Health exchanges intend to provide affordable coverage to a group of consumers who otherwise, for various reasons, have been historically uninsured. Each health exchange will use advanced premium tax credits (APTCs) or “subsidies” pegged at a person’s salary to help defray the cost of health insurance. To be eligible for these subsidies, a consumer (and/or their family) must earn between 133% and 400% of the federal poverty level (FPL). In 2013, 400% of FPL is roughly $46,000 for one person and $95,000 for a family of four. These APTCs are calculated by using the “retail price” of the 2nd cheapest Silver Plan offered to a consumer during their health exchange shopping experience. Health plans offered through the health exchange are ranked by these metal descriptions to signify the level of coverage each one offers. A Bronze plans, the lowest level, covers the least amount of average health care services at sixty percent while Platinum plans cover the most at ninety percent.
U.S. will spend $107B over the next three years providing these advanced premium tax credits (APTCs) to consumers according to a February 2013 report from the Congressional Budget Office
When consumers shop for benefits online, they will see health plans with the subsidized rates after APTCs are applied. Since these subsidies are based on the 2nd cheapest silver plan available to them, there could be instances when the subsidies received are more than the real cost of a cheaper bronze or silver plan. When subsidies are more than the cost of a plan, the consumer pays $0 for coverage. By law, health insurance companies are required to show the amount of APTCs a member uses when billing for premium payments. The question puzzling many health policy professionals is what does this “free health care cohort” look like?
Shopping for $0 Health Insurance
For consumers who earn less than 250% ($27,925) of the FPL, there is actually a second subsidy available called cost-sharing subsidies (CSRs). This second subsidy lowers the copayments, deductibles, coinsurance, and out of pocket costs on a sliding scale for the various Silver plans offered. The closer a consumer is to 133% of the FPL, the more comprehensive the Silver Plan becomes with lower copayments and deductibles. For example, at the 100-150% FPL level, the Silver plan receives such a high cost-sharing subsidy it resembles the benefit coverage of a Platinum plan. However, even though the benefits offer more coverage, the cost of the better Silver plan remains the same to the consumer.
U.S. will spend $28B over the next three years providing these cost sharing subsidies (CSRs) to consumers according to a February 2013 report from the Congressional Budget Office
Economically, it makes the most sense for consumers that earn below 250% of FPL to buy a Silver plan eligible for both types of subsidies (APTCs and cost-sharing). However, there will be other plans available to buy that are cheaper than these highly subsidized Silver Plans. For example, Bronze and Catastrophic plans could be priced lower due to the level of coverage they offer. However, the cost-sharing subsidies do not apply to these plans. So while they will seem cheaper in price, there will be higher out of pocket costs associated with these products.
Medicaid members that may lose coverage due to seasonal salary changes and uninsured people that earn right above the Medicaid eligibility level have the most to gain from a Silver Plan in the exchange. It is the best way for these consumers to receive the richest benefits at the lowest price. However, this cohort by default has the highest sensitivity to price due to lower levels of disposable income. During the shopping experience, this cohort will have to pass on free or lower priced plans with higher copayments and deductibles to land in a Silver plan. However, this cohort has all the demographic characteristics to suggest this will not happen. Based on a U.S. Census Bureau report they are younger (58% aged 19-34), foreign born (34%) work part time year round (29%), and earn less than 25,000/year (25%).
So how much does free healthcare cost?
Roughly $135B over the next three years for approximately 7 million individuals.
Example of Health Exchange Shopping Experience from IDEO