Marketplace Competition & Insurance Premiums in the First Year of the Affordable Care Act

Marketplace Competition & InsurancePremiums in the First Year of the Affordable Care ActAugust 2014John Holahan and Linda BlumbergThe Urban Institute ACA Implementation—Monitoring and Tracking: Cross-Cutting Issues 2It is well documented that premiums in the individual Health Insurance Marketplaces (Marketplaces) in large numbers of geographic areas have been surprisingly low, particularly for the second lowest cost silver plans to which federal subsidies are attached.1 But at the same time, there is considerable variation within most rating regions between the lowest cost and highest-cost plans within a state. Using a local benefit package as an essential health benefits benchmark limits differences in benefits across plans. The actuarial value tiers limit the variation in deductible and co-payments, setting natural limits on how much cost sharing overall can vary at a particular plan level. So what drives significant differences in premiums? Carriers appear to set rates based on assumptions about the population being covered – what is their expected utilization, how much risk does the carrier face? Carriers also make assumptions about how well the Affordable Care Act’s (ACA) risk adjustment, risk corridors and reinsurance (3Rs) will work to mitigate risk, and such assumptions will vary among carriers. If a carrier believes the 3Rs will be effective, its rates will be lower than those of a competitor that has less confidence in the 3Rs. Similarly, if a carrier projects it will attract a healthier group of enrollees than its competitors, then its rates will be lower. Another factor, of course, is the leverage that carriers have over providers, which will vary by both carrier and market. Related to this are area labor costs. Finally, premiums will vary with the decisions that carriers make in whether to be aggressive in pursuing market share versus being conservative to avoid losses and their perceptions of likely pricing behavior on the part of competitors. In this paper, we consider the variation in premiums within markets and the effects of competition, or lack thereof, on premiums. We look at both markets that are highly competitive and those in which competition is more limited. The carriers that chose to be aggressive acknowledge the importance of being one of the two second lowest cost silver plans to attract large numbers of enrollees; this is because federal subsidies limit premiums for individuals based on their incomes. For example, those with incomes between 133–150 percent of federal poverty level (FPL) pay between 3–4 percent of their incomes for coverage in the second lowest cost silver plan, regardless of the actual premium set by the carrier;2 the federal government pays the balance. Those choosing a more expensive plan than the second lowest cost silver plan must pay 100 percent of the difference in premiums in addition to the percent of income cap. Those choosing a lower cost plan contribute less to the premium. Carriers cannot know whether they will be one of the second lowest cost plans when they submit their rates for review, but they face incentives to try to be. They can also make different assumptions about factors influencing individuals’ plan choices—whether individuals will primarily focus on price or whether networks, brand recognition and other factors are important. While it was not clear when 2014 rates were set, based on interviews and state it seems clear that large numbers of individuals have chosen plans primarily based on price. With support from the Robert Wood Johnson Foundation (RWJF), the Urban Institute is undertaking a comprehensive monitoring and tracking project to examine the implementation and effects of the Patient Protection and Affordable Care Act (ACA) of 2010. The project began in May 2011 and will take place over several years. The Urban Institute will document changes to the implementation of national health reform in selected states to help states, researchers, and policy-makers learn from the process as it unfolds. This report is one of a series of papers focusing on particular implementation issues in these case study states. Cross-cutting reports and state-specific reports on case study states can be found at www.rwjf.org and www.healthpolicycenter.org. The quantitative component of the project is producing analyses of the effects of the ACA on coverage, health expenditures, affordability, access, and premiums in the states and nationally. For more information about the Robert Wood Johnson Foundation’s work on coverage, visit www.rwjf.org/coverage. ACA Implementation—Monitoring and Tracking: Cross-Cutting Issues 3In this paper, we present data on silver-tier premiums in several markets within each of 10 states. Four states (Alabama, Arkansas, Rhode Island, and West Virginia) had fairly limited competition. The other six (Colorado, Maryland, Massachusetts, New York, Oregon, and Virginia) were very competitive, especially in urban, more pop