Putting the ACA Back Together Again

Premium subsidies, incentives and interconnectivity of ACA policies Greg Fann

As we enter 2019, I suppose it’s fair to think of the current Affordable Care Act (ACA) markets as scrambled eggs that aren’t going to be easily unscrambled. As the old English nursery rhyme Humpty Dumpty soberly concludes, once an egg is cracked, repairing it is too big of a challenge for “all the king’s horses and all the king’s men.”  As a child reading that story, my innocent presumption was that the men and the horses had aligned objectives, mutual trust and open communication to reach a solution; it didn’t occur to me until recently that perhaps this was not necessarily true. As an adult who analyzes health markets and provides strategic advice, I have no such impressions of responses to ACA challenges. While engendering support from various stakeholders, the regulatory changes implemented by the Trump administration offer an alternative direction and are generally not viewed as constructive by many of the ACA’s early and ardent supporters. It is unlikely that there will be an ongoing cooperative effort to solve the current problems—at least not on a large scale. Targeted piecemeal changes have been the norm. These changes expectedly have had some intended impact, but they also often bring along unknown and unintended consequences. Once implemented, reversing regulations is difficult and sometimes undesirable, even for those originally resistant to such changes.

At the end of 2018, we were left with a working ACA model—but one that would not have been designed from a blank slate. Undoubtedly, more changes will occur as “government intervention drives marketplace changes, which, in turn, creates a recurring need for more government intervention.”1 As these changes occur, it is important that we consider the holistic impact. The multi-variate implications at play are mathematically intricate and are often beyond the understanding of legislators and their office and committee resources. The interconnectivity among each of the underlying issues is undoubtedly complex, but the consequences can be quantified; understanding these dynamics “before” rather than “after” policy implementation is a worthy and necessary goal. The actuarial profession can provide useful objective analysis on the potential outcomes for policymakers to consider before making critical decisions that are difficult to unwind down the road.

This article concludes an anthology of articles comprising the Strategic Initiative “Commercial Health Care: What’s Next?” of the Society of Actuaries (SOA) Health Section Council. The initiative, established to proactively educate health actuaries and other interested parties on potential changes in ACA markets, began in the spring of 2017, shortly after the U.S. House of Representatives passed the American Health Care Act (AHCA). The AHCA changed the federal financial outlays from an income-based subsidy structure2 to an age-based tax credit model3 based on 2016 Republican policy proposals. The U.S. Senate had other ideas, and the initial legislation was notably more aligned with the ACA model. The Senate was not able to reach consensus after several attempts, resulting in no significant ACA-related legislation in the first two years of the Trump administration.

However, changes on the regulatory front have been steady as legislative repeal attempts have started and stopped. The series of articles associated with this initiative has loosely followed the regulatory implementation. While the banner of “pre-existing condition protections” recently has ascended to the perceived status of being the ACA’s crown jewel, premium subsidies are the real lifeblood of ACA markets. This final article concludes the Strategic Initiative with a focus on the impact of premium subsidies and their connectivity to other issues, including those discussed in this series of articles. While other ACA issues may be interconnected, the impact of premium subsidies (and resulting net premiums) is the primary indication of consumer response to market changes. Readers are strongly encouraged to digest the entire series and seek to further understand the interconnectivity of the each of the issues discussed.


The series of articles began with a discussion of age/gender rating restrictions. Specifically, the ACA prohibits gender-based rating and prescribes a maximum 3:1 age scale. As the exchange markets are predominantly comprised of subsidized enrollees and may exceed a 90 percent proportion in 2019, it is important context to consider how an age curve may impact net premium rates for individuals eligible for premium subsidies.

As an illustration, consider premium levels for four individuals, at opposite ends of the age range, with and without premium subsidy eligibility. The premium subsidy individuals are assumed to be at an income level that would allow them to purchase the benchmark Silver plan for $200.4 We also incorporate the elimination of cost-sharing reduction (CSR) payments (referred to as “CSR defunding” or “without CSR funding” through the remainder of article) that resulted in a change in premium relationships5 beginning in 2018.

Figure 1 illustrates the premium rates prior to the CSR change. As expected, the unsubsidized ratio is 3:1 for each plan, but the subsidized ratio is significantly narrower for platinum and gold plans, equivalent for the silver benchmark plan, and inverted for the bronze plan.

