Distributional consequences of widening allowed Actuarial Value bands

One of the major proposals in the draft Center for Medicare and Medicaid Services (CMS) rule that was released on the 15th is to increase the de minimas allowed actuarial value band.  Currently the regulation allows a plan to be included in a metal band if it is within two Actuarial Value (AV) points of the target band for normal bands, and within a point in either direction for the targeted Cost Sharing Reduction Silver plans.  So that means a standard Silver plan which should be a 70% AV could be anywhere from 68% AV to 72% AV.  The proposed modification would allow for a plan to qualify for a band if it was no more than four points below or two points above the target.  A Silver plan would be anywhere from 66% AV to 72% AV.

All else being equal, a lower AV means a slightly lower premium.  It also means higher out of pocket spending for patients. But all else is seldom equal so things can get messy.

This has significant distributional consequences.  And these consequences are not entirely straightforward as the individual market is a complex market.  Let’s start looking at the easiest scenarios and then build in complexity.  We will need to divide the analytical units into four groups.  The vertical split of a 2×2 grid are people who either have met their out of pocket limit or have not incurred sufficient claims to meet their out of pocket limit.  The horizontal split is between people who receive premium tax credits that are keyed to the price of the second Silver and people who are not receiving premium tax credits and thus pay the full premium out of pocket.

We will only look at individual beneficiary consequences.

The simplest scenario to analyze is a market that has converged with multiple carriers.  Indianopolis, Indiana is a good example.  There are two carriers that currently offer Silver plans with 68% AV with similarly narrow networks and very similar pricing.  The strategic logic of that situation will have both carriers offer Silver plans that would be near 66% AV as soon as they could.

That produces a nice simple outcome matrix:

Individuals who are receiving subsidies and have significant claims that matched their out of pocket maximum under a 68% AV Silver are indisputably worse off. They will face higher cost sharing. If all cost sharing is from deductibles (an oversimplification), they will go from having a $4,400 deductible to a $4,850 deductible. They do not benefit from lower premiums as the federal government is the risk bearer and reward recipient of lower premiums as the subsidy formula is based on the federal government filling in the gap between the calculated individual contribution as determined by income and the cost of the second least expensive Silver.

Individuals who have not met their out of pocket maximum and are subsidized for a 68% Silver will still not meet their out of pocket maximum and their post-subsidy premium will not change. They are indifferent.

Individuals who are not subsidized and who meet their out of pocket maximum are almost always worse off. They have a small gain in lower premiums (2% drop in AV leads to a 2.4% premium drop on first estimate) but higher cost sharing. There is a small sliver of individuals whose costs above current cost sharing is less than the premium drop. But this is a sliver of people whose total costs are within $100 of the current out of pocket maximum.

The big winners of this change from a beneficiary point of view are individuals who are not subsidized and who are under the out of pocket maximum. They have no incremental cost sharing and they have lower premiums. If the non-subsidized market is extremely price sensitive this will bring in more healthy individuals as prices will fall slightly.

This is the simplest scenario. This intuition should serve people well, but things will get complicated.
Read more of this post

More on Advance Care Planning in Medicare

This article starts with the Death Panel nonsense, reignited by a Republican Party official in Florida last week, but the second half of the piece is a fairly good discussion of the issues around Advance Care Planning that the Medicare program began paying for January 1, 2016. Some of our recent work shows that the comment period held during 2015 for this pending change was not particularly controversial.

Forget about the nonsense, and read the discussion of the policy reality at stake.

A snippet:

The CMS rule requires no specific diagnosis and sets no guidelines for the end-of-life discussions. Conversations center on medical directives and treatment preferences, including hospice enrollment and the desire for care if patients lose the ability to make their own decisions. The conversations may occur during annual wellness exams, in separate office visits or in hospitals. Nurse practitioners and physicians’ assistants may also seek payment for end-of-life talks.

End-of-life conversations have occurred in the past, but not as often as they should, said Paul Malley, president of Aging with Dignity, a Florida nonprofit. Many doctors aren’t trained to have such discussions and find them difficult to initiate.

“For a lot of health providers, we hear the concern that this is not why patients come to us,” he said. “They come to us looking to be cured, for hope. And it’s sensitive to talk about what happens if we can’t cure you.”

