How New Mexico Dramatically Reduced Marketplace Deductibles At Zero Cost To The State

High deductibles, which can impose significant financial burdens and deter use of essential health care, are a longstanding problem for many consumers who buy their own insurance through the health insurance Marketplace. Earlier this year, New Mexico made significant progress in addressing that problem, when a quarter of all Marketplace participants shifted from relatively high-deductible bronze and silver plans to gold plans with much lower deductibles.

No state dollars were required to achieve those results. Instead, the changes resulted from the insurance regulator requiring consistent and rigorous adherence to Affordable Care Act (ACA) insurance rating rules. Previously, insurers in New Mexico, like those in most other states, had engaged in de facto “medical underwriting,” by varying plan premiums based on the characteristics of the people who were expected to enroll in each metal-tier level. New Mexico officials prohibited this approach, instead requiring each metal level’s premium to reflect the statewide characteristics of all individual-market enrollees. The resulting drop in gold premiums, while increased silver-tier premiums raised advance premium tax credit (APTC) amounts, let many consumers save money on net premiums while lowering out-of-pocket cost sharing by moving to relatively generous gold-tier plans. Several other states are already moving in New Mexico’s direction, and many more should consider following suit.

In collaboration with Greg Fann of Axene Health Partners, a leading national actuary who was the first to call attention to compliance problems raised by current rating practices, I advised New Mexico’s insurance regulator as it was developing the policy approach described here. In this article, I explore the approach in further detail and share lessons learned for other states.

New Mexico’s Results

As shown in exhibit 1, the proportion of New Mexico exchange participants with high-deductible coverage in bronze and silver plans fell by more than half, dropping from 49 percent of enrollees in 2021 to just 23 percent in 2022.

Among consumers with incomes at or below 200 percent of the federal poverty level—all of whom qualify for silver plans with cost-sharing reductions (CSRs) that provide very high actuarial value (AV)—the proportion enrolled in silver plans dropped by 9 percentage points. However, a much larger change involved a shift from bronze to gold among those with non-silver coverage: The share choosing high-deductible bronze over silver fell by 18 percentage points, while the share enrolled in gold rose by 27 percentage points.

For enrollees with incomes above 200 percent of poverty, changed plan choices greatly increased coverage generosity. Instead of nearly two-thirds (63 percent) of New Mexico enrollees in this income range receiving high-deductible bronze- or silver-tier insurance, almost seven in 10 (69 percent) now have relatively low-deductible gold coverage.

Exhibit 1: Change in New Mexico Marketplace enrollment between 2021 and 2022 open enrollment periods—by metal level, actuarial value, and income as a percentage of federal poverty level

Source: Analysis of the Centers for Medicare and Medicaid Services, Public Use Files for 2021 and 2022 open enrollment periods. Notes: Results with more detailed income categories are available upon request. Low-actuarial value (AV) silver plans have 73 percent or 70 percent AV. High-AV silver plans have 94 percent or 87 percent AV. Totals may not sum because of rounding.

From 2021 to 2022, no other state experienced anything like New Mexico’s changes in metal-level enrollment distribution. The national share of Marketplace consumers in bronze fell by 3 percentage points, the share in silver grew by 2 percentage points, and the proportion in gold increased by 1 percentage point. Average single deductibles at each metal level in plans offered for 2022 on the federal Marketplace enrollment platform are detailed in exhibit 2.

Exhibit 2: Average deductibles by metal level and actuarial value

Sources: Healthcare.gov, Centers for Medicare and Medicaid Services Public Use Files, 2014–22 open enrollment period deductibles and health savings account enrollment. Note: AV is actuarial value.

How New Mexico Did It

New Mexico’s Office of Superintendent of Insurance (OSI) quickly achieved major affordability gains by requiring all insurers to follow a rigorous and consistent approach to non-discriminatory rate-setting for qualified health plans (QHPs) offered on the Marketplace. This policy greatly increased alignment between metal-level premiums and generosity of underlying coverage.

A key legal safeguard for non-discriminatory insurance premiums is the ACA’s single-risk-pool requirement for individual market premiums. In its preamble to the single-risk pool regulation the Centers for Medicare and Medicaid Services (CMS) explained the need for that requirement as follows:

“Without the single risk pool rule, [the ACA’s] prohibitions against traditional underwriting could incentivize issuers to find ways to segment the market into separate risk pools and charge differential premiums based on segmented risk, a de facto mechanism for underwriting… [T]he single risk pool requirement provides [a] layer of protection against adverse selection among plans and protects consumers by requiring issuers to consider the risk of all enrollees when developing and pricing unique plans.” (Emphasis added.)

