Tag Archives: reinsurance

No, New York Times, “guesswork” is not the reason ACA premiums are rising

The New York Times, whose editorial board has long been a strong supporter of the Affordable Care Act, published an article on its front page yesterday in which the headline read, “Seeking Rate Increases, Insurers Use Guesswork.” And, lest there be much doubt that the article suggested that speculation — the sort that regulators might understandably reject as a basis for premium hikes — rather than hard facts were leading to the frightening premium hikes, here are some quotes selected by author Reed Abelson for publication:

“But many insurers, including those seeking relatively hefty increases below 10 percent, say they are asking for higher premiums because they remain unsure about the future and what their medical costs will be.”

“It’s the year of actuarial uncertainty, and actuaries are conservative,” said Dr. Martin Hickey, chairman of the National Alliance of State Health CO-OPs and the chief executive of the New Mexico exchange. “The safest thing to do is to raise rates.”

Yes, to be sure, there was the suggestion in other parts of the article that higher than expected claims were part of the problem, but both the headline and remaining comments suggest that the high rates of increase were the result of unsupported speculation.

Wrong, New York Times! If you actually read the justifications for the premium increases submitted by insurers and their accompanying actuarial memoranda, you can see there are two dominant themes: (1) higher than expected claims expenses and (2) diminution of federal subsidies to the insurance industry.  You can also see lengthy memoranda containing facts and figures explaining their experience last year and the basis for their trending those experiences into the future. And, while one need not invariably take the insurance industry at its word or at face value, this is an instance where they have to make the best case possible for their rate increases. Regulators will scrutinize insurers’ work. Misstatements or rank guessing would seem to be against the insurance industry’s interest.

So instead of quoting people, who might themselves be guessing, let’s look at what the insurers actually said. I am going to bore you with 17 representative filings from across the nation. I do so because I want to make clear that the evidence is overwhelming. Most of these are contained in or accompanied by lengthy memoranda containing elaborate tables justifying the increases. I’ve attempted to be diverse in my selection of insurers to avoid repetition of, for example, the Blue Cross position or the Aetna position.

1. Blue Cross and Blue Shield of Alabama

BCBSAL proposes an average 28% increase to rates for the products offered in 2015. The main drivers of the need for a rate increase are as follows:

• Single risk pool experience which is significantly more adverse than that assumed in current rates

• Medical inflation and increased utilization as indicated in Section 5: Projection Factors

• Expected increases in the average population morbidity of the Individual Market, also described in Section 5: Projection Factors

• Reinsurance program changes, described in Section 9: Risk Adjustment and Reinsurance

BCBSAL determined that the following items did not contribute significantly to the need for a rate increase:

• Taxes and fees: Minimal changes in the amount needed for taxes and fees, described in Section 10: Non-benefit Expenses and Profit & Risk

• Benefit changes: No changes to offered benefits for 2016

2. HealthNet of Arizona

The projected claims experience was developed using calendar year non-grandfathered 2014 experience. If our rate request is approved, the expected premium for the entire risk pool is $313.91 PMPM. This represents an increase of 24.7% in average premium. 2014 premiums received were $127,867,744. Claims paid were $171,764,569. Since 2014 medical costs are increasing with an annual trend of 5.5%. Prescription drug costs are increasing with an annual trend of 10.3%. Claims costs are 85.1% of premium. Administrative costs are 14.5% of premium. Profit is -4.8% of premium.

3. Cigna Health and Life Insurance Company (Connecticut)

The most significant factors requiring the rate increase are:

Changes in Medical Service Costs: The increasing cost of medical services accounts for the majority of the premium rate increases. Cigna anticipates that the cost of medical services in 2016 will increase over the 2015 level because of prices charged by doctors and hospitals and more frequent use of medical services by customers.

Transitional Reinsurance Program Changes: The federally mandated transitional reinsurance program is in effect for three years (2104, 2015, and 2016). The amount of funding available to issuers under the reinsurance program to offset adverse claim experience decreases each year ($10B in 2014, $6B in 2015, and $4B in 2016). Additional premium is required to compensate for the reduced reinsurance support in 2016.

Morbidity (Risk Pool) Adjustments: The marketplace for non-grandfathered individual plans is affected by provisions of the Patient Protection and Affordable Care Act (the Affordable Care Act) that became effective in 2014, including:
guarantee issue and renewal requirements
modified community-rating requirement
federal premium subsidies for low and moderate income individuals.

The effects of these 2014 changes when coupled with previous regulatory changes and overall utilization experienced in 2014 suggest that it is appropriate to increase the overall claim level assumption reflected in the premiums for individual plans in Connecticut.

