Revisiting Alexander-Murray copper

In Mayhew On Insurance by David Anderson

Alexander-Murray was a fairly straightforward proposal.  It was an honest attempt to solve problems.  Almost every section I could read through the bill and do the following:

  • Identify what problem the new language was attempting to address
  • Identify a clear pathway to resolve that problem
  • Assess a reasonable likelihood that the identified problem would be resolved in a manner favorable to the advocates of that section.

I may not have liked all of the sections on policy grounds (Iowa 1332 waiver revision section for instance) but mechanically the bill made a lot of sense.  The Problem-Change-Solution chain was clear and strong.

However there was one instance where Underpants Gnomes were involved.  And that was the section on expanding Catastrophic plans that would then be renamed Copper plans.  This never made sense to me.  The problem that the bill was trying to solve was to offer more low premium plans to more people while also bringing the Catastrophic plans into the Metal risk adjustment process.

The 2017 risk adjustment data shows the morbidity differences between Catastrophic and Bronze plans quite well (Figure 5)

Catastrophic plans are, from a benefit design viewpoint, merely funny looking Bronze plans. Catastrophic plans have a pricing advantage over Bronze plans because they have a massive risk adjustment advantage.  Catastrophic plans only risk adjust against themselves.  As you can see, Catastrophic has perhaps a third of the morbidity of Silver plans.  This is because Catastrophic plans are mostly limited to people under the age of 30.

Bronze plans are APTC subsidy eligible and they also contribute net risk adjustment payments to the rest of the Metal plans.  A portion of the Bronze premiums are in excess of Bronze claim costs as that money is shifted to cover some of the claims incurred by people who bought Silver, Gold and Platinum plans.

I could see the logic of expanding Catastrophic plans with split risk adjustment as a means of offering more people lower cost premium plans.  It would be attractive to most off-Exchange and some on-Exchange Bronze buyers.  Average morbidity in the Catastrophic pool would increase but the new entrants would see premium savings as they would not be paying risk adjustment to other metal plans.  Incumbent Catastrophic buyers would be worse off as the morbidity increase would lead to premium increases.  Silver, Gold and Platinum buyers would see higher premiums as significant risk adjustment support from Bronze would disappear.

But expanding Catastrophic plans that are rebranded as Copper plans and then bringing those plans into the Metal risk adjustment process makes no sense from any perspective.

This is 99.4% irrelevant to policy going forward as Alexander-Murray is dead but this has bugged me for months.