Figure 1: 3:1 Age Curve: Premium Levels With CSR Funding
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
Unsubsidized Premium $300 $350 $400 $450 $900 $1,050 $1,200 $1,350
Subsidized Premium $150 $200 $250 $300   $50    $200    $350    $500
Unsubsidized Age Ratio 3:1 3:1 3:1 3:1
Subsidized Age Ratio 1:3 1:1 1.4:1 1.7:1

The initial article considered proposals intended to attract a younger demographic by shifting premium rates to a more actuarially-aligned age curve of 5:1; similar proposals have been constructed since the formation of the ACA as an attempt to provide more attractive premium rates to the underrepresented group of young adults. The impact of a 5:1 age curve is illustrated in Figure 2. In this example, the total premium of the two unsubsidized individuals is held constant. As expected, the unsubsidized ratio is 5:1 for each plan. The subsidized ratios are similar to Figure 1. Interestingly, a change from a 3:1 curve to a wider 5:1 curve would increase subsidized bronze premiums for a young adult ($150 to $167) and lower subsidized bronze premiums for an older adult ($50 to $33). As most enrollees are subsidized and bronze plans are a popular selection due to having the lowest premiums, it is worth noting that a change to a wider age curve may result in the opposite of the intended enrollment incentives.

Figure 2: 5:1 Age Curve: Premium Levels With CSR Funding
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
Unsubsidized Premium $200 $233 $267 $300 $1,000 $1,167 $1,333 $1,500
Subsidized Premium $167 $200 $233 $267      $33    $200    $367    $533
Unsubsidized Age Ratio 5:1 5:1 5:1 5:1
Subsidized Age Ratio 1:5 1:1 1.6:1 2:1

Premium rate relationships changed in 2018 due to CSR defunding. Relative to Figure 1, the impact of CSR defunding is illustrated in Figure 3. For unsubsidized enrollees, premiums remain the same6 except for silver plans. As unsubsidized enrollees do not receive CSR benefits (only available in silver plans), almost all of this segment exited silver plans in 2018 with the exception of off-exchange plans that did not include the CSR “load.” The real impact of CSR defunding is the enhanced premium subsidies (hence, lower net premiums) offered to subsidized enrollees. Compiled statistics indicate about 80 percent of federal exchange enrollees can find a plan for a cost of $75 or less in 2018 and 2019, compared to about 70 percent in 2015–2017.7 Note that the gold subsidized premium is now lower at age 64 than age 24, as the gold unsubsidized premium is lower than the comparable silver premium.

Figure 3: 3:1 Age Curve: Premium Levels Without CSR Funding
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
Unsubsidized Premium $300 $425 $400 $450 $900 $1,275 $1,200 $1,350
Subsidized Premium   $75 $200 $175 $225    $0    $200    $125    $275
Unsubsidized Age Ratio 3:1 3:1 3:1 3:1
Subsidized Age Ratio n/a 1:1 .7:1 1.2:1

Next, we will consider the premium results of a 5:1 age curve with CSR defunding. Before continuing, the reader may want to pause and think through the results of each of the changes individually and estimate the combined impact.

As should be expected, the same relationships hold true in the 5:1 scenario. The results in Figure 4 relative to Figure 2 are similar to Figure 3 relative to Figure 1—that is, higher silver premiums for subsidized enrollees and lower non-silver premiums for other plans. In Figure 4, the premium relationship from changing from 3:1 to 5:1 is also inverted for gold plans ($175 to $183 for age 24, $125 to $117 for age 64).

Figure 4: 5:1 Age Curve: Premium Levels without CSR Funding
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
Unsubsidized Premium $200 $283 $267 $300 $1,000 $1,417 $1,333 $1,500
Subsidized Premium $117 $200 $183 $217        $0    $200    $117    $283
Unsubsidized Age Ratio 5:1 5:1 5:1 5:1
Subsidized Age Ratio n/a 1:1 .6:1 1.3:1

Summarizing the results, unsubsidized premium relationships are intuitive. In Figure 5, silver premiums are crossed out after CSR defunding as they are unattractively priced relative to other plans.

