1. Report on RFP
COHIEX #0001
For an
Independent Consulting Firm
to Conduct Background Research
to Support the Development of the
Colorado Health Benefit Exchange
Submitted by
Jonathan Gruber
January 2012

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I. Introduction
The Colorado HealthBenefitExchange will be anew marketplace where individualsandsmall
employerswill be able toshopforand purchase healthinsurance.Duringthisplanninganddevelopment
phase,Coloradofacesawide varietyof choices,suchas: How to designexchangesandoutside
insurance marketstominimize adverse selection? Whatrole can reinsurance,riskadjustment,andrisk
corridorsplayin conjunctionwithexchangestoensure afairdistributionof risksacrosspayers? Howto
bestintegrate the individualandSHOPexchanges? Shouldthe state merge individual andsmall group
insurance poolsforratingpurposes?
Effective state policy-makingonexchanges,therefore,willrequiretwokeyanalyticinputs. The
firstisa richunderstandingof the existing healthinsurance market. Onlybycarefullyunderstandingthe
distributionof state populationacrossinsurance types,andthe pricespaidbyindividualsandfirmsfor
that insurance,canthe state assesshowthose individualsandfirmswillreacttothe changesinthe
insurance environmentthatwill arisedue tothe implementationof currentfederallaw. The secondisa
dynamicmodel of exactlyhowindividualsandfirmswillrespondtothe implementationof federal law,
includingthe launchingof the ColoradoHealthBenefitExchange andnew financial assistance thatwill
be available tocertaincustomers.
Thisreportdescribesthe resultsof oureffortstoaddressboththose needsinordertoprovide
the essential inputstoexchange planningforthe state of Colorado. We have done so bydrawingon the
rich array of data that is available forColoradoonindividuals,firms,andthe insurance environmentin
whichtheyfunction. We use these datato undergirdaneconomicmicrosimulationmodelthathasbeen
developedoverthe past12 yearsto undertake exercisesexactlylikethose requiredbythisRFP,
supportedbya careful analysisof insurance marketdataforthe state carried outby actuarial experts.
We begin,inPartII,by providingbackgroundonthe model we will be usingforthisworkas well
as the wide varietyof excellentColorado-specificdatasourceswe planto draw onfor thisanalysis. In
Part IIIwe discussthe characteristicsof Coloradoinsurance marketsbefore the implementationof
healthreform. PartIV presentsourprojectionsof the effectsof the Exchange and currentlyenacted
federal lawonthe state. Part V concludeswithadiscussionof resultsandrecommendationsforfuture
work.

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II. Background on Model and Data
The Gruber Microsimulation Model
The core of our analysisisthe GruberMicrosimulationModel (GMSIM),whichcomputesthe
effectsof healthinsurance policiesonthe distributionof healthcare spendingandprivate andpublic
sectorhealthcare costs. Thismodel hasbeenused overthe pastdecade bya wide variety of state and
federal policymakerstoanalyze the impactsof healthinsurancereforms. Thismodel wasfirst
developedin1999 foruse in estimatingthe impactof tax creditsonhealthinsurance coverage,with
fundingfromthe KaiserFamilyFoundation. Overthe subsequentdecade,the model’scapabilityhas
beenexpandedtoconsiderthe full varietyof possible healthinterventions,includingpublicinsurance
expansions,employerorindividual mandates,purchasingpoolsforinsurance,single payersystems,and
more.
GMSIM has beenusedby the federal governmentandby a numberof statesto model state-
specifichealthinsurance reforms. GMSIMmodelinghasbeenusedinMassachusetts, California,
Connecticut,Delaware,Kansas,Michigan,Minnesota,Oregon,Vermont,WisconsinandWyoming.
Data Sources
GMSIM draws ona numberof excellentdatasourcesavailable forColorado. We review here
the major data sourcesthatform the basisof our analysis.
The Colorado Household Survey
For national work,GMSIMhas reliedonthe CurrentPopulationSurvey(CPS),anationally
representative surveywhichprovidesdetaileddataoninsurance coverage,employerinsurance offering,
healthstatus,anddetaileddemographicinformation(income,race,age,etc.). Coloradohasan
excellentsource of datathroughthe ColoradoHouseholdSurvey(COHS)collectedbythe Colorado
Departmentof HealthCare PolicyandFinancing(HCPF) in2008-09. This surveyof 10,000 randomly
selectedhouseholdsprovidesvirtuallyall of the same informationasthe CPSsample thatprovidesthe
basisfor GMSIM. We can therefore readilyrecalibrate the frontendof the model toworkwiththe
COHS data insteadof the CPS. We’ve usedboththe targetand householdfilesof the COHS.
The transitionbetweenourCPSdata and the COHS isnot perfectlyseamless;forexample,there
issome data collectedbythe CPSthat isnot collectedbyCOHS(suchas the availabilityof employer-
sponsoredinsurance forsome householdmemberswhoare notthe surveytarget). But we have

