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State Premium Variation Greatest for ACA Plans

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Theo Merkel
Director Private Health Reform Initiative at Paragon Health Institute

Theo Merkel is the Director of the Private Health Reform Initiative and a Senior Research Fellow for the Paragon Institute and a Senior Fellow at the Manhattan Institute.

Drew Gonshorowski
Senior Research Fellow at Paragon Health Institute

Drew Gonshorowski is a Senior Research Fellow at Paragon Health Institute. He brings a decade of experience conducting quantitative research and building models examining health policy and entitlement programs.

The Paragon Pic this week shows the substantial variation in premiums for Affordable Care Act (ACA) benchmark plans across states in comparison to the variation in premiums for employer sponsored insurance (ESI) and actual per capita health expenditures for those in commercial insurance (in both ESI and the individual market).

The design of the ACA premium tax credit (PTC) contributes to this variation by tying the value of the subsidy to the benchmark plan premium and capping the premium contribution as a percentage of household income – insulating the vast majority of enrollees (79 percent of individual market enrollees received a PTC in 2022) from premium increases. This gives substantial power to insurance companies, especially in regions with limited competition, permitting them to increase premiums and see a corresponding increase in federal payments while the premium contribution for most enrollees stays flat. Last year the Urban Institute estimated that ACA insurance markets with only one insurer had benchmark premiums 28 percent higher than those with five or more.

Often missed is the power the credit design provides states. State can make a multitude of decisions that impact the form and amount of federal assistance including whether or how to participate in the Basic Health Plan or Section 1332 waivers, shield higher-cost insurers from competition, load the value of “cost-sharing reduction” payments onto benchmark premiums, offer modified benefits, and impose more restrictive community rating, among others.

Allowing the decisions of insurers and states to directly influence the amount of federal spending is a dangerous inflationary road, one where consumers ineligible for PTC – who thus must pay the benchmark premium in full – can be collateral damage. In our paper, Brian and I suggest capping PTC benchmarks at 125 percent of the national average. This would allow for reasonable regional variation but dampen incentives to inflate benchmark premiums to obtain higher federal subsidies.

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