Figure 5: Unsubsidized Premium Levels
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
3:1 With CSR Funding $300 $350 $400 $450    $900 $1,050 $1,200 $1,350
5:1 With CSR Funding $200 $233 $267 $300 $1,000 $1,167 $1,333 $1,500
3:1 Without CSR Funding $300 $425 $400 $450    $900 $1,275 $1,200 $1,350
5:1 Without CSR Funding $200 $283 $267 $300 $1,000 $1,417 $1,333 $1,500

After reducing gross premiums by the subsidy amounts, the resulting relationships are less intuitive. Figure 6 illustrates that the lowest price environment for young adults is the current one (a 3:1 age curve without CSR funding), with the lone exception being platinum plans. Accordingly, restoring CSR funding or widening the age band could potentially detract from attracting young adults to ACA markets.

Figure 6: Subsidized Premium Levels
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
3:1 With CSR Funding $150 $200 $250 $300 $50 $200 $350 $500
5:1 With CSR Funding $167 $200 $233 $267 $33 $200 $367 $533
3:1 Without CSR Funding   $75 $200 $175 $225   $0 $200 $125 $275
5:1 Without CSR Funding $117 $200 $183 $217   $0 $200 $117 $283

Proposed changes from a 3:1 age slope to 5:1 have been thought to attract more young adults to the marketplace. There may be some opportunity to attract a larger share of young adults in the unsubsidized population, but the primary impact may be the opposite in the larger, subsidized segment.

The combination of the age curve with the ACA subsidy structure provided greater incentives for older, low-income adults. Legislative proposals intended to shift this imbalance have been immediately criticized for their impact on those segments receiving favorable ACA treatment.8 In a sense, the ACA, even in its infancy, has established new baselines that have been regarded as normative benchmarks that serve as comparison points for future proposals, without any regard to the appropriateness of the resulting net rate levels.

Throughout 2017, there were calls to appropriate CSR funding through bipartisan legislation. It was often listed as the primary requirement necessary to “stabilize the market.”9 At the end of 2018, there is wide recognition that CSR defunding has increased premium subsidies and made the market more attractive to subsidized enrollees and, consequently, more attractive to insurers. Many of the same organizations that warned of CSR defunding damage10 now have a better understanding of premium subsidy mechanics and are advocating that CSRs not be funded again.11 It was not hard to find warnings about the ACA subsidy structure12 or the CSR-induced subsidy enhancements13 before they were implemented. Once put into operation, they provided unique benefits to certain populations and changed the dynamics of the marketplace. Reversing these changes could be very difficult, and attempts to do so will draw opposition—even from those initially opposed to implementation.


Before the ACA, it was common for states to have separate pools for high-risk individuals. Premiums were largely subsidized by state government revenues and insurer assessments. The ACA does not directly provide federal funds for high-risk individuals, but it includes two separate mechanisms that lower premium costs for these individuals. First, the aforementioned premium subsidies are available to individuals below 400 percent of the federal poverty limit (FPL), regardless of health status. Second, rating requirements do not allow gross premium rates to vary based on health status. While this “community rating” mechanism runs the risk of not attracting healthy individuals, the ACA’s premium subsidies provide incentives for lower-income healthy individuals to enroll, particularly after CSR defunding. The resulting unsubsidized premiums are based on a pooling of the larger subsidized population of a mixed-health status and an unhealthy mix of the unsubsidized population.

The ACA fundamentally changed how we fund health costs for high-risk individuals. It shifted the burden from a patchwork of state-focused plans to the broader individual market. In a sense, the burden shifted from a total population obligation to a limited population of individual market participants, causing premiums to immediately rise. Ultimately, much of this burden is re-shifted to the federal government (to a greater extent than planned) via premium subsidies. A recent preference for states has been to utilize the federal funding and mechanically carve-out high-risk individuals to relieve pressure on premium rates.

Specifically, the “invisible reinsurance” option discussed in “Creating Stability in Uncertain Times” is intended to attract a healthier mix of the unsubsidized population. While federal money is not directly appropriated for high-risk individuals in the ACA, states have been able to use Section 133214 of the ACA to appropriate funds to mechanically pay for (or “reinsure”) the higher costs for these individuals and remove them from the risk pool rate development. The resulting lower premiums in the healthier risk pool provide government savings that are used to fund the invisible reinsurance. Any shortfall to fully fund the reinsurance costs can be covered by a third party, such as a state promoting such a waiver.