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developedimputationmethodologiestodeal withthismissinginformationinthe COHSsothat the
GMSIM runs seamlesslyonthese state-specificdata. It is possible thatsurvey estimatesof Medicaid
enrollmentmaydifferfromadministrative totalsin thatsurveyrespondentstendtounder-report
Medicaidcoverage.Thisphenomenoniswell-documentedandoccursinbothstate and federal surveys
of healthinsurance coverage.
Our sample excludesthose whoare age 65 andover,whoare coveredbymilitaryhealth
insurance,orwhoare receivingMedicare becausetheyare disabled. We will focusonpoint-in-time
definitionsof insuranceanduninsurance.
To update the demographicandeconomicinformationin the COHSforfuture years,we utilize
projectionsfromthe state andthe Congressional BudgetOffice. Startingwith2011 baseline numbers,
we have total populationincrease 1.25%peryear.For publicinsurance growth,we use growth
estimatessuppliedby the State of Coloradoupuntil 2013. For those same years,the otherthree
insurance typesabsorbthe remainingpopulationincreaseproportional totheirsize inthe previousyear.
For all yearsafter2013, the four insurance types (employer,individual, publicanduninsured)divide the
total populationincrease amongthemrelativetotheirsize inthe precedingyear. The rate of inflationof
healthcare spendingcomesfromCBO(andaveragesabout6% per year).
IndividualInsuranceMarketData
Analysis of the impactof the Exchange and enactedfederal law onthe non-groupmarketwas
largelycarriedoutby WakelyConsultingGroupandisdescribedintheircompanionreport. Wakely
collectedinformationfromthe sevenmajorinsurersinthe individual market,representingover90%of
the market,as well asinformationfromthe state.
Otherdata
To measure the premiumsfacedinthe groupmarket,we use datafrom the Medical
Expenditure SurveyInsurance/EmployerComponent(MEPS-IC). These datarepresenta verylarge
sample of employersthatare surveyedontheirinsurancedetails,includingpremiumsandthe sharing
rulesforpremiumsbetweenemployersandemployees. The MEPS-ICprovidesstate-specificandfirm-
size specificinformationthatcan allowusto impute premiuminformationontobothlarge andsmall
firmsinthe state. To capture publicinsurance costsperenrollee,we relyondataprovidedtousby the
ColoradoDepartmentof HealthCare PolicyandFinancing.

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How GMSIM Works
GMSIM usesthe data sourcesdescribedabove toestimate the impactof healthpolicychanges
on individuals,firmsandgovernments. GMSIMis able tocarefullyintegrate all of the keyfeaturesof
enactedfederal law,includingbutnotlimitedto:
 The introductionof tax creditsforlow income families
 The individual mandate
 Tax creditsforsmall businesses
 Penaltiesforbusinesseswhose employeesgetfederal tax credits
 Reformedinsurance marketswithmodifiedcommunityratingandguaranteedissue withno
preexistingconditionsexclusions
 Regulationsonminimuminsurance coverage,suchasmandatedbenefits,maximumdeductibles
for small businesses,andoutof pocketmaximums
 Regulationsoninsurers,suchasmandatesfordependentcoverage,coverage of preventive care
withno patientcostsharing,andminimumMedical LossRatio(MLR) restrictions.
 The introductionof a state insurance exchange
GMSIM firstturns these policyrulesintoasetof insurance price changes. Forexample,forthe
newlyavailable tax credits,the modelcomputesthe impliedpercentage change inthe price of nongroup
insurance foreachindividual inthe model. These price changesare thenrunthrougha detailedsetof
behavioral assumptionsabouthowchangesinthe absolute andrelative price of varioustypesof
insurance affectindividuals,families,andbusinesses. The keyconceptbehindthismodelingisthatthe
impactof tax reformson the price of insurance continuouslydeterminesbehaviorssuchasinsurance
take-upbythe uninsuredandinsurance offeringbyemployers. The model assiduouslyavoids“knife-
edge”type behavior,wheresome critical levelisnecessarybefore individualsrespond,andbeyond
whichresponsesare verylarge. Instead,behaviorismodeledasacontinuousfunctionof how policy
changes(netof tax) insurance prices.
A keysetof price changeswill arise fromnew federal regulationsonthe individual market,
includingthe minimumessential benefitspackage,the minimumactuarial value requirement,and
communityrating. To incorporate the impactsof these regulatorychanges,GMSIMisintegratedwith
actuarial resultsfromWakely’smodel. Inparticular,Wakelyusesthe datadescribedabove tomodelthe
effectof these regulationsonthe price of eachindividualmarketproductofferedbythe insurersintheir