4. Aetna Health, Inc. (Florida)

Why We Need to Increase Premiums
Medical costs are going up and we are changing our rates to reflect this increase. We expect medical costs to go up 10%. Medical costs go up mainly for two reasons – providers raise their prices and members get more medical care.
For policies issued to individuals in Florida, some examples of increasing medical costs we have experienced in the last 12 months include:
· The cost for an inpatient hospital admission has increased 8.0%.
· The average cost for outpatient has increased 8.4%.
· Costs for pharmacy prescriptions have gone up 8.0%.
· The use of outpatient hospital services has increased 4.5%.

What Else Affects Our Request to Increase Premiums
Several requirements related to the Affordable Care Act (ACA) impact these rates. These include:
· “Keep What you Have” and its impact on the population that will enroll in the plans covered by this filing
· Enhanced network access standards – which limit our ability to control the cost and quality of medical care
· Changes to required taxes and fees
· Phase-out of the Transitional Reinsurance Program which increases rates for plans issued to individuals

5. Humana Employers Health Plan of Georgia, Inc. (Georgia)

Many factors influence this rate calculation. The primary factors include
‐ Population health‐ Expected changes in the aggregate health level of all individuals insured by all carriers in the individual health insurance market.
‐ Claims cost trend‐ Changes in expected claims costs associated with changes in the unit cost of medical services, changes in Humana’s contracts with hospitals, physicians, and other health care providers, and the increase or decrease in utilization of medical services including changes in the severity and mix of services used.
‐ Plan Changes‐ Changes to plan designs due to changes in federal requirements.

6. Wellmark Health Plan of Iowa, Inc. (Iowa)

Reason for Rate Increases The effective average rate increase for these products is 28.7%, varying by plan as listed in the table above. The primary drivers of the proposed rate increases include, but are not limited to:

• Adverse Experience/Risk Adjustment Transfer: The risk of the market is more adverse than what we had assumed in the current rates; which leads to a significant projected risk adjustment transfer payment to other carriers.

• Medical and Drug Inflation: Both increased utilization and increased cost per service/script contribute to projected claims trend.

• Phase out of Federal Transitional Reinsurance Program: As this program phases out over three years, the expected receivables from this program are smaller for 2016 than they were for 2015.

7. CareFirst of Maryland (Maryland)

The main driver of the financial performance of these products and the proposed rate increase is the very significant increase in average morbidity between 2013 (the pre-ACA pool which underwent underwriting) and 2014 (the post-ACA guarantee-issue pool). The allowed claims per member per month (PMPM) increased from $197 in 2013 to $391 in 2014, a much higher and faster increase than anticipated.

8. HealthPlus Insurance Company

The biggest driver of rate change is 2014 claims experience that is more adverse than assumed in current rates. Another driver is due to the lower Federal reinsurance recoveries.

9. Coventry Health & Life Insurance (Missouri)

Why We Need to Increase Premiums
Medical costs are going up and we are changing our rates to reflect this increase. We expect medical costs to go up 9.4%. Medical costs go up mainly for two reasons – providers raise their prices and members get more medical care.

What Else Affects Our Request to Increase Premiums
We offer individuals in Missouri a variety of plans to choose from. We are changing some benefits for these plans to comply with state and federal requirements.
Several requirements related to the Affordable Care Act (ACA) may also impact these rates. These include:
• Changes to our expected projected average population morbidity and its relationship to the projected market average for risk adjustment.
• Changes to required taxes and fees
• Phase-out of the Transitional Reinsurance Program which increases rates for plans issued to individuals

10. Aetna Health Inc. (Nevada)

Why We Need to Increase Premiums
Medical costs are going up and we are changing our rates to reflect this increase. We expect medical costs to go up 10.6%, excluding the effect of benefit changes described below. Medical costs go up mainly for two reasons – providers raise their prices and members get more medical care.

For Individuals in Nevada, some examples of increasing medical costs we have experienced in the last 12 months include:
• Primary Care Physician visits have increased by 124.2%.
• Inpatient bed days have increased by 51.0%.
• Expenses for emergency treatment have increased 22.7%.

What Else Affects Our Request to Increase Premiums
A prominent hospital system in Nevada moved from participating to non-participating in 2014 and is expected to stay that way into 2016. This has an adverse impact on claims costs since the more favorable lower-cost in-network reimbursement rates no longer apply.

Several requirements related to the Affordable Care Act (ACA) also impact these rates. These include:
• Enhanced network access standards – which limit our ability to control the cost and quality of medical care
• Changes to required taxes and fees
• Phase-out of the Transitional Reinsurance Program which increases rates for plans issued to individuals

11. Blue Cross Blue Shield of New Mexico (New Mexico)

[E]arned premiums for all non-grandfathered Individual plans during calendar year 2014 were $84,497,659, and total claims incurred were $105,605,811.

After application of the ACA federal risk mitigation provisions, the total BCBSNM Individual non-grandfathered block of business experienced a financial loss of 17% of premium in 2014.

The proposed rates effective January 1, 2016, are expected to achieve the loss ratio assumed in the rate development.

