The design of the Affordable Care Act’s exchange subsidies has created a bizarre and perverse set of incentives. The more states try to make the exchanges work well and keep insurance premiums low, the more their low income residents end up needing to pay for insurance. This backwards dynamic has only gotten worse since the Trump administration ended payments for the Cost Sharing Reductions (CSR), which caused insurers in most states to add all of that extra cost on to their states’ silver plans. In fact, for every $100 by which a state manages to reduce premiums, certain low-income people end up paying $45 more on average.
The reason for this is the ACA’s design. People making less than 400% of the federal poverty level (roughly $48,000 for an individual) qualify for Advance Premium Tax Credits (APTC). The APTC is calculated by determining how much it takes to make the second-lowest cost silver plan (SLCSP) in a region a set percentage of the recipient’s income. Regardless of whether the premiums of the SLCSP are $400 a month or $40,000 a month, someone making $35,000 a year will get an APTC big enough so they would only need to pay $270 a month.
What this means is that for people under 400% FPL, the official premiums don’t matter at all. What really matters for them is the difference between the cost of the second-lowest cost silver plan and the lowest cost bronze/silver/gold plan. Looking at all the counties on Healthcare.gov, it is clear that as the SLCSP grows, so do these gaps. Keeping premiums low means, paradoxically, more expensive insurance for people who qualify for subsidies.
A Tale of Three Counties
The best way to understand this problem is to look at three counties: Los Angeles, CA; Allen Parish, LA; and Crockett, TN.
LA County. No state had tried as hard to make the ACA exchanges work as California. The state expanded Medicaid, created their own active purchaser exchange, highly regulated insurers and benefit design, and created a massive outreach effort. And no part of California has done more to try to make the law work than Los Angeles. There the county Medicaid public option, LA Care Health Plan, entered the exchange as an individual market public option.
Allen Parish. Allen Parish, meanwhile, is a rather standard county with a moderate level of insurance competition in a typically red state (Louisiana) that was slow to take part in the ACA’s Medicaid expansion.
Crockett. Tennessee did not expand Medicaid and basically tried to undermine the exchange from the beginning. Parts of Tennessee have just one insurer that is actively exploiting the ACA’s design to maximize relative subsidies.
Consider these three descriptions when digesting the following table, which shows how much customers in the markets actually pay for health insurance.
| 40-Year Old Earning 200% to 400% of the Federal Poverty Line | |||
| County | Bronze Plan Premium | Subsidy for $35k Earner | Net Premium Paid |
| Los Angeles | $257.84 | $70.00 | $187.84 |
| Allen Parish | $387.25 | $262.55 | $124.70 |
| Crockett | $459.99 | $594.14 | $0.00 |
What these examples show you is that effort is inversely related to keeping premiums low for low-income people. Los Angeles put in the most effort and as a result have the highest net premiums ($187.84). Allen Parish put in very little effort and has a middling premium ($124.70). Crockett is in a state that actively tried to sabotage the exchanges and naturally has the lowest premium ($0).
A National Phenomenon
These three counties reflect a broader reality about the dysfunction on the Obamacare exchanges. My analysis of Healthcare.gov data shows that, for individuals age 40 with income between 200-400% FPL, every $100 decrease in SLCSP official premiums is correlated with paying $45 more for a bronze plan on average (assuming they use their APTC to buy the cheapest bronze plan). For people between 100-200% FPL, every $100 decrease costs them $17.50 (assuming they decide to use their APTC to buy the cheapest silver plan, which they need to to qualify for a special reduction in cost-sharing).
The Perverse Irony of LA Care
LA Care, the country’s only so-called individual public option, shows how messed up the incentive structure of the ACA truly is.
The creation of LA Care Covered plans in theory worked great at improving the ACA. This year LA Care offers not only the cheapest silver plan in Los Angeles but the cheapest silver plan in the state. It likely helped drive down premiums among all its competitors. Yet by doing this, it indirectly hurt the low income people it was trying to serve.
By offering the lowest premium silver plan, LA Care brought down the SLCSP and as a result the relative size of the subsidy that low income people in Los Angeles qualify for. LA Care’s presence on the exchange will save the federal government roughly $95 million this year. However, it will result in roughly 315,000 low income people in Los Angeles paying around $74 million more to get insurance.
If we take this example to the extreme, and via active sabotage California were able to make its exchange as expensive and dysfunctional as the exchange market in Crockett County, the federal government would be spending an extra $6.5 billion and most people in California making less than $48,000 would qualify for coverage with no premiums. That is more than double the amount the Federal government spend on ACA subsidies in California last year.
Obviously, it would be silly to blame LA Care for doing too good of a job of making health insurance cheap. Their actions have provided a clear financial benefit for the minority of people buying individual coverage without subsidies and offer a continuity of care for the very low income people who frequently move from Medicaid to the exchanges and back — a big benefit that can’t be easily quantified in pure financial terms. The problem is simply that this insane dynamic exists. It is a fiscal, policy, and moral nightmare.
Neither the state government, the county government, or low income individuals benefit from the effort California and Los Angeles County put into trying to make the ACA work. In fact, they are all arguably net losers. The more states try to make the law work, the worse off they make the most vulnerable people.
Ridiculous Incentives
A big part of the problem is that, when the congressional Democrats and the Obama administration were designing the ACA, they honestly thought they were transforming health care and that exchanges were the future. A lot of effort was put into creating the business exchange (SHOP) part of the law. Some Obama advisors were convinced people would love the exchanges and they would soon became the major way people got coverage. The exchanges would be flooded with insurers and customers alike. Long term, the subsidized population was expected to make up only a small segment of the marketplace, so they probably didn’t think through the subsidy structure.
As it turned out, the American public has zero interest in trading employer coverage for a system that requires them to spend every December shopping around for a new, low quality, high deductible health insurance plan. Instead, the ACA exchange has become a health insurer of last resort for low and moderate income people.
The ACA left regulating the individual insurance market mostly up to the states and even wanted them to play a bigger role than they have. Yet all the money comes from the federal government, which punishes states for encouraging competitive markets. States have both a financial incentive to make the program inefficient and the power do that.
It is likely only state Democrats’ purely partisan commitment to the law that has kept them trying to make it “work well” despite the incentive structure. Groups and state legislatures pushing modest “improvements” to state ACA exchanges shouldn’t focus on lowering premiums, which can actually make things worse for many. Instead they should be focused on increasing the spread between the second cheapest silver plans and the cheapest silver plans.