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data, foreach age group, accountingforhealthstatusadjustment. Boththe baseline individualmarket
premiums,andthe change inthose premiumsdue tothese new regulations,are thenincorporatedinto
GMSIM.
In doingthistype of analysis,anumberof assumptionsmustbe made abouthow individualswill
respondtotax subsidies,throughtheireffectonthe price of insurance. These assumptionshave been
developedbasedonthe available empirical evidencefromthe healtheconomicsliterature,towhichDr.
Gruber isa major contributor.1
The single mostimportantdeterminantof healthinsurancecoverage iswhetherindividualsare
offeredhealthinsurance attheirplace of employment. A fundamental problemfacedbyindividual-
basedmicro-simulationmodelsisthatdata onindividualsdoesnotreflectthe nature of theirco-
workers,sothat itis impossible to exactlycompute the completeincentivesforeachfirm. Forexample,
small firmtax creditsare basedonboth firmsize andfirmaverage wages,butdata suchas the COHStell
us justaboutthe sampledworkersowe can’tcompute average firmwages. GMSIMaddressesthis
problembybuilding“syntheticfirms,”assigningeachCOHS workera setof co-workersselectedto
representthe likelytrue setof co-workersinthatfirm. The core of thiscomputationisdatafrom the
Bureauof Labor Statisticsthatshow,forworkersof any givenearningslevel,the earningsdistributionof
theirco-workers. Usingthese data,othersample individualsare randomlyselected inorderto
statisticallyreplicate the earningsdistributionforthatworker’searningslevel. These workersthen
become the co-workersinasyntheticfirm. We can thenmodel firmdecisionsbasedonthe
characteristicsof their(syntheticsetof) workers.
One of the importantfeaturesof GMSIMisa detailedmodelingof how employerswillrespond
to newfinancial incentives. Inthe model,employersface three decisionsaboutinsurance: offering
(whethertoofferif nownotoffering,orwhethertodropif now offering);the divisionof costsbetween
employerandemployees;andthe levelof insurance spending. Eachof these decisionsismodeledas
subjectto“pressures”fromgovernmentinterventions. Inparticular,subsidiestooutside insurance
options(suchasthe expansionof Medicaidortax creditstothe exchange) exertpressuresonfirms
currently offeringinsurance todropthatinsurance andto raise employee contributions (inorderto
1 These assumptions and the broader structure of the model arepresented in depth at http://econ-
www.mit.edu/files/5939

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induce theiremployees tochoose the outside option);subsidiestoemployerspendingoninsurance
(suchas the small businesstax credit) exert pressureson firmsthatdon’tnow offerinsurance tobe
more likelytoofferand causesfirmstopickup a larger share of the cost of insurance aswell asto
increase insurance generosity; andpenaltiesonfirmsthatdonot offerinsurance causesfirmstonot
drop insurance.
III. The Insurance Market in Colorado Before Reform
In thissectionwe describe avarietyof aspectsof the insurance marketinColoradoasit stands
in2011. This providesimportantbackgroundforthinkingaboutthe changesthatare expectedin2014.
Note that thisanalysisdoesnotconsiderthe impactsof plannedbutnotyetimplementedexpansionsin
publicinsurance inthe state.
Table 1 showsthe overall distributionof insurance coveragein2011. The total populationof
the state for 2011 is estimatedtobe 4.3 millionpersons. The mostcommonsource of insurance is
employer-sponsoredinsurance(ESI),withover2.6 millionpersonscoveredthroughESI,orover60% of
the state’spopulation. Mostof these individualsare inlargerfirms(above 50 employees),assmall firms
are muchlesslikelytooffercoverage. There are 308,000 individualswithnon-groupcoverage,while a
slightlyhighertotal of 465,000 have publicinsurance throughthe MedicaidorSCHIPprograms. This
figure islowerthantotal administrativecountsforpublicinsurance inthe state since itexcludesthe
elderlyandthose whoare disabledcoveredbyMedicare andMedicaid. Finally,830,000 persons,or
19% of the non-elderlypopulation,lackinsurance.
Figures1-9 provide summarystatisticsonuninsuredindividualsinColorado. These figures
presentanarray of importantfactsabout those whoare uninsuredinthe state.
 Figure 1: Offering Status. The vastmajorityof the uninsuredare notofferedemployer-
sponsoredinsurance today;accesstoESI inColorado,asnationwide,isthe keycorrelate
of insurance coverage. Atthe same time,roughly two-fifthsof the uninsuredare
offered(andeligible for) ESIandchoose notto take it; thatgroup, whoare turningdown
largelysubsidizedinsurance,are amajor targetof the individualmandate.
 Figure 2: Income. The uninsuredare poorerthanaverage, withroughlythree-fifthsof
the uninsuredpopulationhavingincome below twicethe povertyline(the povertyline