Changes in Medical Service Costs:

The main driver of the increase in the proposed rates is that the actual claims experience of the members in these Individual ACA metallic policies is significantly higher than expected. After application of the ACA federal risk mitigation provisions, the total BCBSNM ACA block of business experienced a loss of 19% of premium in 2014.

12. Medical Mutual of Ohio (Ohio)

Medical Mutual of Ohio is proposing an overall rate increase of 16.9% for plans effective January 1, 2016. This increase will potentially impact the 37,673 existing MMO members. The rate change ranges from 7.4% to 26.0%, varying by plan, age, change in tobacco user status, change in family composition, and the geographic area where the member resides.
The experience of MMO Individual ACA plans was not favorable in 2014. MMO has paid nearly $167 million claims and only received $114 million in premium. In 2014, MMO lost about $42 million dollars on its individual ACA business alone. With the rate increase implemented for 2015 and proposed for 2016, MMO’s experience is expected to improve, becoming profitable in 2016.
The following items are the main drivers for the proposed rate increase:
1. The transitional reinsurance recovery decreased from the 2015 level and will have a smaller impact offsetting the total claims.
2. The increase in the medical and drug cost is about 6.2% annually. Out of that increase, 40% is due to the change in unit cost, 31% is due to the change in utilization and the rest is due to the change in the mixture of services.
3. We expected the morbidity and demographics to improve in 2016 due to increased penalty of non-compliance, a greater understanding of the ACA law, and a reduction in the amount of pent-up demand for services. This alleviates the rate increase needed based on the experience.
4. There’s no changes in benefit from 2015 to 2016.
5. The administrative cost and commission will decrease $2.51 per member per month. The profit and risk will increase $7.92 per member per month. The taxes and fees will increase $4.51 per member per month.

13. Geisinger Quality Options (Pennsylvania)

Geisinger Quality Options has proposed an overall base rate increase of 58.36% for Individual PPO members renewing in the Marketplace effective January 1, 2016 through December 1, 2016. The overall increase is largely due to the claims experience in ACA compliant individual market plans being much higher than what was assumed in current rates. Other contributing factors include annual claims trend, federally-prescribed ACA fees and reduced benefits in the Transitional Reinsurance Program.

14. Pacific Source Health Plans (Oregon)

This filing requests an aggregate increase of 42.7 percent over the rates approved in our 2015 Oregon Individual filing. The proposed rates are based on PacificSource’s historical Oregon Individual claims experience adjusted for PacificSource’s historical average risk compared to the market average risk, anticipated medical and pharmacy claims trend, expected change in market morbidity from 2014 experience period to 2016 projection period, changes in benefits, and expected state and federal reinsurance recoveries. The proposed rates also reflect changes in the taxes and fees imposed on health insurers for 2016. The range of rate increases is 23.4 percent to 60.4 percent and impacts PacificSource’s 8,216 Oregon Individual members. The variation in rate increases is driven by some changes in benefits i.e. copays, deductibles, OOP max, as well as adjustments to geographic area factors. The overall average impact of benefit changes on the requested rate increase is 0.0 percent.

The increase in rates from 2015 to 2016 is primarily driven by a dramatic worsening of claims experience in 2014 as compared to 2013, and the reduction of expected reinsurance recoveries in 2016. Note that this is the first rate filing where a full year of post ACA experience data was available. This data shows that the overall increase in morbidity from PacificSource pre ACA experience to post ACA market experience is much greater than originally projected in our 2014 and 2015 rate filings. The combined medical and pharmacy annual trend used in this filing is 7.0 percent, which reflects expected changes in costs, changes in utilization, and the impact of leveraging. The primary driver of the annual trend assumption is specialty drug cost and utilization, particularly Hepatitis C drugs. Administrative expenses and margin are budgeted to decline compared to the 2015 rate filing.

Over the calendar year 2014, the Oregon Individual block earned 30.2 million in premium and incurred an estimated 50.0 million in claims, for a raw medical loss ratio of 165.2 percent. Premium and claims expenses are shown before the impact of reinsurance, risk adjustment, and risk corridor. At this time we do not expect risk corridor payments to be made to issuers. After expected risk adjustment and state and federal reinsurance recoveries, we estimate a 2014 loss ratio of 116.5 percent. Combined administrative expenses, commissions, taxes, and assessments were approximately 24.6 percent of premium.

15. Scott & White Health Plan (Texas)

The Scott & White Health Plan is requesting an average rate increase of 32.3% to the Individual HMO Rating Pool. There are 24,294 covered individuals as of January 2015. 10.0% of the 32.3% increase is due to health care cost inflation, 14.3% of the increase pertains to changes in Risk Adjustment and Reinsurance assumptions, 2.7% is due to changes in fees, and the remaining 5.3% is due to actual and expected unfavorable experience.

