It’s Not Just the Prices: ACA Plans Have Declined in Quality

 This paper examines the value of individual market health insurance products in the Affordable Care Act (ACA) exchange from 2014 to 2023 and compares the value of these products to the larger employer-sponsored insurance (ESI) group market.

What We Found

While there are many features of health insurance products that consumers may consider when assessing value, this paper identifies three characteristics that define value and influence participation in products: the availability of provider networks with generous benefits, the cost-sharing structure that divides financial responsibility between insurance companies and enrollees, and the cost of premiums. The paper explores how the value of health insurance products declined across these characteristics and resulted in the ACA exchange offering lower quality plans over time when compared to ESI. The following points illustrate notable weaknesses in value across the three characteristics.

• Provider networks: The percentage of individual market consumers enrolled in plans with broad provider networks declined from 36 percent to 11 percent between 2014 and 2023. An increasing share of individual market enrollees are in Medicaid-managed-care-like plans.
• Cost-sharing: As overall premiums have risen, middle-income exchange enrollees with incomes above 200 percent of the federal poverty level were much more likely to choose a bronze plan in 2023 (54 percent) than they were a decade ago (33 percent).
• Premiums: Individual market premiums have increased more rapidly —50 percent more—than employer plan premiums over the past decade.

We attribute these decreases in the value of ACA plans to structural features of the ACA individual market framework. In particular, the ACA insurance rules caused premiums to increase and led insurers to offer narrower and more restrictive networks over time. The design of the ACA premium tax credits has also incentivized enrollees to select lower-quality plans. In addition, the ACA risk adjustment program is overcompensating insurers for lower-income enrollees who enroll in silver plans, causing significant price competition for these plans and a race to the bottom in plan quality. Lastly, a variance in state enforcement of ACA rating rules further distorts and complicates plan offerings and consumer selections.

What We Recommend

Recognition of the poor and declining consumer value of insurance options is a prerequisite to implementing changes that improve value for individual health insurance market consumers. The following recommendations would improve the individual market without adding to the cost of the program:

• Improve the accuracy of the ACA risk adjustment program by adding income-based risk factors.
• Congressionally appropriate cost-sharing reduction subsidies and require insurers to set prices for metal tiers based on actuarial value.
• Expand employers’ ability to offer individual coverage health reimbursement arrangements.

Why This Matters

While the ACA has resulted in lower quality product offerings to date, this should not be considered an inherent feature of a federally regulated health insurance framework but instead as a natural consequence of the current blend of the ACA regulatory environment, the premium subsidy structure, flaws with the risk adjustment program, and uneven regulatory enforcement. In all health insurance markets, there is some incentive to buy less generous coverage and save on premiums while absorbing higher cost-sharing exposure, but this incentive is uniquely strong in the individual ACA market with premiums proportionally inflated for all plans with flat-dollar subsidies. The proposed opportunities for reform will create a better-functioning individual market with stronger offerings to consumers and more efficient government subsidies.

Introduction

Like other forms of insurance, health insurance is in part a financial services product, one that allows individuals to reduce the cost of unforeseen sickness and accidents by paying premiums to insurance companies to cover a large portion of this risk.1 In general terms, the value of insurance products is reflective of the benefits provided relative to the underlying cost.

A value assessment of health insurance products is perhaps more complicated than other insurance protection: It has more layers than risk mitigation financial transactions and is based on the unique subjective needs and often personal desires of individuals and families procuring health coverage.2 While there are many features of health insurance products that consumers may factor in when determining value, three familiar characteristics3 influence decisions to purchase health insurance and the selection of products and plan designs. These three features are easily understood through the following questions:

1. Provider networks: Which doctors and hospitals are covered with the most generous benefits?
2. Cost-sharing structure: How is financial responsibility for medical services split between insurance companies and enrollees?
3. Premiums: How much does the insurance product cost?

The provider network and cost-sharing structure of health insurance products directly impact the resulting premiums. Some medical providers are generally willing to agree to lower in-network payment rates if provider networks are narrow and insurance consumers are steered to their facilities or offices. Conversely, access to a broad network of medical providers generally involves higher payment rates for medical services and accordingly higher insurance premiums. Richer benefit designs that lower cost sharing for consumers (e.g., low deductibles and copays) also result in higher premiums. Higher premiums are not necessarily unattractive or indicative of poor value, as they may be the direct result of richer benefits and broader networks, both of which are key factors when consumers assess value. The overall value of health insurance products is best summarized by an assessment of medical providers in the products’ network, the benefits provided net of cost sharing and the premium cost.

This paper examines the value of individual market health insurance products in the first 10 years (2014-2023) of the Affordable Care Act (ACA)4 exchanges. It then compares the ACA value to the much larger employer-sponsored insurance (ESI) group market and concludes by offering insights into what changes could be made to improve the value of individual health insurance products offered in the current regulatory environment.

The major findings of this research include the following:

• The ACA regulatory framework and related stakeholder responses have led to predominantly lower quality benefit options and plan selections than those available to individual health insurance market consumers.
• The value of ACA individual market product selection has diminished over time.
• From 2014 to 2023, the percentage of individual market consumers enrolled in broader network products declined from 36 percent to 11 percent.
• In 2014, 33 percent of individual market middle-income consumers—those not receiving cost-sharing reduction (CSR5) benefits—were enrolled in the lowest metal tier (bronze) compared to 54 percent of consumers in 2023.
• From 2014 to 2023, the average unsubsidized premium has increased by 62 percent compared to 40 percent for ESI coverage.
• Multiple structural items of the ACA individual market regulatory framework have contributed to this dynamic.
• The ACA imposed regulations on the individual market that increased insurance premiums broadly. This has made it more difficult for plans to offer coverage options at prices consumers perceive to be of high value, a dynamic that is exacerbated for more generous plans.
• Premium tax credits (PTCs) that assist certain enrollees to purchase coverage are calculated as a fixed-dollar-amount voucher, the amount of which is calculated from a specific benchmark plan (second-lowest-cost silver) premium. This creates an economic incentive for subsidized enrollees to select plans that are of equal or lower price than the benchmark plan. The enhanced subsidies under the American Rescue Plan Act (ARPA) and the Inflation Reduction Act (IRA) have increased the impact of this dynamic, as more enrollees are impacted by the PTC subsidy structure.
• The risk adjustment program has significantly overcompensated insurers for price-sensitive consumers earning less than 200 percent of the federal poverty level (FPL). These enrollees are incentivized to select lower-cost silver plans.
• Varying focus and levels of state enforcement of ACA rating rules have further complicated and distorted plan offerings and consumer selections.

While the ACA has resulted in lower quality product offerings to date, this should not be considered an inherent feature of a federally regulated health insurance framework but instead as a natural consequence of the current blend of the ACA regulatory environment, the premium subsidy structure, flaws with the risk adjustment program, and uneven regulatory enforcement. The following recommendations would improve plan quality without adding to the cost of the overall program:

• Improve the accuracy of the risk adjustment program by adding income-based risk factors.
• Appropriate CSRs and enforce single-risk-pool rules, which would end “silver-loading,” align premiums with coverage generosity, and incentivize carriers to offer better value products.
• Expand employers’ ability to offer individual coverage health reimbursement arrangements (ICHRAs), which would improve the risk pool6 and encourage better product offerings from carriers.

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https://paragoninstitute.org/private-health/its-not-just-the-prices-aca-plans-have-declined-in-quality-over-the-past-decade