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in2011 is $22,350 for a familyof four). But at the same time there are a non-trivial
numberof uninsured,aboutone-eighth,withincomes abovefourtimesthe povertyline
(above the income limittowhichpremiumtax creditsare available).
 Figure 3: Age. There isa wide age distributionof the uninsured. The mostcommonage
groupis 25-34 year olds,butat leastone-tenthof the uninsured are ineachof the six
age bandsshowninFigure 3.
 Figure 4: Gender. The uninsuredare slightlymore likelytobe male.
 Figure 5: Racial Composition. The uninsuredare more likelytobe minoritiesthanisthe
overall non-elderlypopulation. Sixty-threepercentof the uninsuredare white
(comparedto73% for all non-elderlystate residents),while 24% are Hispanic(compared
to 14% forall non-elderlystate residents).
 Figure 6: Family Structure. The largestgroupof the uninsuredare childlessadults,
followedbysingle-parentfamiliesandcoupleswithchildren. Note thatuninsured
childrenare includedinthe “couple withchildren”andthe “single parent”categories.
 Figure 7: EmploymentStatus. Aboutthree-fifthsof the uninsuredadultsinColorado
are employed(fullorpart time). Thismirrorsthe national portraitof the uninsuredas
the “workingpoor.”
 Figure 8: Health Status. The COHS providesafive categorymeasure of self-assessed
healthstatus. Slightlymore thanone-half of residentsrankthemselvesasinexcellentor
verygoodhealth,while lessthanone-quarterrankthemselvesasinfairor poor health.
Thispopulationappearsmuchmore ill thandoesthe overall non-elderlypopulation,
where roughlytwo-thirdsare inexcellentorvery goodhealthandonlyabout10% are in
fairor poor health.
 Figure 9: ReasonsforNotAccepting ESI Offer. As notedearlier,about40% of the
uninsuredare offeredESIbutare not enrolled. The predominantreasongivenbynon-
enrolleesiscosts. Some individualsare alsonotyeteligiblebecause theyare ina
waitingperiod.
 Figure 10: Lengthof Time Uninsured. Amongthe uninsured,thereisawide distribution
of the amountof time that theyhave beenuninsured,butmostuninsuredhave been
uninsuredforalongtime. Only20% of the uninsuredreportthemselvesashavingbeen
uninsuredforlessthanone year,while 23% reportthemselvesasbeinguninsuredfor
more than 5 years.

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IV. The Impact of Reform onInsurance Coverage
MovementsAcrossInsuranceCategories
In thissection,we use GMSIMto estimate the impactof reformonmovementsof individuals
across insurance categories. We begin,in Table 2, by showingthe netchangesininsurance coverage in
the state in 2016. We choose tofocus onthisyear because Ifollow the CongressionalBudgetOffice in
assumingthatit takesthree yearsforthe full impactsof the law to be felt;we will show year-by-year
resultsbelowaswell.
In undertakingthisanalysis,the impactsof enactedfederal law onColoradoare computedby
comparingoutcomesinthe state to the outcomesthat wouldhave occurredabsenthealthcare reform.
That is,we projectthe situationinthe state in2016 absentreform, andthenthe situationafterreform,
and take the difference. We label thisscenariothe “noreform”scenario.
We estimate averymodestimpactof the reformon the numberof personswithemployer-
sponsoredinsurance. Total employer-sponsoredinsurance coverage doesnotchange. Insurance
coverage actuallyrisesby a verysmall amountinsmall firms,andfallsbyan offsettingsmall amountin
largerfirms. Aswe discussbelow,these small netimpactsreflectsomewhatlargerchangesingross
movementsof ESI.
The nexttwo rowsshowthe projectedchangesinenrollmentinthe individual market. Absent
reform,we projectthat360,000 personswouldbe enrolledinthe individual market. Reformshrinks
that figure by80%, withthe remaining70,000 personsconsistingof those whoare “grandfathered”into
theiroldindividual plans. Atthe same time,a reformedindividual marketemergeswithenrollmentof
620,000 persons,includingmostof those fromthe non-reformedmarket,those whopreviouslyhad
othertypesof insurance coverage andthose whowere previouslyuninsured.
We estimate asizeable increase inthe numberof individualswithpublicinsurance coverage,
whichrisesby150,000 personsmore than200% of the numberabsentreform.2
Finally,we estimate
that the numberof uninsuredindividualsinthe state willfall byabout480,000, or about55% of the
numberof uninsuredabsentreform. Below we willdiscussthe reasonsthat390,000 residentsremain
uninsured.
2 These estimates exclude the expansions in public insurancecoverageslated to take placein 2012. These
expansions will enroll 10,000 very lowincome individuals (below10%of the poverty line) and implement a new
insurancebuy-in programfor the low-income disabled.Therefore, the 2016 public insurancefigures displayed in
Table 2 for the no reform caseare underestimated by atleast10,000 individuals.

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Evolution OverTime
In Figure 11 we showthe evolutionof coverage overtime. We considerfivemajorinsurance
categories:ESI,unreformed(grandfathered) individual insurance,reformedindividual insurance,public
insurance,anduninsured. Ineachyear,we show the change inthat categoryrelative totoday(2011).
So,for example,inthe firstyearof reformwe findthatemployer-sponsoredinsurance goesup
modestly,due tothe mandate andsmall businesstax credits,butby2016 the effecthasfallentoclose
to zero.
The numberof uninsuredfall rightawayin2014 and the reductioncontinuestogrow overtime.
The size of the unreformedindividualmarketfallsimmediately,andcontinuestoshrink,whilethere isa
large jumpinreformedindividualinsurance thatcontinuestogrow. There isalsoa steadyrise inpublic
insurance.
The Size of the Exchange
Of paramountimportance forColoradoisprojectingthe size of the state’sinsuranceexchange.
There isconsiderable uncertaintyaroundthe size of the exchange,however.
Thisreformedindividualmarketconsistsof twopopulations,thosewhoreceivetax credits,and
those whodo not;the vastmajorityisinthe formercategory. Individualsinthismarketwill purchase
insurance eitherinthe newstate healthinsuranceexchange,orthroughplanssoldoutside the
exchange,butinthe reformedmarket. The same pricingrules(inparticularcommunityrating)will
applyto bothparts of the reformedmarket. The most importantdifference betweenthe exchange and
the outside marketisthatindividualsreceivingtax creditscanonlydo so throughthe exchange,andthat
any small firmsthatreceive the small businesstax creditmustpurchase insurance throughthe SHOP
exchange. Individualsandbusinesseswhodonotwishto use tax creditsare free topurchase insurance
eitherinside the exchange orin the outside reformedmarket.
The uncertaintyinprojectingthe size of the exchange thereforearisesfromthe uncertaintyin
forecastingthe locationof insurance purchasedfornon-tax creditrecipients. The ultimate decisionon
where tobuy insurance will dependona varietyof factors(otherthanprice,whichwill be the same
inside andoutside the exchange),manyof whichare to be decidedbythe exchange board(e.g.the set
of insurance offeringsinthe exchange).
In the face of thisuncertainty,Table 3providesarange of estimatesforthe size of the
exchange. The firstrowshowsthat 460,000 individualsandtheirfamilieswillavail themselvesof tax

