Proposed cuts in transitional reinsurance could increase Exchange premiums 7-8% in 2015

Late last week, HHS released its 255-page HHS Notice of Benefit and Payment Parameters for 2015. Buried away in this technical documents are at least two interesting matters.

  1. HHS is planning to cut reinsurance payments to insurers participating in its Exchanges in a way that, in and of itself, could increase gross premiums 7-8% in 2015 and increase the risk of further adverse selection
  2. HHS has validated the claims of insurers that President Obama’s recent about-face on the ability of insurers to renew certain policies not providing Essential Health Benefits could destabilize the insurance market.  The Notice proposes changing the way insurers calculate their profits and losses so that the amount of payments made by government to insurers in the Exchange would increase. It claims, however, that it does not know how much this will cost.
The HHS Notice for 2015
The HHS Notice for 2015

Less reinsurance

Under the system in place for 2014, if insurers in an Exchange have to pay between $45,000 and $250,000 on one of their insureds, the government picks up 80% of that loss (assuming the $63 per insured life it taxes various other health insurance plans is sufficient to pay that amount). But in 2015, the money that goes into this transitional reinsurance pool (section 1341 of the ACA, 42 U.S.C. sec. 18061) declines by a third from $12 billion to $8 billion and the head tax correspondingly declines from $63 to $44. As a result, HHS proposes to now pick up only 50% of the tab for losses between $70,000 and $250,000. Thus, losses between $45,000 and the new $70,000 attachment point will now fall entirely on insurers without federal help and insurers will have to pay 30% more on losses between $70,000 and $250,000.

This reduction in free reinsurance provided by the taxpayers will almost certainly result in increased premiums for insureds. My estimate is that the average premium hike induced by this reduction in reinsurance is likely to be about 7-8%.

Here’s how I did this computation. I took loss distributions contained in the government’s “Actuarial Value Calculator.” That’s the Excel spreadsheet the government (and insurers) use to figure out what metal tier, if any, their policy falls into. I then performed the following steps.  You can verify what I have done in the Computable Document Format (CDF) document I have placed on Dropbox. You can view the document using the free CDF player or using Mathematica

Step 1.  I determined the expected value of claims under those loss distributions with reinsurance parameters set at the 2014 rates.  I get four results, one for each metal tier: {3630.52, 4223.87, 4468.95, 5556.06}. I then do exactly the same computation but use the 2015 reinsurance parameters. I get four results, one for each metal tier: {3906.67, 4550.95, 4807.06, 5948.53}.

Step 2. I multiply each result by the actuarial value of the associated metal tier to approximate the size of the premium needed to support the expected level of the claims. I get {2178.31, 2956.71, 3575.16, 5000.46} for the 2014 reinsurance parameters and {2344., 3185.67, 3845.65, 5353.68} for the 2015 reinsurance parameters.

Step 3. I then simply compute the percent increase in the needed 2015 premiums over the needed 2014 premiums and get {0.0760631, 0.077436, 0.0756584, 0.0706371}

If losses are, as I suspect they will be, greater than those assumed in the actuarial value calculator — because the pool is going to be drawn for a variety of reasons from a riskier group than originally anticipated —  the diminution in reinsurance is yet more significant and, standing by itself, could add more than 7-8% to the gross premiums charged in the Exchanges.

Whether the increase in gross premiums is about 7-8% or whether it is higher, it creates a heightened risk for an adverse selection problem.  This is so because, although subsidies insulate many people in the Exchanges from increases in gross premiums — net premiums are pegged to income rather than gross premiums for them — it will affect the significant number (estimated by HHS to be about 18% (4/22)) who are expected to purchase policies inside the Exchanges without subsidies.  The higher premiums go, however, the more we would expect to see the healthy drop out and find substitutes for the non-underwritten policies sold in the Exchanges. (If premiums are low enough, adverse selection is not a problem: insurance is a good deal for everyone and healthy and sick purchase it alike. See, e.g., Medicare Part B, which is very heavily subsidized and does not suffer seriously from adverse selection.)

Note to experts. Some of you might think I erred in saying that the 2014 reinsurance attachment point is $45,000 and not $60,000. But the 2015 notice says on page 11 that it will retroactively reduce the attachment point to $45,000.

