March 21, 2017


The Little Death Spiral That Couldn't (Stan Veuger & Benedic Ippolito, March 21, 2017, Real Clear Health)

For better or for worse, it is nearly impossible for the ACA's insurance exchanges to implode to the extent that its detractors have long predicted. To understand why, it is important to understand how the subsidies and regulations in the ACA work. The ACA employs "price-linked subsidies." That is, the premium subsidy consumers receive is based on the actual prices for insurance on the exchanges. In addition, the ACA's regulatory framework caps the out-of-pocket expenses faced by consumers.

This works as follows. For those who purchase insurance on the exchange and have incomes below 400 percent of the poverty level (nearly $100,000 for a family of four), the ACA limits how much of your income you can spend on premiums. This amount ranges from 2 percent to 9.5 percent of income depending on the level of said income, under the assumption that you are purchasing the second-cheapest silver plan. Once you contribute this portion of your income towards premiums, the federal government picks up the rest of the tab. That means that even if premiums rise, once you have hit the contribution cap, you do not have to contribute more. Critically, a full 83 percent of exchange enrollees receive these subsidies. All of those enrollees are effectively shielded from future premium increases.

A true death spiral - one that leaves a market bereft of sellers and buyers - relies on increasing prices driving more and more consumers from a market. But what if consumers don't actually pay those higher prices?

Consider what happened last year when average premiums for the benchmark plan increased by 22 percent. Despite the headline-grabbing increase, the Obama administration correctly predicted that most consumers wouldn't be affected. Unsurprisingly, this year's enrollment numbers held relatively steady, even with efforts by the current administration to curb enrollment (sign-ups in the final two weeks of this year's open enrollment were over 300,000 lower than the last week of 2016 alone).

Posted by at March 21, 2017 11:54 AM