How Would Alternative Subsidy Structures Affect Stability in the ACA Individual Market?

BRIEF RAND research has found that subsidies in the Affordable Care Act's (ACA's) health insurance exchanges exert a stabilizing effect on the insurance market by encouraging younger, healthier people to stay enrolled in the face of premium hikes. This broadens the pool of insured individuals and helps keep costs down for all enrollees. Put another way, subsidies reduce the problem of adverse selection— when the highest-cost, least healthy individuals disproportionately buy coverage—which can lead ultimately to market collapse. Yet the exchange subsidies have proven controversial. Critics of the current subsidies have advanced alternative structures, sometimes arguing that such alternatives could be administratively simpler or less expensive for the federal government. Furthermore, subsidies in the 34 states with federally run exchanges currently face a legal challenge. The Supreme Court is expected to rule on the case in the summer of 2015. If this challenge is upheld—and perhaps even if it is not—interest in alternative subsidy structures may gain added traction. How would these alternatives affect the subsidies' power to counter adverse selection? Affect Stability in the ACA Individual Market?