Enhanced subsidy uncertainty from the actuarial perspective

With the government shutdown over the fate of the ACA enhanced subsidies, I thought it might be interesting to chat with some actuaries who work with ACA plans.

The three questions that were top of mind for me were:

Q1: If the enhanced subsidies (ie the enhanced Advanced Premium Tax Credits)  expire, what happens to the risk pools?

Q2: How does the timing of the renewal impact the expected risk pools for marketplace plans?

Q3: Is there any concern that the waivers for catastrophic coverage for adults over 30 will have any negative effect on the marketplace risk pools?

On Q1, the consensus was that the enhanced subsidies expiring would lead to a sicker risk pool because of adverse selection. The magnitude of the expected increase varies state by state, but Charles Gaba of acasignups.net pulled some excerpts of rate filings, and Blue Shield of California explicitly called out a 225 basis points increase in morbidity driven by the expiration:

The expiration of American Rescue Plan enhanced subsidies. We expect this to drive a morbidity increase of 2.25% for both BSC and the market, offset by a 0.75% favorable mix impact resulting from reduced enrollment in Silver 94/87 plans. Combining the above considerations results in a 1.5% increase to our 2026 premiums.

On Q2, there was some variation in responses, again due to state-by-state differences. In Idaho, for example, open enrollment starts on October 15th, and the window shopping period has already started, so the premium rates are locked in no matter what Congress decides to do. 

But in other states, open enrollment starts in November and plans have filed two sets of premiums, one for if the enhanced subsidies are extended and one if they aren’t, so there’s more time for Congress to act although renewal notices are being sent out and window shopping periods are opening soon which could lead to confusion and adverse selection due to sticker shock.

If the subsidies are extended, but after enrollment starts or even next year, some of the people I spoke with were pessimistic about a late extension doing anything to improve the risk pool because communicating the change would be challenging to potential members. If they’re successful in getting the word out under a late extension scenario, there may be a surprise to the upside for plans’ MLR.

Finally, there’s the scenario where the subsidies are extended, but changed in some material way. Until there are concrete proposals, it would be hard for plans to model it, so that remains an unknown. 

On Q3, there was general agreement among the actuaries that the limited catastrophic waivers the administration is allowing are unlikely to have a material impact on ACA risk pools for a few reasons. The difference between a Bronze plan and a catastrophic plan just isn’t that large in most cases, and the administrative burdens of getting a waiver aren’t trivial.

It’s worth keeping an eye on what happens with catastrophic plans for a few reasons. For one, this administration seems to really like them and expansion seems like a reasonably popular policy priority in the next few years.

But from an actuarial perspective, another reason to keep an eye on the catastrophic plan risk pools is that they’re not very large, so even small amounts of adverse selection can have big effects. Two areas of potential concern Joe Caldwell, Principal Consultant at Evensun called out:

1. Members on high-cost, rare disease therapies (which often aren’t risk-adjustable) may be more likely to go through the administrative burdens, creating a winner’s curse situation. You can imagine a member supported by a pharma manufacturer or specialty hub program really throwing off the risk pool because a $10,600 deductible for a catastrophic plan is minor compared to the treatment costs.

2. There’s also the inverse situation where savvy, highly risk-adjustable members opt into catastrophic plans, giving the marketplace risk pool the short end of the stick on risk adjustment payments.

It’s going to be an interesting couple of years for ACA plans, especially for the actuaries as they work in a uniquely uncertain environment. Special thanks to Joe Caldwell, Principal Consultant at Evensun and some other actuaries who spoke with us on the condition of anonymity.