Of the eight states that have filed Section 1332 waivers, seven have pursued a reinsurance option. These waivers have appropriately reduced the high unsubsidized premiums; however, little attention has been paid to the impact of this change on the larger subsidized market.15

In Figure 7, the unsubsidized premiums represent a 30 percent discount from the current environment in Figure 3, reflective of a reasonable savings level associated with invisible reinsurance. The 30 percent premium savings for unsubsidized enrollees actually provides greater savings for the federal government—57 percent at age 24 as the subsidy is reduced from $225 to $98 and 36 percent at age 64 as the subsidy is reduced from $1,075 to $693. The resulting lower premium subsidies translate into higher net premiums for bronze and gold plans. The most dramatic percentage change occurs for the age 24 individual in a bronze plan, with an increase of 50 percent from $75 to $113.

Figure 7: 3:1 Age Curve: Premium Levels Without CSR Funding and Reinsurance
Age 24 Age 64
Bronze Silver Gold Platinum Bronze Silver Gold Platinum
Unsubsidized Premium $210 $298 $280 $315 $630 $893 $840 $945
Subsidized Premium $113 $200 $183 $218    $0 $200 $148 $253
Unsubsidized Age Ratio 3:1 3:1 3:1 3:1
Subsidized Age Ratio n/a 1:1 .8:1 1.2:1

Utilizing Section 1332 waivers to attract a broader group of people is indeed a noble goal, but consideration of the impact that such changes have on all segments of the market is important. The need for a holistic perspective obviously extends to more innovative uses of Section 1332 waiver authority beyond carving-out costs of high-risk enrollees.

the SINGLE RISK POOL concept

Since inception, the exclusivity of individual ACA markets has been overstated. An required ideal of some early ACA proponents was that populations should be segmented. Employees that had qualified health coverage through their employers and individuals eligible for government programs would be segmented out of the individual market. If all the remaining people had the right incentives to enroll in a tightly controlled individual health market, a large, balanced risk pool with reasonable premiums that people would be willing to pay would result. The problem with this is two-fold. First, there are many ways to leave the individual market. Second, less discussed and perhaps less concerning, there are also nontraditional ways to get in. A listing of the open doors is provided.

  • Escape routes (people leaving the market)
    • Individuals can choose to be uninsured.
    • Young adults under age 26 can be on their parents’ policies or student insurance.
    • Existing policyholders can be on grandfathered plans or transitional plans.
    • Some individuals might have group coverage opportunities (as a dependent or due to a job change).
    • Others might depress income for Medicaid eligibility.
    • Healthy individuals could be on short-term plans, health sharing ministries or association health plans (AHPs).
    • Unhealthy individuals may have access to high-risk pools or Section 1332 reinsurance waivers.
  • Unanticipated entry (people entering market)
    • 21st Century Cures explicitly allows small employers to utilize health reimbursement arrangements (HRAs) and access the individual market.
    • Large employers were utilizing the individual market before small employers, and a 2017 Axene Health Partners LLC study determined “migration of employees from the large employer market would reduce the average age of the individual market and foster lower cost and more stability in the risk pool and the risk adjustment results.”16
    • Individuals can also enter the market via new HRA regulation.17

The other articles in the series of papers all touched on risk pool dynamics. An article focused on the small group market discussed how the 21st Century Cures Act allows employer contributions to qualified HRAs to fund individual market policies. Other articles discussed the weakness of the individual mandate and the expansion of AHPs, and one focused on risk adjustment changes. The “open door” in the individual market creates challenges in predicting the risk pool; a healthier-than-expected mix may be present in 2018, as “enrollment of individuals with income levels between 200 percent and 400 percent of the federal poverty level was expected to increase in 2018 due to additional premium subsidies.”18

The more attractive premium rates in 2018 have increased the number of subsidized enrollees in the marketplace and attracted insurers to return to the market in 2019. The potential downside of renewed competition is not necessarily intuitive. For the first time since ACA inception, average gross premiums are lower than the prior year. As discussed earlier, subsidized premiums for lower-cost plans move in the opposite direction of gross premium changes. What’s more, the presence of additional carriers increases the likelihood of more benefit plans competing to be the benchmark (second-lowest silver plan). This could result in enrollees’ net premiums increasing or needing to change plans to maintain the same premium level—another unanticipated feature of the ACA’s premium subsidy dynamics.