HHS Validates Insurer Fears About Obama Reversal and the Destabilization of Insurance Markets

Many individuals, including me, have claimed that President Obama’s recent decision to permit insurers to “uncancel” certain individual plans that do not contain Essential Health Benefits could destabilize insurance markets. The Notice of Benefit and Payment Parameters just released appears to validate that assertion. Stripped of bureaucratese, the HHS document basically says that insurers are right to be disconcerted by the President’s about face.

For those who enjoy bureaucratese, however, or who properly want to validate my own conclusions about the document, here’s what it actually says.

On November 14, 2013, the Federal government announced a policy under which it will not consider certain non-grandfathered health insurance coverage in the individual or small group market renewed between January 1, 2014, and October 1, 2014, under certain conditions to be out of compliance with specified 2014 market rules, and requested that States adopt a similar non-enforcement policy.

Issuers have set their 2014 premiums for individual and small group market plans by estimating the health risk of enrollees across all of their plans in the respective markets, in accordance with the single risk pool requirement at 45 CFR 156.80. These estimates assumed that individuals currently enrolled in the transitional plans described above would participate in the single risk pools applicable to all non-grandfathered individual and small group plans, respectively (or a merged risk pool, if required by the State). Individuals who elect to continue coverage in a transitional plan (forgoing premium tax credits and cost-sharing reductions that might be available through an Exchange plan, and the essential health benefits package offered by plans compliant with the 2014 market rules, and perhaps taking advantage of the underwritten premiums offered by the transitional plan) may have lower health risk, on average, than enrollees in individual and small group plans subject to the 2014 market rules.

If lower health risk individuals remain in a separate risk pool, the transitional policy could increase an issuer’s average expected claims cost for plans that comply with the 2014 market rules. Because issuers would have set premiums for QHPs in accordance with 45 CFR 156.80 based on a risk pool assumed to include the potentially lower health risk individuals that enroll in the transitional plans, an increase in expected claims costs could lead to unexpected losses.

So, the government wants help in figuring out what to do. One method it is contemplating involves technical adjustments to the Risk Corridors program in a way that would get insurers more money (pp. 101-105).  Although I will confess to considerable difficulty in understanding exactly what it is that HHS suggesting, the basic idea, as I understand it, would be to assume that those who, by virtue of the President’s about face, “uncancel” their policies would have had claims expenses equal to 80% of the average claims of the rest of the pool (page 103-04). HHS will then, on a state-by-state basis figure out what the position of the insurer would have been and try to adjust Risk Corridors such that the position of the insured after application of adjusted Risk Corridors is similar to that which it would have been in had these persons, who pay the same premium as the rest but who tend to have only 80% of the claims expenditures, enrolled in their plan.

It is not clear to me where the statutory authority to make this change comes from. Section 1342 of the ACA (42 U.S.C. 18062) does not define its key terms of “target amount” and “allowable costs” in a fashion that would appear to my eye to extend to hypothetical costs and hypothetical premiums. I will also confess to being unsure as to who would have standing to challenge this proposed give away of taxpayer money to the insurance industry.

What is clear to me, however, is the proposed reform, by necessity, will result in greater previously unbudgeted expenditures by the federal government. If we are really talking about making insurers whole and the people in question might have profited insurers something like $1,000 a person, the federal government appears to be suggesting a change in regulations that could cost it hundreds of millions of dollars.  The HHS Notice declines to put an exact figure on the cost of the change:

Because of the difficulty associated with predicting State enforcement of 2014 market rules and estimating the enrollment in transitional plans and in QHPs, we cannot estimate the magnitude of this impact on aggregate risk corridors payments and charges at this time.

HHS is probably correct in saying it is difficult to estimate the cost of the proposed changes to Risk Corridors.  I don’t think we have a good feel for how many people will return to the plans President Obama has carved out for special treatment.  It does look, however, as if a floor of a couple of hundred million dollars on the cost of the proposal would be quite reasonable. This, of course, could give some ammunition to those, such as Florida Senator Marco Rubio, who have called for repeal of the Risk Corridors provision as an insurance “bailout.” (For a discussion, look here, here and here)

Final Note

Yesterday, I said I hoped to provide a major post.  This actually is not the post I was speaking about. There’s still more news coming.  Maybe today or maybe while recovering from a turkey overdose tomorrow.

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