Further on the impact:

Proponents of advance care planning cheered evidence of the program’s early use as a sign of growing interest in late-stage life planning. Being able to bill makes a difference, Malley said.

The new reimbursement led Dr. Peter Sutherland, a family medicine physician in Morristown, Tenn., to schedule more end-of-life conversations with patients last year.

“They were very few and far between before,” he said. “They were usually hospice-specific.”

Now, he said, he has time to have thorough discussions with patients, including a 60-year-old woman whose recent complaints of back and shoulder pain turned out to be cancer that had metastasized to her lungs. In early January, he talked with an 84-year-old woman with Stage IV breast cancer.

“She didn’t understand what a living will was,” Sutherland said. “We went through all that. I had her daughter with her and we went through it all.”

Exchange Actuarial Value spreads and de minimis exploits

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.


Paying college players-cost of attendance

The Raleigh, N.C. News and Observer has a front pager today on the changes that are coming to college sports regarding paying players. There are so many issues, and so many questions, but a key one is understanding a key University concept, “the cost of attendance (COA).” Duke University’s COA for 2014 is shown below:


Historically, the NCAA has prevented University’s from covering the full COA via an athletic scholarship, but the ruling in the Ed O’Bannon case stated that this could not continue. An athletic scholarship covers Tuition and mandatory fees, as well as room and board, but not other expenses. However, personal expenses such as books are not covered by an athletic scholarship (under Duke’s need based financial aid system, it is possible an athlete could get aid for these expenses, depending upon family income).

The News and Observer article terms the covering of what above is called “books and personal expenses” as a stipend. Note the differences in the Triangle of the costs of “books and personal expenses.”

  • At Duke, $3,466
  • At N.C. State, $3,828 for both in and out of state students
  • At UNC, $4,382 for in state, and $6,118 for out of state

These differences reflect policy choices by the schools, not just for their athletic programs. Merit based scholarship programs such as the B.N Duke and A.B. Duke don’t cover the full cost of attendance, but Duke’s need based financial aid program does (potentially, depending upon income) cover the full cost of attendance. At Duke there is also sensitivity about how large the “full cost of attendance” figure is, so there may be extra incentive to keep the “books and expenses” figure as low as possible.*

Calculating the full cost of attendance figure at a University is a highly idiosyncratic process, and there are many competing incentives. A quick look at the spread in the “books and expenses” aspect of Duke, UNC and NC State’s demonstrates. At UNC and NC State, around 8 in 10 undergrads have to be from the State of North Carolina. UNC shows a different figure for out of state as compared to in state, while NC State does not. Duke has about as many undergrads in a given class from California as there are from North Carolina, so it is hard to imagine how this amount in the expenses component at Duke could be lower than the in state figure at UNC.

I am not saying there is anything nefarious going on, but it is also hard to see how these figures at these three schools located within 30 miles of one another represent an externally validated cost to students. The Ed O’Bannon ruling is bringing attention to the cost of attendance figure for athletes, but this figure is important for all students at a University’s as a whole, and is set amidst a sea of many competing influences. The process of setting these figures seems murky, especially to families trying to compare across University’s. Because of increased attention due to athletics, the bright lights are coming.

*Duke has robust need based financial aid; the diddy I have learned is that a year at Duke costs $90k, we charge $63k and collect $30k. Around half of the undergrads pay full freight, and the other half is sliding based on income.

Ruling against the NCAA

A federal judge ruled against the NCAA in the so-called Ed O’Bannon case, opening the way for players to share in licensing revenue (the use of their image and likeness on TV, etc) above the cost of attending college (what can be covered by a scholarship). The most consequential points:

In a 99-page opinion, U.S. District Judge Claudia Wilken issued an injunction that will prevent the NCAA “from enforcing any rules or bylaws that would prohibit its member schools and conferences from offering their FBS football or Division I basketball recruits a limited share of the revenues generated from the use of their names, images and likenesses in addition to a full grant-in-aid.” Wilken said the injunction will not prevent the NCAA from implementing rules capping the amount of money that may be paid to college athletes while they are enrolled in school, but the NCAA will not be allowed to set the cap below the cost of attendance. (my emphasis)


The injunction will also prohibit the NCAA from “enforcing any rules to prevent its member schools and conferences from offering to deposit a limited share of licensing revenue in trust for their FBS football and Division I basketball recruits, payable when they leave school or their eligibility expires,” Wilken wrote. Her injunction will allow the NCAA to set a cap on the trust fund at less than $5,000 in 2014 dollars for every year an athlete remains academically eligible to compete. The money would be payable to athletes upon expiration of their athletic eligibility or graduation, whichever comes first. She ruled schools could offer lower amounts of compensation if they want, but they can’t “unlawfully conspire with each other in setting these amounts.”