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creditswithinthe reformedindividual market,sothatthisprovidesabase of enrollmentforthe
exchange. We projectthatanother80,000 small businessemployeesandtheirdependentswill take
advantage of the small businesstax creditandenroll ininsurance theiremployerhaspurchasedthrough
the SHOP exchange. Thus,the exchange (acrossindividual andSHOP) willhave enrollmentof atleast
540,000 lives. Atthe same time,there are another160,000 personsprojectedtobe buyinginsurance in
the reformedindividualmarketwithouttax credits,andanother260,000 personsprojectedtoreceive
small groupinsurance coverage fromfirmsnotreceivingthe small businesstax credit. Some share of
these populationswillpurchase throughthe exchange. Sowe canconclude that the size of the
exchange will be between540,000 and960,000.
The Newly Insured
A populationof particularinterestisthose previouslyuninsuredindividualsgaininginsurance
coverage. AsFigure 12 shows,the sourcesof coverage forthe newlyinsuredare fairlywelldivided
betweenESI,publicinsurance,and(the largestcategory) tax-creditsubsidizedcoverageinthe exchange.
There isa small slice of previouslyuninsuredwhoare now takingcoverage evenwithoutthe tax credit,
presumablybecause of the mandate orrevisedratesinthe individual market.
Figures13 and 14 describe the characteristicsof the newlyinsuredpopulation. Thisgroupis
fairlyevenlydistributedbetweenthose below 133% of poverty,from133-200% of poverty,andfrom
200-400% of poverty. On the otherhand,there are veryfew newlyinsuredabove 4timesthe poverty
line. The largestage group of newlyinsuredisthose age 25-34, but there are newlyinsuredthroughout
the age distribution.
Table 4 summarizesthe coverage ratesof the previouslyuninsuredbydemographicgroup. Two
keypointsemerge fromthisanalysis. First,amongchildrenandadultfemalesage 19-44, the major
source of newcoverage will be employercoverage;foradultmalesandolderadultfemales,the major
source of newcoverage will be individual coverage. Second,amongchildrenandadultfemales19-44,
the rate of newinsurance coverage ismuchlowerthanamong adultmalesandolderfemales. Thismay
reflectthe factthat these firsttwogroupswere alreadyeligible forpublicinsurance inmanyinstances,
so that there isa lowerrate of expandedentitlementsforthese groups.3
3 Note that the total number of previously insured gainingcoverage,510,000,is higher than the net risein
insurancecoverage,490,000. This is becausethe net reflects a small offsettingrisein uninsurancefromfirm
dropping,as discussed in the next section.

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Finally,Table 5showsthe full cross-tabulationof movementsacrossinsurance categories.
Those whowere ex-ante onindividual insuranceoronpublicinsurance byandlarge stay withthose
sourcesof coverage. But there are sizeable movementsfromESIto the othercategoriesof coverage,
and evenlargermovementsfrombeinguninsuredtothe three sourcesof coverage.
Who Are the Remaining Uninsured?
A sizeable numberof residentsof Colorado(390,000) remainuninsuredafterreform. Figure 15
breaksdownthe reasonsforthislack of insurance coverage. About8% of those whoremainuninsured
were actuallyinsuredbefore reform,buteither(a) lostcoverage due todroppedemployersponsored
insurance,(b) chose toleave employer-sponsoredinsurance becauseof arise in employee contributions
or (c) chose to stoppurchasingindividual insurance becauseof anincrease inindividual premiums. The
largestgroupof remaininguninsuredisundocumented immigrants,whoare noteligible foreithernew
publiccoverage ortax creditstowardsnongroupcoverage (aswell asnotsubjecttothe mandate). The
secondlargestgroupisthose not subjecttothe mandate. Slightlymore than20% of the remaining
uninsuredare those whoare subjecttothe mandate butchoose to remainuninsured.
Figures16 and 17 drill downfurtherintothese lattertwogroups,thatisjustfocusingonthe
roughly350,000 individualswhoremainuninsured(andnotthose thatlose insurance). Figure 16
showsthe income breakdownsforthose notsubjecttothe mandate,eitherbecause(a) theirincomes
fall belowthe tax filingthresholdandsoare notpenalizedor(b) the lowestcostinsurance available to
them(eitherESIor individual insurance withtax credits) costsmore than8% of theirincome. AsFigure
16 shows,the majorityof those notsubjecttothe mandate are low income individuals,althoughalmost
one-third are above 400% of poverty,where tax creditsare notavailable and the individuals
presumablycannotaffordunsubsidizedcoverage(note thatthe categoryfor133-200% of povertyis
missinghere since there are veryfewindividualsinthatrange not subjecttothe mandate). Figure 17
showsthe breakdownof individualswho are subjecttothe mandate penalties,butwhochoose to
remainuninsured. Once again,the majorityof suchindividualsare lowerincome individuals,withabout
45% above 200% of poverty,butnowthere are more individualsinthe 133-400% of povertyrange.
WhatHappensto ESI?
Figure 18 drillsdownfurtherintothe relativelymodestchange inemployer-sponsoredinsurance
showninTable 2. First,we divide firmsintosmall andotherfirms,aswell asshowingtotals. Foreach
of these categories,we thendecompose the netchange inESIintoitsthree components:those who