16. Optima Health Plan (Virginia)

The rate increase is the same for all members in the same plan. Where the 2016 plan is different than the 2015 plan these members will be automatically enrolled into the 2016 plan shown. Premium rates are effective January 1 2016.
Claims expenses were very high in 2014 relative to earned premium. However payments from the federal transitional reinsurance and risk adjustment programs are expected to help significantly.
The federal reinsurance program is only temporary and while it is continuing into 2016 the amount of reinsurance per claim is less than in 2014 and 2015. As such premium rates will be increased to account for this impact. Additionally the risk adjustment program alone does not appear to provide sufficient relief to enable the Company to meet its pricing targets.
It is anticipated that 2014 had some amount of higher claims due to new members having pent-up demand for services and less healthy people tending to be the first to sign-up for ACA-compliant plans given the new rating and underwriting rules. Because of this we do not assume that 2016 will necessarily be as high a claim level as seen in 2014 but some of what has been experienced will remain.
These reductions from 2014 levels will be countered by upward pressure on costs from other sources such as medical trend as described below.
The proposed rate increase is intended to account for expected claims activity in 2016 given historical experience and changes in morbidity as well as any expected assistance from the federal reinsurance and risk adjustment programs. With the proposed rate increase the anticipated loss ratio is 80 percent.
Medical trend for these products is anticipated to be an average of 7 percent per year on paid claims for example after member cost sharing or a total of 14.5 percent over the period from 2014 to 2016. This was developed based on historical experience as well as consideration for information available on general medical inflation trends. Medical trend includes a combination of utilization and costs of services. This increase in cost is included in the calculation of the rate increase.

17. Security HealthPlan of Wisconsin (Wisconsin)

The biggest driver of the rate change is SHP’s underlying claims experience used in developing the projected index rate. We used SHP’s 2014 individual non-grandfathered, ACA allowed claims as the basis for claim development. The 2014 claims and membership distributions indicate experience is worse than we priced for in 2015 rates. Further, based on a Wisconsin risk score analysis conducted by Milliman, we are projecting no risk adjustment transfer payment. This assumption of no payment results in higher rates in 2016 since we had projected SHP would receive money from the risk adjustment pool when developing the 2015 rates.

Another driver of the rate change is due to the lower federal transitional reinsurance recoveries in 2016. The recoveries assume in 2016 SHP will receive 50% of all SHP’s individual members’ per member per year incurred claims between $90,000 and $250,000. In 2015, rates were priced assuming recoveries to be 50% of claims between $70,000 and $250,000 based on the federal parameters in place at the time of pricing.

The projection of claims from the experience period to the effective period assumes 5.0% annual medical and drug trend. These trends were estimated based on data from SHP, conversations with SHP senior management, Milliman research, general industry knowledge, and our judgment of recent trends.

Conclusion

So, does this sound like “guesswork” to you?  It does not to me.  All of these insurers are lying or mistaken about what is causing their requests for premium hikes? I don’t think so.  Of course, there is “trending” in which insurers approximate how previous increases will continue to the future and this requires some art on the part of insurers.  Of course, insurers may want to present their requests for rate hikes in a way more likely to be approved. But what they have presented is no more “guesswork” here than the work of any insurer in setting rates for almost any form of insurance. It is the sort of actuarial projections that are generally approved by regulators.

Health insurers now have a decent feel what it is going to cost them to participate in Obamacare.  And these insurers have a pretty common perspective: the whopping increase are driven by  greater utilization than expected among those electing coverage  (adverse selection and moral hazard), increases in the cost of medicine, and reduction of federal subsidies.

Exactly what some people predicted.

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The Cons of the ACA

Recently, I was honored to speak before the PIAA, a group of insurance professionals, at the organization’s annual conference in Las Vegas.  The idea was that I would speak on the problems with the ACA and Ardis Hoven, M.D., past president of the the AMA, would speak on positives about the ACA.  I thought the format worked well and I appreciated the high level of discussion and civility of Dr. Hoven.

Here’s what I had to say. Since you can’t use footnotes or hyperlinks in a speech, I’ve provided a few additional annotations here to show the source of some of the information.

The Speech

I’m here to talk about the architecture of the ACA and its problems.

The ACA takes a bold risk.  It places our economy and our health on an metaphorical aircraft whose ability to fly is challenged by history. It proceeds on the assumption that, whereas almost all community rating systems in health insurance have crashed in ugly adverse selection death spirals, the craft engineered by the Obama administration and its consultants is so sophisticated that it will avoid such a fate.  Many will tout what they see as the success of the ACA thus far in reducing the number of uninsured and the absence of many catastrophic failures as evidence that the ACA flies.  But we have not seen turbulence. It is an open question whether, long term, the ACA can survive in its present form.

Let us now talk about how the ACA flies.  It uses a variety of mechanisms to keep it aloft.  The problem is that almost every one of them has the potential for being undermined.