Basically, universities can now offer the full cost of attendance plus $5,000/year to be received upon graduation to play Division 1 basketball or FBS football (other sports aren’t included; they don’t generate much money,and are in fact, money losers). The ruling explicitly denies players from being able to individually negotiate the sale of their likeness, for example through endorsement deals while in college.

Some thoughts on this:

  • This is a fairly friendly adverse ruling, because the NCAA is allowed lots of discretion and the money still all flows through universities and conferences (no direct player endorsements). However, the purely amateur model of college sports is now officially dead.
  • The principle of athletes sharing in more of the money they help generate (beyond a scholarship) is correct, I think, and roughly in line with proposals I have made in the past.  However, a more economically appropriate “fix” would be to set a base stipend amount that the vast majority of players would get, and allow for an explicit market mechanism to determine the amount that “stars” receive. A modest stipend could be delivered while the students played; the stars could get the big bucks when they left college.
  • This decision, along with this past weeks NCAA announcement allowing the 5 FBS football conferences to make their own rules about cost of attendance coverage for athletes signal that there will be some big changes (The NW football union debate is another signal). What strikes me about where Universities like Duke stand now is how much policy making there is to undertake, especially with the decision explicitly saying Universities can set the share of licensing money below $5,000/year/player, they simply cannot collude in doing so. Overlaid on that is the ACC (and other 4 FBS football conferences) trying to determine their rules on what scholarships cover. Will there be an ACC decision about a cost of attendance calculation for football and basketball that must be complied with? Or will it be left up to members to work under a set of to be developed guidelines? And will collusion (I think that is what the ACC members agreeing to a ‘must follow’ cost of attendance decision would be) be ok, but collusion in setting the share of licensing revenue is explicitly not allowed in the judges ruling? Lots of policy making to be done.
  • It is a particularly interesting time for Duke. 5 or 6 years ago, we would likely be looking for a Georgetown solution (play Div 1 basketball, but drop to a lower level in football). But Duke just went to the ACC Championship game in football, and probabilistically speaking have to be approaching a ‘regression to the mean’ phase in basketball within the next 5-7 years. Duke is so far in that I think we will have to match the maximum package allowable, especially in basketball in the short term. Overcoming that inertia and choosing a different approach would be very difficult.
  • I am a member of the Executive Committee of the Academic Council at Duke, the primary faculty governance body at the University, so we will inevitably have to weigh in. This will of course be chaotic. The professors break down into three groups: (1) those who embrace Duke’s big time sports; (2) those who hate the attention and money given to big time sports and who want to de-escalate; (3) those who are clueless about it and don’t pay attention (on basketball national championship game day in April, 2010 I had coffee with a faculty friend who said “isn’t there some sort of match tonight?” Um…). I think that big time sports are inextricably a part of Duke’s identity and there is really no going back. We will have to learn the new rules and compete within them. I will go so far as to say that Duke’s recruitment of undergraduate students ‘niche’ are very smart students who say they want a ‘balanced’ college experience, that includes big time sports. I believe that if we dropped to D3 sports, our student body would become less competitive. This telling of Duke’s story will be bitterly opposed by other faculty. However, you cannot ‘split the difference between the two views’  as Duke either has to try and compete at the highest level of football and basketball, or not.
  • Finally, I assume that Duke makes every effort to fully comply with the rules, and  further assume that this will always be the case. The question is what are the rules, and how will people react as the reality of the new regime becomes clear.

Should be an interesting year.

Duke Renames Charles B Aycock Dormitory

Duke University will announce today that it is renaming Charles B. Aycock Dorm to its original name–East Dormitory (it was changed to Aycock in 1911). Aycock has long been known as “the education Governor” and there was great expansion of compulsory education during his tenure (1900-04). Aycock’s name also graced a prominent N.C. Democratic Party fundraiser (the Vance/Aycock Dinner) until 2011 when they removed it due to the white supremacist views of Governor Aycock.