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were droppedfromcoverage;those whovoluntarilyleftcoverage(eitherbecausetheywere newly
eligible forpublicinsurance,foundindividual coveragemore attractive,orwere faced withhigher
employeecontributions);andthose whotookupcoverage (largelybecauseof the mandate). About
60,000 individualswere droppedfrominsurance coverage bysmall firms,withasmallernumberbeing
droppedbyotherfirms;thisreflectsresearchshowingthatsmall firmsare muchmore price sensitive in
theirinsurance offeringdecisions. Onthe otherhand,manymore individualsvoluntarilyleaveESIfrom
largerfirms. Andthere isa sizeable inflow of new enrolleesintoESIforall firmsizes. Onnet,aswe
showedinTable 2, the change in ESIis small.
V. The Impact of Reform onIndividual Market Premiums
Modeling IndividualMarketPricing
Thissectiondescribesthe impactof reformonpremiumcostsinthe individualmarket. Asnoted
earlier,thismarketconsistsof three populations:those whoremainintheirgrandfatheredindividual
plans;those whomove intothe exchange;andthose whomove intothe reformedindividualmarket
outside of the exchange. Those whoremaininthe grandfatheredmarketsee nochange intheir
premiums. The othertwogroupswill see changesdue tothe new regulations;we will notdifferentiate
betweenthesetwogroupshere because theyare pooledbyinsurancecompaniesforpricingpurposes.
WakelyActuarial andGMSIM focuson modelingsix impactsof enactedfederal law onpremiums
inthe individual market. The firstisthe requirementthat all benefitplanscoverservicesforcertain
essential benefits,some of whichare oftenexcludedinthe currentindividual market. The definitionof
essential benefitsisstill notfullyunderstood,particularlyaroundpotential minimumcoverage levels,
and furtherregulationsare stillforthcoming. Forthisanalysis,itisassumedthatessential benefits
include butare not limitedtothe listprovidedinthe legislation;itisassumedthatanyadditional
essential benefitswouldbe offsetbyotherchangesinthe regulationstokeepthe price of aminimum
insurance package constant. Since mostplansinthe marketcover the vast majorityof the essential
benefits,Wakelyestimatesthatthischange will increasepremiumsbyonly2.2% on average.
The secondis the restrictionplacedonthe individual andsmall groupmarketsthatall plans
mustmeeta minimum“actuarial value”of 0.6; inother words,fora typical population,plansmustcover
at least60% of the costs of medical care onaverage. While thisisquite alow floorrelative togroup
insurance,anumberof those inthe individual marketholdplanswhichare lessgenerousthanthislevel.
Wakelyestimatesthatabout39% of those inthe individual marketholdplanswithanactuarial value

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belowthislevel;enforcingthisnewminimumstandardwill therefore raise premiumsby5.3% on
average.
The third factoris the requirementthatinsurersmaintainaminimumlossratioof 80% for the
individualmarket(orpayrebatesbackto enrollees). While notall of the detailsforthisrequirement
have beenfinalized,itisexpectedthatsome expensesthattraditionallyfell underadministrative
expenses,suchascosts fordisease managementprogramsornurse lines,willnow be categorizedas
claimcosts. Wakelycomputesthat,onaverage,premiumswill fallby3.3% due to reductionsin
administrativeoverheadandotherfactors.
Fourth,the existinghighriskpool (HRP) will be foldedintothe new exchange. Wakely
estimatesthatHRPparticipantsare estimatedtohave about2.4 timesthe claimsrisk (i.e.,morbidity) of
the currentlyenrolledindividual marketpopulation. Incorporatingtheseindividualsintothe exchange
raisesultimate exchangespremiumsby5.5%.
Fifth,there will be premiumreductionsdue tothe managedcompetitionefficienciesintroduced
by the exchange. Individualswhopreviouslyhadtoshopina fragmentedandnon-transparent
individualinsurancemarketwillnowbe able toclearlycompare manyoptionsforindividual insurance
on an apples-to-applesbasis. Thistype of managedcompetitionhasbeenshowntoleadtoreduced
premiumsinothercontexts,andforthatreasonGMSIM followsthe CongressionalBudgetOffice in
assuminga 7.5% efficiencygainfrommanagedcompetition.
Finally,andmostimportantly,the federalgovernmentplacesrestrictionsonthe ratingfactors
that are commonlyusedinthe individual market. Forexample,underwritingfactorsare frequentlyused
by insurersinthe individual markettoprice insurance more inline withexpectedcostsforanindividual.
These underwritingfactorscanbe a significantadjustmenttothe premiumscomparedtothe premiums
for a similarenrollee withaverage healthrisk. Under enactedfederal law,onlytobaccofactorswill be
allowedwithamaximumpremiumratioof 1.5 to 1.0. Similarly,there iscurrentlyno limittohow much
an insurercan charge an enrollee basedontheirage orgender. Ratescan notdifferbasedongender
alone,andthe maximumratioof the highesttolowestadultrate is3 to 1. Currently,mostinsurershave
rate ratiosof around 5 to1 (or greater) foradults,withthe 64 yearoldshavingthe highestrate andthe
19 year oldsthe lowestrate.
These changesinratingruleswill have noaverage effectonthe premiumsthatindividual
insurerscharge a givenbookof business;theywill simplyredistributepricesacrossenrollees.Most
enrolleeswhoare currentlyratedupwill see asignificantpremiumdecrease whilethose withpreferred
or standardrates will see apremiumincrease;likewise youngerenrolleeswillsee large premium