Individual Subsidies

The ACA depends desperately and in perpetuity on taxpayer funded policy subsidies provided directly to the insured. There is a premium subsidy based on household income. And there is another effective premium subsidy achieved through what is termed a “cost sharing reduction program” but this really amounts to people getting gold, platinum or diamond — my term — policies but only having to pay the silver price.  These subsidies have been crucial to the touted success of the ACA.  They have brought low risk individuals into the pool. Without the subsidies, the insurance market would need to depend solely on risk aversion to achieve price stability and escape the death spiral.  Prior experiments relying only on risk aversion alone have been notoriously unsuccessful.

For better or worse, the subsidy has had an immense effect. A recent study conducting by Avalere shows that 83% of Exchange enrollees have incomes at 250% or less of the federal poverty level for their households. The take up rate among those eligible for ACA exchange policies falls from 76% for those earning 100-150% of FPL down to just 16% for those earning 300-400% of FPL. Take up then plummets to 2% for those earning more than 400% of FPL and who are thus ineligible for subsidies.

This elasticity in the demand for health insurance is precisely why the forthcoming Supreme Court decision in King v. Burwell is of such great importance.  If the Supreme Court issues a square holding that the federal government lacks authority to pay the premiums where the state itself has not directly established an Exchange, and neither Congress nor the states does anything to fix the matter, expect insurers in those states rapidly to stop offering individual health insurance on the Exchanges. Indeed, clause IVB in the contracts those insurers negotiated with the federal government precisely in anticipation of King v. Burwell would permit those insurers not just to exit the market next year but to cancel existing policies midstream.

A side point, but one that might trouble this audience.  Every insurer that I know of is accepting payments from the federal government for cost sharing reductions.   But those payments are almost certainly illegal. Congress never appropriated any money for Cost Sharing Reductions.  So, under the law as written, insurers who want to play in the Exchanges are really supposed pay for cost sharing reductions themselves.

Of course, to my knowledge, that’s not happening. The money now landing in insurer’s bank accounts is coming from a fund set up for tax refunds that is, by law, dedicated exclusively to that purpose.  That, I believe is unlawful and, should another party ever control the Executive branch and want to look for a villain or want to extort various favors from someone whom they have over a barrel, might it not chase insurers for receipt of diverted funds?  There is a 1938 Supreme Court decision saying the Government can recover funds paid illegally and a 1990 Supreme Court decision saying that a claim of estoppel can not lie against the federal government.   So, before insurers become accessories or before they count as money on their balance sheets that they might have to pay back, they might want to look at these cases.

Reinsurance subsidies

There are also less visible features of the ACA that are designed to improve the probability of the airplane staying aloft. The ability of the ACA to fly also depends substantially for 2014, 2015 and 2016 on premiums subsidized by free specific stop loss reinsurance given to insurers who agree to risk their capital in untested Exchange markets.  It is, however, a form of support that is going to flame out after 2016.

How much support does it provide? If you use the data from the 2016 draft actuarial value calculator produced by CMS, you can compute that the subsidy will still be about 3% of premiums for 2016.  It was higher in 2014 and 2015. How will the ACA continue when prices increase at least 3% more just due to the elimination of this single subsidy.  The naive might think that 3% is not all that much.  And, without taking adverse selection into account, I would expect the market to shrink only by about an equal percentage.  But if history and economics tells us anything — and it does — because of adverse selection, the actual price increase will be greater and the resulting decline in enrollment will be greater.

I would not expect Congress to do any sort of mid-flight refueling of reinsurance subsidies, to continue my airplane metaphor. The policy justification for specific reinsurance subsidies seems rather thin.  If reducing the overall risk to insurers was the issue, aggregate stop loss, perhaps available at an actuarially fair price, rather than free specific stop loss reinsurance would make more sense.  And if the government, and, derivatively, the insurance industry, was fearful of there being no market for reinsurance where the risk involved was so untested, Congress could have made a guess and established a fair price and reinsurance facility itself. Moreover, if uncoupling household income from the ability to obtain medical care was a primary goal of the ACA,  why would Congress not just increase individual premium subsidies instead of sending that money to enrich, sorry guys, insurance companies?  This form of corporate welfare helps people at 350% of federal poverty level or even people at 1000% of FPL buying unsubsidized policies on the Exchange as much as it helps the person earning 150% of FPL who might desperately need more assistance. If one accepts major premises of the ACA, one might seriously question why such is the case.

Risk Corridors: The Free Derivative

The ACA depends somewhat for 2014, 2015 and 2016 on another form of subsidies for the insurance industry.  It indirectly subsidizes premiums by providing insurers with a free financial derivative: risk corridors that reduce the amount of capital prudent insurers might otherwise need to stockpile or aggressive state regulators might require them to stockpile. This reduction occurs because Risk Corridors reduces the probability of insurers losing substantial amounts of money via participation in the Exchanges. To use a finance term, Risk Corridors reduces Value at Risk, which is a decent estimate of the amount of money participating insurers need to keep in more liquid and probably less lucrative investments.