CMS’s rating instructions thus require carriers to base premiums for a particular plan, not on the expected characteristics of that particular plan’s enrollees but on “the average demographic characteristics of the single risk pool” consisting of all the insurer’s individual market enrollees in the state. This forces each insurer to vary premiums among its individual market plans based on differences between the plans, not differences between the consumers who are expected to enroll in each plan.

To implement these requirements in New Mexico, the state’s insurance regulator explained its approach as follows:

“OSI is seeking to have metal-level premiums vary with the generosity of underlying coverage, priced to reflect expected utilization by a standard population. To achieve that goal, our guidance asks carriers, in effect, to take two steps: first, assume that consumers act in their best interests when choosing a plan, which means that the only consumers enrolled in silver-level QHPs are in variants with 87% or 94% actuarial value; and second, use induced demand factors that are consistent across metal levels and that vary utilization inversely with consumer cost sharing, as captured in … induced demand and induced utilization factors published as part of CMS risk adjustment formulas.”

To ensure that “silver premiums will reflect AV parity rather than a varying mix of AVs from subjective projections of different CSR variant distributions,” OSI instructed all carriers to assume a constant, statewide distribution of silver QHP enrollment among high-AV variants. As a result, silver QHPs were priced based on claims costs 44 percent higher than those in baseline silver coverage with 70 percent AV.

These regulatory expectations led to an increase in New Mexico’s average silver premiums, according to estimates from the Henry J. Kaiser Family Foundation, and a drop in average gold premiums, triggering the enrollment shifts described above. The vast majority of silver-tier enrollees qualified for APTCs, which insulated them from the effects of increased gross premiums.

New Mexico’s Reforms In Historical Context

New Mexico is now one of only six states where the lowest-cost average silver premium is at least 5 percent above such premiums for gold, and one of only two where silver is at least 10 percent above gold. The other state in the latter category is Wyoming, where market conditions created premium relationships like New Mexico’s, and where federal rather than state authorities review annual rates.

In 2015, the Department of Health and Human Services’ assistant secretary of planning and evaluation projected that, if federal CSR payments ended, silver premiums would immediately rise to exceed gold premiums, and the market would evolve to feature premium relationships like those now seen in New Mexico and Wyoming. This prediction has not come to pass, except in a handful of states. Almost five years after then-President Donald Trump ended federal CSR payments in late 2017, gold premiums continue to exceed silver premiums in 37 states, even though a higher percentage of covered claims is now funded through silver premiums than gold.

A key contributor to this departure from expectations is a flaw in the federal government’s risk adjustment formulas.

Risk adjustment compensates for foreseeable cost variations that are not reflected in premium differences allowed by the ACA. Insurers with below-average costs that are not covered by premiums pay into risk adjustment, and those with above-average costs receive risk-adjustment payments. Originally based on claims in the large-group market, ACA risk adjustment overpays carriers for consumers who qualify for CSRs in silver plans. As a result, because each state’s risk-adjustment system is a “zero-sum game,” risk adjustment underpays (or overcharges) carriers for other consumers.

This dynamic predates 2017’s termination of federal CSR payments. Soon after the ACA took effect, insurers identified CSR consumers as profit centers. At a major national conference in 2016, a leading actuarial firm’s presentation explained that “CSRs are Key to Success.” The presentation noted that CSR enrollees dominated profitable member cohorts, and enrollees in non-silver metal levels dominated the unprofitable cohorts. Because of significant differences between claims predicted by risk-adjustment formulas and those actually incurred, silver members’ costs fell well below the total revenue they generated, while gold members incurred costs significantly above total revenue.

At the time, risk adjustment overcompensated insurers for CSR consumers by ignoring the impact of low income and associated social determinants of health in reducing use. Even though cost sharing is much lower in 87 percent-AV and 94 percent-AV silver plans than in 70 percent-AV silver plans, the former plans serve only low-income people. Accordingly, actual claims costs are lower in the highest-AV silver plans than in much less generous, 70 percent-AV silver coverage. Once federal CSR payments ended, another contributor to overpayment emerged: The risk-adjustment formula continues to assume that silver plans charge premiums that reflect 70 percent AV, rather than higher premiums that are now charged in most states.

This risk-adjustment flaw incentivizes insurers to make money by attracting profitable CSR consumers and avoiding unprofitable consumers in metal levels other than silver. That undermines the ACA’s fundamental goal that “individual-market insurers … no longer compete based on their ability to avoid risk, but rather on their ability to deliver high-quality care at an affordable price.”

Low silver premiums are key to attracting profitable CSR consumers, who have low incomes and tend to be very responsive to small differences in premiums. Accordingly, many carriers seek a profitable customer mix by aggressively underpricing silver premiums and raising premiums at other metal levels, even if that means violating the ACA’s single-risk-pool rating rules.

