Will the "private option" lead to higher premiums on exchange? | Arkansas Blog

Friday, March 8, 2013

Will the "private option" lead to higher premiums on exchange?

Posted By on Fri, Mar 8, 2013 at 9:37 AM

The pool of people that stand to gain coverage under expansion are, by definition, low-income folks. Originally, they were going to go to Medicaid. For all of the flaws of the hodge-podge public-private approach, this set up Medicaid as an "effective, separate high-risk pool," as Boston University health economist Austin Frakt put it on Twitter.

There is no doubt that the expansion pool is significantly healthier and younger than people currently on Medicaid. But there is still a correlation between income level and health costs. So under the "private option," if we add 200,000+ folks below 138 percent of federal poverty level (FPL) to an exchange serving mostly folks 138-400, what does that do to price of premium?

I asked Arkansas Surgeon General Joe Thompson and he responded:

There’s no question that there is a correlation between income and risk. However a lot of the folks that have chronic, long-term, disabling conditions [are already in Medicaid]....Volume is going to increase competitiveness of our insurance market which will in turn drive down price a little bit.

We’ve got a lot of moving parts. In general, getting people insured with less of the underwriting will be a good long-term event for prices because it will drive out some of the cost-shifting that was going on because whenever we had an uninsured individual having no payment we were cost shifting on to the private carriers.

One point that Thompson makes here is that he believes that overall, expansion of coverage is going to stabilize and hopefully lower premium prices. Fair enough, but that doesn't address the impact of the "private option" in comparison with traditional Medicaid expansion. On that point, Thompson says it's a double-edged sword — we're adding a riskier pool, but by adding more people, we can attract more sellers and make the market more competitive.

After I spoke with Thompson, I came across this in that study from the Congressional Budget Office that everyone keeps citing about the cost difference between Medicaid and subsidizing premiums on the exchange.

The additional enrollees are likely to spend more on health care, on average, than those previously expected to purchase insurance through the exchanges because people with lower income generally have somewhat poorer health. As a result, CBO and JCT now estimate that the premiums for health insurance offered through the exchanges, along with premiums in the individual market, will be 2 percent higher than those estimated in March 2012.

It's a little bit unclear to me how this impact on exchange premiums is built in to the CBO's estimate that insuring folks on private health insurance on the exchange will cost 50 percent more than insuring folks via Medicaid. But two points: the CBO's estimate addresses the impact of people 100-138 FPL v. 138-400 whereas Arkansas will be adding 0-138; the CBO's estimate imagines a subset of expansion moving from Medicaid to the exchange whereas within Arkansas, the "private option" would move the entire expansion pool. In other words, that 2 percent hike on exchange premiums is probably too low of an estimate for the impact of the "private option" versus traditional Medicaid expansion.

In this morning's D-G, George Washington University law professor Sara Rosenbaum makes the point that the expansion pool is relatively young and healthy: “Everybody thinks that they are very sick, very poor homeless, but that’s not the case." And indeed, those characteristics are built in to the Arkansas DHS estimates of the cost of traditional Medicaid expansion, which assumes significantly lower per-person costs than the current program.

It's absolutely the case that, as Thompson pointed out, some of the costliest low-income folks are not part of the expansion pool. I assume the CBO factored that in. In any case, unless you think that completely eliminates the increased risk factor correlated with lower incomes, you can't get around the fact that adding a pool of folks 0-138 FPL to a pool of folks > 138 FPL would theoretically drive premiums up.

Very important to note: almost all consumers will be protected from these kinds of premium fluctuations because of the structure of the ACA's subsidies. But who will be on the hook if premiums are higher? The government! This isn't going to be the biggest cost, but it's another one, and the government has reason to be awfully worried about costs under the "private option."

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