If you run the computations — ask me how — it looks as if Risk Corridors reduces the amount insurers need to charge for Exchange policies by a little less than 1%.  Again, you might say, in what I suspect would be a deprecating tone, big deal. And, I agree that, taken by itself, the ACA is unlikely to crash based on a 1% increase standing alone.  But it’s all cumulative and the problem with death spirals is that once you find yourself in their clutches they are a bit like a black hole, very difficult to escape.

Insurers may not have to wait until 2017 for Risk Corridors to disappear.  They are already in grave trouble.  Congress also never appropriated any money for Risk Corridors. And this wasn’t an accident. The statute, as written, depends on assessments on insurers based on a formula to magically equal payments out to insurers based on a formula over the 3-year span of the program.  We are already seeing, as many predicted, however that such an assumption was unwarranted.  Due perhaps to loss leader pricing and the predictable propensity of consumers to pick precisely those plans that were charging too little relative to actuarial risk, it appears that, on balance, at least after what I would hope would be clever but lawful accounting, that few insurers are making enough money under Obamacare policies to provide any funding to the many insurers who gained volume at the expense of profitability. So, when the Obama administration suggested it might lawlessly raid other government accounts to fund Risk Corridor deficits, Congress responded in section 227 of the Cromnibus bill by walling off the plump Medicare Parts A and B trust funds and CMS operating accounts as a source to repay obligations created by the Risk Corridor program.

Might deficits in early years of Risk Corridors be funded out of profits in later years as the Obama administration has suggested? The omens aren’t good. According to a review of 2014 industry filings by Standard & Poors, Risk Corridors will likely collect less than 10 percent of what industry is expecting to be reimbursed. 14% of insurers will likely pay into Risk Corridors.  56% expect money out. The absence of Risk Corridor money will be fatal to some insurers.

Already, we are seeing the death and near death of some less well capitalized insurers, particularly the co-ops capitalized, I might add, not so much by private investors but by $2.4 billion from the taxpayers in a less well publicized cost of Obamacare. Low premiums are not of terribly great value if they end up bankrupting private insurers on whom the success of Obamacare depends.

Individual Punishment

Thus far, I have spoken of the carrots to get even people of low risk to participate in the Exchange marketplaces.  Obamacare is fueled, however, not just by subsidies but by punishment. Obamacare chose a different punishment model than for programs such as Medicare Part B or Medigap.  In those programs, and in some Republican proposals for Obamacare reform, if you don’t select insurance when you are first eligible, you just pay a lot more for insurance if you elect coverage later.  No commerce clause problems, no tax. Obamacare, by contrast, increases administrative costs by potentially assessing  a penalty each year if you don’t have coverage. The ability of this punishment to stem a death spiral depends on the size of the punishment and the number of people who are subject to it.  And what I now wish to suggest is that even without its formal repeal, the Individual Mandate was weak to begin with and has been further enfeebled by administrative moves taken in response to political uproar.

Consider, for example, a slightly fictionalized version of one typical American. According to the Kaiser Foundation Calculator, a 45 year old non-smoking person making $48,000 per year would expect to pay $3,742 on average for a Silver Policy.  Suppose, however, that the individual considers themselves to be only 30 in health years. The individual thus considers its average expenses that would be covered by insurance to be $2,941.  Would the $746 difference in tax created by the mandate be sufficient to get that person to purchase an Exchange policy.  Not if that person was risk neutral.  $746 in tax is less than the $801 excess in medical expenses.

Alternatively, eliminate $3,000 from the person’s income. Now, because the premium the individual would have to pay is more than 8% of household income, the individual is exempt from the individual mandate. There are a significant number of uninsured people thus exempted from the mandate on grounds that they are simply too poor to purchase Obamacare.

But there’s more to make sure, as the CBO recently confirmed, that only one in six of the uninsured will actually be subject to the mandate.  There is the absurdly expanded hardship exemption. There’s the health sharing ministry exception mostly for evangelical Christians. And there’s the peculiar 3 months off exemption (26 USC § 5000A(e)(4)).

In short, one of the reasons Obamacare will have difficulty flying is that we are afraid of our inability accurately to determine whether people can really afford insurance and at what price.  For now, though, if one wants to rely on sticks, the stick is actually too weak and hits too few people.

The Employer Mandate

Another key component of the ACA has been the employer mandate.  Or, at least it was supposed to be a key component.  In fact, in what a lot of people, including me, think is a very dangerous precedent that will, one day, bite ACA proponents in the proverbial behind, the Obama administration simply decided, without any apparent discretion, to delay enforcement of the law for one year and, for the current year, to apply the statute only to employers with more than 100 employees, even though the number the statute picks is 50. If a change to the tax code is so complicated that it takes mid sized businesses with financial advisors 5 years to understand it, perhaps that’s a sign there is something more fundamentally wrong.

