Exchange Actuarial Value spreads and de minimis exploits
January 9, 2017 1 Comment
The ACA simplifies insurance by restricting the actuarial value of the plans that can be sold. Bronze covers roughly 60% of expected pool costs, Silver covers roughly 70% of the expected pool costs, Gold covers roughly 80% of the expected pool costs and Platinum covers roughly 90% of the projected pool costs. Cost Sharing Reduction (CSR) adds three more layers of coverage at roughly 73%, 87% and 94% of the projected pool costs to be covered by the insurer.
However the law allows for the Secretary of Health and Human Services (HHS) through the Center for Medicare and Medicaid Services (CMS) to make rules that allow for de minimas variation from the targeted actuarial value. CMS has had a consistent rule that a 2% variation in actuarial value is the maximum allowable wiggle room for a policy to be included in a band. Therefore a Silver policy with no CSR could cover anywhere from 68% to 72% of the pool’s expected cost.
This is an area of exploitation for premium tax credit benchmark strategic manipulation. The benchmark for all premium tax credits is the cost of the second least expensive Silver plan. A large spread between the least expensive Silver plan and the benchmark Silver plan advantages subsidized buyers. Most of my analysis of the Silver Gap strategy space has focused on network manipulation as an obvious source of creating a usable gap between the first and second least expensive Silver plans in a region. My background is in network and provider configuration so this was my prism.
However, the de minimis actuarial value variation in a band is another opportunity for aggressive gap creation. In this scenario, a carrier with a low cost network and product type can use two different cost sharing structures to create two plans. The first plan would have a minimal actuarial value of 68% while the second, benchmark plan would have an actuarial value of 72%.
UPMC Health Plan in Pittsburgh is an example of the foregone opportunity. Plan 16322PA0050104 is the least expensive Silver in zip code 15219. It has an actuarial value 71.53%. Plan 16322PA0050103 Is the benchmark Silver. It has an actuarial value of 71.5%. These values are from the 2017 PUF URRT Worksheet 2. Both plans are at the high end of the allowed actuarial value range. They are both using the same network and the same EPO plan type. The extreme similarity means the premiums minimally differ. Healthy, low income individuals will not be seeing a significantly better deal on the least expensive Silver after the subsidy than the same value proposition for the least expensive Silver.
If UPMC Health Plan elected to offer a their lowest priced offering a 68% Silver** plan with a comparatively higher cost sharing structure and concurrently lower actuarial value and then offered 16322PA0050103 as the benchmark Silver, the almost four percent actuarial value spread would, all else being equal, lead to 4% to 5% reduction in premium for the least expensive Silver plan compared to the current case. The lower premium will mildly advantage most non-subsidized buyers as their option space will have expanded. It will significantly advantage low income, subsidized buyers who previously were marginally deciding to not buy at the current price points. These individuals are highly likely to be comparatively healthy and profitable for a carrier and their decision to opt out of the market and pay either the individual mandate tax or claim an exemption leads to a less healthy risk pool.
Carriers who have a dominant position at the lowest price Silver Plans without proximate competition due to either their sole carrier status or the lack of low priced, narrow network competition should seek to offer a significant actuarial value spread as allowed by the de minimis variation in order to improve the risk pool by including more comparatively healthy and low cost subsidized buyers.
** Plan ID 76179IN0110008 (68.1% AV) and 54192IN0040001 (68.8%) are good examples of 68% AV Silver plans.