As explained earlier, those rules require an insurer to base its cost projections and resulting premiums for every individual-market plan by assuming that each plan is used by the identical population—namely, all of the insurer’s individual-market enrollees. If the same people enroll in silver plans that, altogether, pay 85 percent of covered claims, and in gold plans that pay 80 percent of claims, the silver plan’s costs, hence its premiums, should be higher than gold’s. But in most of the US, they are not.

In one rate filing that illustrates the broader trend, an insurer explained that its premiums were lower for silver than for gold plans, despite lower overall cost sharing in silver, because silver enrollees “behave fundamentally differently from members who choose gold level.” In effect, the insurer created separate risk pools for enrollees at different metal levels, with each pool reflecting the distinctive characteristics of people expected to enroll at the applicable metal level—precisely the “de facto mechanism for underwriting” condemned by CMS in the regulatory preamble quoted above.

When New Mexico sought to end those practices by promulgating clear rules for the individual market, most insurers’ initial rate filings fully complied with the new guidance. However, a few carriers tried to continue aggressively underpricing silver premiums. After the insurance regulator made clear that such non-compliant filings were problematic, the initially divergent insurers joined their peers in pricing plans based on coverage generosity, rather than the characteristics of expected members.

Why New Mexico’s Achievement Matters

New Mexico’s approach to premium alignment let the state make significant progress addressing the longstanding problem of high out-of-pocket costs in the health insurance Marketplace, without spending state general fund dollars. From 2017 through 2021, average single deductibles in healthcare.gov plans were roughly twice those in average employer-based coverage (exhibit 3).

Exhibit 3: Average single deductibles: Marketplace plans in healthcare.gov versus employer-sponsored insurance, 2014–21

Sources: Centers for Medicare and Medicaid Services Public Use Files, 2014–22 open enrollment period deductibles and health savings account enrollment; Henry J. Kaiser Family Foundation (KFF), 2021 Employer Benefits Survey. Note: Average deductibles in the exchange fell to $2,357 during the 2022 open enrollment period. KFF Employer Benefits Survey data are not yet available for 2022.

The Commonwealth Fund reported in 2020 that, compared to workers with group coverage, people in Marketplace or other individual-market plans were nearly twice as likely to have deductibles equaling at least 5 percent of income (27 percent versus 14 percent). Much evidence shows the impact of high deductibles in deterring use of essential care and imposing financial burdens, especially on low-wage workers and people with chronic illness.

It is easy to understand why, in 2020, then-presidential candidate Joe Biden proposed to reduce deductibles by making lower-deductible gold plans, rather than higher-deductible silver plans, the benchmark for advance premium tax credits. Congress provided additional financial help with premiums in the American Rescue Plan Act, making lower-deductible coverage more affordable for millions of people. But average deductibles in healthcare.gov plans still exceed $2,300 for consumers as a whole and $4,500 for consumers without CSRs. And no federal legislation has directly tackled the challenge of high out-of-pocket cost sharing for Marketplace families. State policies such as those in New Mexico are thus likely to be important vehicles for improving affordability of Marketplace plans in the coming years. New Mexico is building on this success by creating its own supplemental CSRs to further lower out-of-pocket costs for consumers beginning in 2023, funded by a health insurance premium assessment.

Prospects For Action In Other States

Policy makers in other states are increasingly recognizing the need to align metal-level premiums with coverage generosity so that premiums reflect differences between plans, not the populations expected to enroll in each plan. In one noteworthy example, the Texas legislature unanimously passed a bill in 2021 that instituted rate review and required premium alignment. The Texas Department of Insurance recently proposed standards that, much like New Mexico’s, would require carriers to use CMS-approved induced demand factors at all metal levels and to apply consistent assumptions about the statewide distribution of silver enrollment among CSR variants. These most recent steps follow on the heels of earlier action taken by state leaders in Maryland, Pennsylvania, and Colorado’s administration and legislature.

A Path To Affordability

A kind of “prisoner’s dilemma” has contributed to premium misalignment in much of the country. Both consumers as a whole and insurers as a whole are likely to be better off if premiums align with coverage generosity. But no single insurer can afford to follow the ACA’s rating rules if regulators let competitors gain a powerful competitive edge by violating those requirements. In setting clear rules of the road that are enforced to guarantee a level playing field, New Mexico has blazed a path to affordability while protecting consumers and insurers alike. That path is open to all states interested in lowering residents’ deductibles and other out-of-pocket costs.

Author’s Note

From July 2017 through June 2022, Dorn was affiliated with Families USA, which advocated for premium alignment policies in multiple states, including New Mexico.