceberg and leave it alone; ice growth above the surface may indicate a growing problem while receding ice may indicate less danger is present. The third option is to slice off the tip of the iceberg, simply concealing the danger but not removing it. This is obviously the worst option.

Growth of STLD plans are not a cause of problems in ACA markets. Growth of STLD plans are an indication of problems in ACA markets. The tip of the iceberg is never itself the problem. It’s a helpful indication that there is a dangerous problem beneath the surface. Perhaps we can agree to keep a safe distance and not disturb the iceberg as we sail by (and still permit those so inclined to curse it), but we would be wiser to celebrate its visibility and heed the warning of the problem beneath the surface.

Greg Fann, FSA, FCA, MAAA, is a Consulting Actuary with Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.