I grew up in Goldsboro, N.C., near the birthplace of Charles B Aycock, and he is easily the most famous person ever from Goldsboro/Wayne County (he is one of two North Carolinians honored with a statue in the U.S. Capitol).

Increased understanding of the so-called Wilmington Race Riot of 1898 (offical state commission report on it from 2006; N & O report) started the process that has lead to this renaming, and various student groups have been seeking this for at least 5 years. The Wilmington event in 1898 was really much more than a riot, and is likely the closest thing to a coup that has ever occurred in the United States (a black/white coalition local government was driven from power). Governor Aycock was not at the riot, but did contribute to and benefit from the white supremacist political climate of the time. Josephus Daniels, owner and publisher of the Raleigh News and Observer, was a close ally of Gov Aycock’s. The paper that is known as a liberal bastion today, was the mouthpiece of white supremacy and Jim Crow for a long time.

And a full context of this story requires noting that James B Duke, the benefactor of the University, and Josephus Daniels were bitter political enemies (the Duke’s were Republicans, nearly an unforgivable sin at the time). However, in 1911 when the dorm was named Aycock, what is today Duke was still Trinity College, and James’ older brother Benjamin N. Duke was the brother most directly involved in the University at that time.

Growing up in North Carolina my entire life, I never heard of the Wilmington Race Riot until sometime within the past 10-12 years. I remember it vividly. I was driving at night and there was a public radio interview with someone talking about the Wilmington race riot and I was really somewhat stunned because I had never heard this story before. What the hell are they talking about?

In North Carolina public schools, you do an entire year of North Carolina history in Fourth and Eighth grades. And Goldsboro, where I grew up is less than 100 miles from Wilmington, and we played the three Wilmington High Schools in sports. However, I heard not a peep of this history, and that makes me angry, especially given where I grew up. I am unsure if that has changed today (my youngest child will be in eight grade next year, so I will find out). I have been trying to convince any history grad student I have met the past several years to do a “history of the history” of the Wilmington race riot as a dissertation, but no takers yet.

I hope that somehow the renaming of this dorm can be a catalyst for increased education, done in a way that helps North Carolina struggle with our history and chart our future. I confess to being pessimistic about this coming to pass, as it is likely to turn into a Duke v North Carolina–both the state and University–story (UNC, ECU and UNCG  all have Aycock dorms as well). I believe that it is the correct thing for Duke to do in any event.

update: revised for clarity and to fix some typos

The beginning of the end of college sports as we know it

I suspect today will be remembered as a seminal event in making college athletics whatever it will become; and it will be something much different than it is today.

Northwestern’s football team is free to seek union representation to bargain with the University, according to a ruling by the National Labor Relations Board.

During the labor board hearing, CAPA and former Northwestern quarterback Kain Colter, who spearheaded the movement, had to prove that players were employees and not just student-athletes. These are the points that ended up convincing the board to let them unionize:

  • Northwestern profits from football players’ work. The decision notes that the university made $235 million in revenue thanks to ticket sales, television contracts, merchandise sales, and other licensing agreements from 2003 to 2012, along with less measurable but still important value in the form of alumni donations and the university’s general reputation.

  • Players are compensated for that work. Players receive scholarships and stipends in exchange for playing football for the university. Players sign a “tender” at the beginning of each scholarship period that tells them the rules and conditions of their scholarship; it is in effect, the board says, an employment contract. If a player leaves the team or abuses team rules, the scholarship can be revoked—proof that the compensation is based on playing football.

  • Northwestern exerts significant control over players’ daily lives. Players spent 50 to 60 hours a week on football-related activities during training camp and 40 to 50 hours a week during the regular season, easily equivalent to a full-time job. The decision says players’ schedules, including practices, meals, games, and travel, were often up to coaches, while other things like living arrangements, outside employment, personal vehicle use, off-campus travel, internet posting, and alcohol use were subject to restrictions or coach permission thanks to NCAA rules and university policies.

The underlined and bolded part is the key, I think. While Northwestern’s players say they don’t want salary, but other types of benefits, it seems only a matter of time. Past blogging on the general issue of the economics of colleges sports here, and my proposal for how players in revenue sports could be paid.