How Biden Administration Can Make Care More Affordable

Democrats will need to commit to campaign promises to make the Affordable Care Act (ACA) marketplace coverage more affordable since winning control of the Senate.

According to a report by Health Affairs, the draft COVID relief legislation introduced in the Ways and Means Committee on February 8 would reduce the percentage of income paid by marketplace enrollees for a “benchmark” silver plan at every income level, and remove the cap on subsidy eligibility, so no one who lacks access to other insurance would pay more than 8.5% of income for the benchmark plan.

Those changes would remain in effect for two years, and Democrats will likely attempt to make similar subsidy boosts permanent in subsequent legislation, the report says.

While reducing premiums, the COVID relief legislation does not touch out-of-pocket costs. The Biden administration can take regulatory action, however, to offer affordability, providing a functional equivalent to Biden’s pre-election proposal to raise the value of a “benchmark” plan from silver—70% actuarial value (AV)—to gold (80% AV). 

While the silver benchmark is set by statute, the Centers for Medicare and Medicaid Services (CMS) can craft regulations ensuring that everyone has access to a gold plan for less than the cost of the benchmark silver plan. The door to such action was opened, ironically, by an earlier regulatory move by the Trump administration.

Introducing a Gold Standard

These changes would be a major improvement for families earning between 200% and 400% of the Federal Poverty Level (FPL). Below that income threshold (about $25,000 per year for an individual), cost-sharing reduction (CSR) subsidies reduce out-of-pocket costs in silver plans to roughly 10% of expected medical costs on average—the equivalent of a “platinum” level with an AV of 90%, more generous than most employer-sponsored plans. (CSR subsidies are available at incomes up to 250% FPL but decline significantly in value for incomes above 200% FPL. CSR raises the actuarial value of a silver plan to 94% for enrollees with incomes up to 150% of FPL, and to 87% for enrollees with incomes in the 150-200% of FPL range. Because annual out-of-pocket costs are capped, enrollees who require extensive care skew the averages upward, as a billionaire entering a bar skews the average income of those present. For most enrollees, plans cover a lower percentage of costs than the AV suggests.)

At incomes above 200%, coverage with reasonable deductibles is out of reach for most buyers. Subsidies are set against a silver benchmark. The average deductible for a silver plan without CSR in 2021 is $4,816. Gold plan deductibles average a third of that, $1,648. (Many silver and gold plans do exempt considerable services from the deductible). High out-of-pocket costs for the half of current ACA marketplace enrollees who don’t qualify for maximum CSR subsidies constitute as severe an impediment to affordable coverage as high premiums.

A Regulatory Opening—Courtesy Of Donald Trump

The opportunity to make gold plans available for less than silver plans, and bronze plans at lower prices than today, comes from President Trump’s October 2017 decision to cut off direct federal reimbursement to insurers for CSR subsidies, which insurers are obligated to provide to low-income enrollees who select silver plans.

With the subsidies no longer directly reimbursed, most state insurance regulators allowed insurers to price the value of CSR into silver plan premiums only, since CSR is available only with silver plans. This came to be known as "silver loading." Since ACA premium subsidies are designed so the enrollee pays a fixed percentage of income for the benchmark (second-cheapest) silver plan, inflated silver premiums meant inflated subsidies—and discounts in bronze and gold plans. 

In 2018, the first year in which silver loading took effect, enrollees with incomes above 200% FPL responded, abandoning silver plans in favor of cheap bronze plans, and sometimes heavily discounted gold plans, the report said. At a time when enrollment was being depressed by other Republican actions—including the threat of repeal and the Trump administration's gutting of funding for enrollment assistance and advertising—silver loading boosted enrollment, roughly by about 500,000.

Half the Silver Lode Fell Off the Truck

But silver loading has stopped halfway. Those who analyzed the likely effects of a cutoff of direct CSR funding anticipated that gold plans would become consistently cheaper than silver. That's because CSR raises the average, blended value of silver plans above that of gold plans. CBO forecast that silver loading would boost enrollment by about a million.

In practice, discounts generated by silver loading have been partial and haphazard. They're available in one zip code and not the next; they appear one year and disappear the next. Gold plans priced below the silver benchmark are available in some but not most markets.

Market watchers have identified two likely causes for the only-partial effect. First, competitive pressures drive insurers to underprice silver plans, when allowed. A majority of on-exchange enrollees are eligible for CSR, and the cheapest silver plans gain an outsized share of enrollment.

The second factor is the risk adjustment program that CMS administers to deter insurers from trying to attract the healthiest enrollees. The current formula, based on usage in employer-sponsored insurance, favors silver plans, at the expense of gold and bronze plans, by assuming that CSR will stimulate more usage of medical services than has proved to be the case. That's probably because CSR enrollees have lower incomes than those in employer plans, and even the reduced out-of-pocket costs inhibit care more than anticipated. Insurers that attract too much enrollment at other metal levels may suffer in the zero-sum risk adjustment game.

The Path Forward

Regulatory actions that would maximize silver loading and thus render ACA marketplace coverage significantly more affordable are not hard to find.

First, fix the risk adjustment formula so that it reflects the experience of ACA marketplace enrollees rather than beneficiaries of employer-sponsored insurance. This would mean comparatively higher risk-adjustment payments to insurers who attract more gold- and bronze-plan enrollees, as opposed to silver-plan enrollees, increasing access to both higher-AV and lower-priced plans, including $0 premium plans.

Then, require insurers to price plans at each metal level in strict proportion to their actuarial value. That could entail pricing silver plans at the average AV obtained by all of an insurer’s enrollees. Alternatively actuaries Greg Fann and David Cruz have proposed pricing silver as if all enrollees obtain 94% or 87% AV. If silver is so priced, gold plans with characteristics similar to a silver plan from the same insurer will be less expensive for enrollees with incomes over 200 percent FPL.

Since more than half of all on-exchange marketplace enrollees have incomes below 200 percent FPL, where CSR-enhanced silver would remain the best value, insurers under these new regulations would still be motivated to offer the cheapest silver plans. But premiums for their bronze and gold plans would have to be proportionate.

Strict silver loading—which means strict pricing according to real value—would make coverage not only more affordable, but more predictable. Gold plans would consistently be priced below silver plans. Every subsidy-eligible enrollee would have access to a plan with an actuarial value of 80% or higher priced lower than the benchmark. Bronze plans discounts would also expand.