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increaseswhileolderenrolleeswill likelysee decreases. Thiswill have impactsonaverage premiumsin
the reformedindividualinsurance markettothe extentthatthe morbidityinthatmarketchanges. That
is,if olderand lesshealthyuninsuredindividualsrespondtothese new regulationsbypurchasing
individualinsurance,thenthe average price inthe reformedmarketwillrise.
To incorporate these effectsintothe modeling,Wakelyprovidedinformationonthe change in
nongrouppremiumsbyage andhealthstatus,whichwasthenmatchedintoGMSIM. GMSIM is then
usedto model the changingcompositionof the reformedmarket,andthe resultingeffectson
premiums.
It isimportantto recognize some limitationsinourmodelingof prices. Inparticular,given
publiclyavailable datawe cannotincorporate the effectsof the banon pre-existingconditions
exclusions. Thisbanwill cause arise inpremiumsasinsurersare forcedto coverconditionsthatthey
had previouslyexcluded. Inaddition,thereare new premiumtaxesoninsurersthatwill raise premium
rates. On the other hand,we assume inthe modelingthatthe state incorporatesitshighriskpoolsinto
the reformedindividualmarket. The existinghighriskpool is currentlysupportedbyassessmentson
insurers. If those assessmentsremainedinplace andwere usedtooffsetthe highcostsof verysick
individualsinthe reformedindividual market,itcouldleadtolowerpremiumsinthatmarket.
Moreover,temporaryreinsurance isintendedtohelpoffsetthe transitional costsof a highermorbidity
individualinsurancemarket,whichwill alsolowerpremiumsinthe individual marketfrom2014 through
2016. Overall,we cannotpredictthe netimpactsof these factorson premiumswithoutmore analysis.
Results
The resultsof our analysisof premiumimpactsonthe individual marketare showninTable 6
and Figure 19. These figuresfocusonthose whoare initially,and whoremain,inthe individual
insurance market, eithergrandfatheredorinthe reformedmarket. Withnoreform, we projectan
average premiumforthe individual insurance marketin2016 of $5570, and an average actuarial value
of about0.6. Thismeansthat for the typical enrollee,individual marketinsuranceproductsonaverage
covered60% of theirmedical spending. Reformraisespricesinthe individual market,withthe average
premiumrisingby19%. At the same time,insurance becomesabout11% more generousonaverage,
partlydue to the mandatesdescribedabove,andpartlydue toindividualschoosingricherinsurance
withtheirtax credits.
While pricesrise onaverage,formanyenrolleesinthe individual marketthisisoffsetbythe
newtax credits. As the lastcolumnof Table 6 shows,afterapplyingtax credits,premiumcostspaidby