At any rate, the employer mandate is, for lack of a more sophisticated term, stupid. If it actually works, it keeps people off the individual exchanges, which is exactly what should not be happening. The employer mandate perpetuates both symbolically and literally the counterproductive tie between a poorly functioning and lumpy labor market and something as important as health.  It puts the employers’ decision as to what sort of coverage best suits the employee ahead of the ability of the individual to choose.  The tax deductibility of payments helps the wealthy more.  The lack of portability between jobs decreases the sort of continuity of care that might improve health. It is everything a good liberal should hate.  (Indeed, some have had the courage to note the many flaws with the current law.) And so I wonder if King v. Burwell comes out against the government, whether the employer mandate, which has barely made it on to the Obamacare Aircraft, might be abortively deplaned with eager Republicans and Democrats in need to save face actually coming together on this issue.  Indeed, if I were a Limbaugh-style Republican who wanted Obama to fail, I would actually insist on the employer mandate continuing as a way of starving the individual exchanges of healthy people who might stabilize their prices and of helping high income voters more.

Conclusion

One’s perspective on the ACA can’t be whether it helps insurers or whether it helps the medical profession.  In fact it shouldn’t even be on whether more people have health insurance.  The positive factor to be considered is whether it has improved health.  I will concede that, on balance, it probably has — slightly. Many medical interactions are beneficial and, although supply of medical practitioners has not increased much, there are 2-4% more such interactions thanks to the ACA.   In any event, whether the ACA marginally improves health is not the exclusive test.  These programs have to be paid for and they come at a heavy price.  The CBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.

If you forget about Medicaid expansion and take the net increase the uninsured as a result of the ACA and divide that by the cost of providing coverage to them, it turns over 10 years to average with premium subsidies, cost sharing reductions, the 3Rs, and administrative costs about $7,600 per person.  And in addition to racking up our already bloated deficit, there will be be taxes, fees and subsidies that have their own perverse incentives. Some have estimated the cost of providing a currently uninsured person an additional year of a quality life at over $200,000 possibly over $1 million. That’s enough that we have to look hard at whether there might be some better and simpler alternatives.

As we move forward  ought to be looking not at Obamacare vs. The Bad Old Days Where Evil Insurers Deprived Sick People of Coverage but rather to a variety of alternatives ranging from, yes, Bernie Sanders Single Payer plan to, better,  libertarian plans to use market mechanisms more effectively  to perhaps better yet, lots in between.  Yes, Obamacare has gotten off into the air, but if they would honestly call “Mayday,” it is my hope that a variety of people would try to help out.

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Reinsurance reduction will add 7% to gross premiums for 2015

That’s in addition to whatever increases are caused by medical inflation and adverse selection

 

As we draw to what was originally to be the close of the 2014 regular open enrollment period for policies sold on Exchanges under the Affordable Care Act and as the evidence comes in on the actual numbers and demographics of purchasers, it’s time to start thinking about 2015. In this post, I’m not going to speculate today about the effects of the expanding the “hardship exemption” from the individual mandate on insurers’ experience in 2014, the effect of the “Honor System” in extending the time in which individuals can purchase coverage on the Exchange without medical underwriting, or on the effects of any of the other the myriad changes in the law that have been promulgated by the Executive Branch since Congress passed the ACA in 2010. Instead, I want to focus on the effect of statutory changes in the government-created reinsurance program on likely premiums in 2015.

First, a refresher. One of the ideas behind Obamacare was to lure people into the Exchanges with carrots and sticks.  The most frequently discussed carrots were advanced premium tax credits that reduced the effective price of insurance for many individuals and, for many of those receiving the premium tax credits, contracts with extra benefits (cost-sharing reductions) for which the purchasers do not have to pay. Not only, however, are Exchange policies subsidized by reducing the price to the consumer but also by reducing the cost the insurer faces in paying claims.  A key mechanism for this latter reduction for the first three years of the program is free “reinsurance” provided to all insurers for slices of their claims. Of course, the reinsurance isn’t really free; there’s a $63 per insured life tax levied on other health insurance policies in order to make policies on the Exchange more attractive, a transfer whose justice will not be considered today.

The reinsurance works in 2014 by having the government reimburse insurers for 80% of the amount of any insureds claim between $45,000 and $250,000. Thus, if an insured had claims of $105,000, the government rather than the insurer would pay for $48,000 of the claim while the insurer itself would pay for the remaining $57,000.  If an insured had claims of $30,000, the insurer would pay the whole bill.  And if an insured had claims of, say, $300,000, the government would cover more than half — $164,000 — while the insurer itself would pay the remaining $136,000.

Sample of the data embedded in the Excel spreadsheet for The Actuarial Value Calculator
Sample of the data embedded in the Excel spreadsheet for The Actuarial Value Calculator

One can use information contained in the government’s own “Actuarial Value Calculator” to estimate the effect of this reinsurance on Exchange premiums.  (I’ve placed a graphic above this paragraph showing some of the information in the Calculator.)  Based on my computations using Mathematica and done in connection with a recent academic conference, the reinsurance should lower the price of an Bronze policy by about $450 (11%), a Silver policy by $531 (11%), a Gold policy by $545 (11%) and a Platinum policy by $616 (10%).

