EVEN SLIGHT INCREASES IN HEALTH CARE PREMIUMS may result in significant numbers of low-income Americans dropping out of the health care insurance market altogether. That is a key finding in a new research study released today, co-authored by Harvard Kennedy School Assistant Professor Mark Shepard.

The study analyzes data from Massachusetts’ health care insurance program known as “Commonwealth Care,” considered a model for the Affordable Care Act (ACA), to determine the impact of subsidy variations among different income groups. Such subsidies are considered a “textbook policy response” to induce low-income people in particular to purchase insurance.

“Established in the state’s 2006 health care reform, CommCare offers heavily-subsidized private plans to non-elderly adults below 300% of poverty who do not have access to insurance through an employer or another public program,” the authors write. “Public subsidies are substantial:  on average for our study population, enrollee premiums are only about $70 per month – or less than one-fifth of insurer-paid medical claims ($359 per month) or insurer prices ($422 per month).  There is also a mandate to have health insurance, backed up by financial penalties.” The mandate is similar to the one contained on a nation-wide scale in the ACA. 

The researchers determined that enrollee demand for insurance is extremely price sensitive.

“As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each $40 increase in monthly enrollee premiums,” the authors write, explaining that the percentage of lower-income consumers willing to buy insurance drops to just 70% even when the subsidy represents 90 percent of the price charged by the insurer. “As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers’ average costs, at most half of potential enrollees would buy insurance, and even premiums subsidized to 10% of average costs would still leave at least 20% uninsured.”

The authors also found that when premiums increase, the people who drop out of insurance tend to be some of the healthiest and lowest-cost enrollees. This tendency, which economists call “adverse selection,” means that the people who remain insured tend to be sicker and have higher average costs. Average medical costs of the insured population increase by $10-$50 per month (3-14%) with each hike in premiums, the researchers stated.

“Our results suggest that unless enrollee premiums are set substantially below average costs, the market for low-income health insurance would significantly unravel,” the authors concluded. “From a positive economics perspective, our results point to substantial challenges in generating universal coverage via partially subsidized insurance programs like the ACA’s exchanges….More generally, our results help predict and explain low take-up of even heavily subsidized insurance for low-income adults.”

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Mark Shepard

Associate Professor of Public Policy

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