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consumersinthe individualmarketfall considerably,by27% on average. Thus,afterthe
implementationof enactedfederal changes,aswell asthe introductionof the exchange,,those who
stay inthe individual insurance marketseeasizeable reductioninpremiumcostsandmore generous
insurance coverage.
The distributional impactsonpremiumsare exploredinFigure 19,whichdividesthose stayingin
the individual marketintobucketsbytheirpercentagechange in(aftertax credit) premiumcosts. More
than one-thirdof those inthe marketsee adecline inpremiumcostsof more thanhalf;thatis, forone-
thirdof those inthe individualmarket,theirpremiumcostsfall bymore thanhalf. Overall,70% of those
currentlyenrolledinthe individualmarketsee reductionsinpremiumcosts,17% see no change in
premiumcosts,and13% see a rise inpremiumcosts. Only7% of enrolleessee arise inpremiumcosts
of more than10%.
VI. The Impact of Reform onHouseholdBudgets
The nextstepinthe analysisistoconsiderthe impactof reformnot onlyoninsurance coverage
inthe state,butalsoon householdbudgets. We doso bycomputingthe additional householdbenefits
and costsdue to enactedfederal lawto determinethe netimpactonhouseholdbudgets.
Budgetaryeffectsonhouseholdsderive fromanumberof sources. The firstisthe higherwages
that arise fromreducedemployerspending,throughfirmdroppingandloweremployercontributions
towardshealthinsurance (althoughthisispartiallyoffsetbyhigherESIenrollmentamongthose
previouslyeligible). Thisreducedemployerspendingispassedthroughinthe formof higherwagesto
employees. The secondisexchange tax credits;forthisanalysis,we consideronlythe tax credits
receivedbythose whowouldbe uninsuredabsent enactedfederal law. Those whoare insuredeither
withor withoutthe lawwill alreadysee the benefitsof the tax creditsasa decrease inpremium
spending,andthusitwouldbe double-countingtoconsiderthemhere. The thirdcomponentis
Medicaidexpenditureonthose gainingMedicaidcoverage;once again,benefitisalsoonlyconsidered
for those whowouldotherwise be uninsuredtoeliminate concernsof double-countingforthe
previouslyinsured. Sothose individualsalreadyenrolledinpublicinsurance seenobenefitsfromthe
expansioninthe program. The fourthisESI premiums paidbyemployees,whichwill godownas
employersdrop insurance,butmayrise as the remainingemployersshiftthe costof insurance totheir
employees. The fifthisspendingonindividual marketpremiums,whichwill rise due tomore enrollment
inindividual insurance markets,butfall due toexchange creditstothose whoremaininthe non-group

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market. The sixth isoutof pocketspending,whichishealthcare spendingthatispaiddirectlybythe
household,throughcostsharinglike deductibles,copaymentsandcoinsurance forthe insuredorfor
care receivedby the uninsured. The final costcomponentischange intaxes,whichisthe resultof
higherwagesasfirmsthat drop insurance raise theiremployees’ compensationthroughdirectpay,as
well asthe newMedicare taxesthatare leviedonthe wealthytofinance reform.
Table 7 providesestimatesof the impactof the ColoradoHealthBenefitExchange andenacted
federal lawonhouseholdbudgetsinColoradoin2016. Overall,the neteffectispositive,withColorado
householdbudgetsimprovingby$1.8 billion,or$790 perhousehold. The largestsinglesource of
benefitsisexchange creditsforthe previouslyuninsured,whichamountstomore thanhalf of the net
gains;there isalsoan enormoustransferthroughincreasedpublicinsurance coverageforthe previously
uninsured. The otherchangesare more modest,withsmall risesinwagesandreductionsinpremiums
and outof pocketspendingthatare partiallyoffsetbyhighertaxes –the bulkof whichare for higher
income familiespayingMedicare taxation.
While the aggregate budgeteffectonhouseholdbudgetsislarge and positive,thereare some
differenceswhenthe householdeffectsare isolatedfordifferentincome levels. Figure 20detailsthe
budgeteffectsbyincome level. Lowerincome householdsreapthe majorityof the benefits.
Householdsmakinglessthan133% of FPL receive about$800 millioninbenefitsperyear,orabout
$1430/household;familiesmaking133-200% of povertyreceive asmalleraggregate benefitbuta higher
benefitperhouseholdof $2505. There are alsosizeable benefitsforfamiliesinthe 200-400% of
povertyrange,andmodestbenefitsforthose inthe 400-500% of povertyrange. There are small net
costs forthose 500-1000% of poverty,andmuchlarger lossesforthose higherincome familiesabove
tentimesthe povertyline;thisislargelydue tothe increasedMedicare tax forhigh-incomehouseholds.
Anotherwayto examine theseimpactsistoconsiderhow manyhouseholdswin,loseorare
unaffectedby currentfederal law;thatis,insteadof expressingthe aggregate dollareffectsbyincome
group,we divide individualsineachincome groupintothose thatsee netbenefitsandthose thatsee
netcosts of reform. The resultsof thisexercise are shownin Figure 21. We see here thatfor all groups
belowtentimesthe povertyline,there are alarge numberof winnersaswell asa modestnumberof
unaffectedhouseholds,withamore modest numbersof losers. Evenforthose above tentimesthe
povertyline, the winnersoutnumberthe losers,althoughthe countsare relativelyeven. Overall,there
are more than three timesasmanywinnersasloserswithinthe state of Colorado.

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Figure 22 showsthe increase in household budgeteffectsfrom2014 to 2019. In the firstyearof
implementation,there are modest budgeteffects. Butthe impactgrows overtime,andby 2019 isover
fourtimesas large perhouseholdasin2014.
It isimportantto note that these estimatesreflectall of the modelinguncertaintyinherentin
thisexercise,andsoexactmagnitudesshouldnotbe interpretedasoverlyprecise. Moreover,this
analysisexcludesimportantsourcesof financing,mostnotablythe reducedMedicare reimbursementof
hospitals,whichultimatelymayaccrue tosome Coloradoresidentsinthe formof lowerincome. Butthe
general conclusionthatenactedfederal law createsmanymore winnersthanlosersinColoradois
strongenoughthat itwouldnotchange evenaccountingforthese otherfactors.