Recently, the single risk pool dogma has softened. There is growing recognition that the individual market can run on the fuel from premium subsidies rather than government coercion.19 Solutions involving “splitting risk pools”20 are no longer automatically viewed as attempts to undermine the ACA and have been floated (along with solutions within risk pool) as policy proposals by both major political parties.


Any discussion of premium subsidies would be remiss without further mention of Section 1332. 2019 and 2020 ACA challenges are no different than 2014; the market is less attractive to young, healthy individuals, particularly those with higher incomes. Section 1332 of the ACA allows states to modify the subsidy structure21 and seek to attract a broader market.22 As highlighted throughout this article, changing the ACA subsidy mechanisms has broad ranging effects that should be carefully examined.

On a positive note, it’s easy to conclude that 2018 has been the ACA’s best year. The unstructured patchwork of changes has provided favorable options both on and off the exchanges. Concerns about market stability have dampened, as more insurers are returning to the lower premium environment in 2019. As you read through the series of articles extending back to the spring of 2017, you will note the gloomy reality in terms of market stability, competition and regulatory concerns. The enhanced premium subsidies have made coverage for low-income enrollees more attractive and have likely improved the risk mix. 2018 enrollment was more robust than many commentators expected,23 and the uninsured rate fell after rising in 2017. Insurers are experiencing record profitability,24 and that is reflected in the rate reduction in 2019. Competition is returning, and consumer popularity is also increasing. Polling should continue to rise as more people learn of the repeal of the individual mandate, which was consistently regarded as the ACA’s least popular provision. The expansion of alternative options won’t help ACA market enrollment, but it will likely improve consumer sentiment for those individuals who have been unable to find an ACA solution. The improved market dynamics, a split Congress and increasing popularity affirmatively answer the question posed throughout this series: Is the individual market sustainable in the long-term? As we move into 2019, it will be instructive to understand the impact that a change in the premium structure has had on the ACA markets. Such understanding will facilitate a greater understanding for states that utilize Section 1332 to leverage federal funding to optimize their local markets.


The ACA is an intricate web of interconnected pieces with complex mathematical relationships. Actuaries are the experts who understand how the puzzle pieces fit together. The ACA was a redesign of market rules with an allotment of federal funds, which provided insurance incentives to previously uninsured individuals in 2014. At the same time, it increased premiums and disadvantaged some prior individual market consumers. The unbalanced incentives created a skewed market and sustainability challenges.

Since 2014, some rules have changed in an unstructured fashion, and federal funding notably was increased in 2018. While results have improved in 2018 and markets will be more competitive in 2019, the intrinsic ACA design remains a limiting factor in reaching certain populations. Using Section 1332 authority, states can reallocate the federal funding to attract a broader population mix. The favorable 2018 environment has attracted more issuers in 2019, while at the same time consumers have more access to off-market options. Beginning in 2020, market fluidity will continue, but the real changes will likely occur at the state level. It remains to be seen whether the ACA will be put back together in 50 different ways. It certainly won’t look like it did in 2014; it will remain scrambled, and actuaries will play an integral role in the patchwork. As premium subsidies provide the market fuel, assessment of proposals should consider the impact on net premiums and the interconnectivity of premium subsidies with other ACA issues.

This is the final article in a series of SOA Health Section articles written to discuss commercial health care considerations. I would like to personally thank David Dillon for leading this initiative and each of the authors for their volunteerism and insightful contributions. While the Strategic Initiative is complete, changes in ACA markets live on. Further exploration of “What’s Next?” is ongoing with the SOA Health Section’s Individual/Small Group Subgroup. Please join us for continued robust discussion. I would love to hear your thoughts on interconnected issues in the ACA that have not been discussed in this series of articles. We will work together to communicate these dynamics inside and outside the profession, fulfilling our mission of continuing to provide dispassionate advice and public service in a challenging environment.

Greg Fann, FSA, FCA, MAAA, is a consulting actuary with Axene Health Partners LLC. He focuses on commercial health care strategy, risk adjustment, market dynamics and risk-based capital requirements. He was Chair of the Strategic Committee of the Health Section Council in 2017 and 2018, which was responsible for shepherding this Strategic Initiative. He currently leads the Individual/Small Group Subgroup of the Health Section.


This article reflects the opinions of the author, and not those of Axene Health Partners LLC or the SOA.

Copyright © 2019 by the Society of Actuaries, Schaumburg, Illinois.