The parameters of the reinsurance policy will change in 2015.  HHS currently says that instead of “attaching” at $45,000, reinsurance will only kick in if an individual’s claims exceed $70,000. And instead of reimbursing the insurer 80% of the slice between the attachment point and the $250,000 limit, the government will now reimburse just 50% of the slice. The table below shows the results of this change in reinsurance on the expected value of the reinsurance policy. If one assumes that medical inflation will be 4%, the value of the reinsurance will range from $192 for Bronze policies to $243 for Platinum policies. These computations are all again done using Mathematica based on data provided by the government itself in its Actuarial Value Calculator.

Value of reinsurance subsidy in 2015 for varying rates of medical inflation
Value of reinsurance subsidy in 2015 for varying rates of medical inflation

Insurers will need to compensate for the diminished reinsurance by raising prices.  How much?  The table below shows the answer: somewhere between 7 and 8% depending on the type of policy being sold and the rate of medical inflation.

Increase in premiums for 2015 just to cover reduction in reinsurance subsidies
Increase in premiums for 2015 just to cover reduction in reinsurance subsidies

If one adds regular medical inflation to the increases induced by reduced subsidization, here’s a picture of what we get. To obtain a single result for each rate of medical inflation, I’m going to weight the metal tiers according to their rough proportions in the market as last measured.

Projected premium increases for 2015 with reinsurance subsidy reductions taken into account for varying rates of medical inflation
Projected premium increases for 2015 with reinsurance subsidy reductions taken into account for varying rates of medical inflation

The results of combining ordinary medical inflation with reinsurance reductions are a bit scary.  While most people seem to believe the ACA system can survive premium increases of 6% or 8%, what we see is that even if medical inflation is kept to 4%, the results of combining medical inflation with subsidy reduction is a 12% hike.  And, if insurers are nervous about pricing in 2015 due to higher than expected claims experience in the early parts of 2014 or the persistence of problematic demographics such that they expect ordinary claims inflation of 10%, then we start getting into premium increases of about 18%.

Is there a workaround?

It is fair to say that the Obama administration has not been reluctant to change implementation of the Affordable Care Act in response to changing circumstances.  And, I suspect that if the Obama administration starts getting hints that insurers selling on the Exchanges are either thinking of pulling out of the Exchanges or of raising premiums significantly, one of the ways it will respond is by altering the parameters of the reinsurance program.  The attachment point, limit and reimbursement rate are all matters as to which the Obama administration has regulatory flexibility.  Indeed, it changed the 2014 reinsurance parameters favorably for insurers late into the process. And, of course, by providing a lower attachment point, higher reimbursement rate and/or a higher limit, the government can increase the effective subsidy created by the free reinsurance and thereby reduce pressure on insurers to raise premiums.

If, for example, the Obama administration were to go to, say, a 65% reimbursement rate rather than a 50% rate for 2015 and were to go to a $60,000 attachment point rather than a $70,000 one, a 4% increase in medical inflation might result in a lesser 9% increase in premiums rather than 12%.  And even a 10% increase would result in a lesser 14% increase in premiums rather than an 18% one.

The problem with this “fix,” however is that it costs money.  And, by statute, the government is supposed to spend $4 billion less on the reinsurance program on claims for 2015 than it spent on claims for 2014.  That’s why HHS reduced the reinsurance parameters for 2015 in the first place.

I can foresee two ways around this limitation.  The first is for the Obama administration to engage in creative math and find a theory under which the projected cost of its reinsurance program aligns with statutory requirements.  While cynics may be fond of my projection of this response, there is a serious question as to the extent that principled actuaries in the Executive branch will permit this “methodology” to be used. The second possibility is for the Obama administration to stockpile funds from 2014  and use them to pay reinsurance in 2015.  Section 1341(b)(4)(A) of the ACA appears to make this possible.  This scheme only works, however, if the government actually has money left over from its 2014 reinsurance pool.  And, while lower than expected enrollments in the Exchanges increase the probability that there will be money remaining, that potential surplus could well be eaten away if claims for 2014 are higher than expected.

A result of improper conceptualization

Amidst all the technical detail, it’s worth thinking about how this could have happened. How could the architects of the ACA, who were acutely aware of the risks of an adverse selection death spiral, create a system in which there were built in pressures to increase premiums? I think the answer comes in examining the rhetoric of the reinsurance program.  It was not articulated as a subsidy but rather as a way of reducing the risk of entering the Exchanges. See here, here and here for examples.   If adverse selection or moral hazard drove claims costs up, the government would significantly insulate insurers from that risk by providing reinsurance. This, along with Risk Corridors in the first three years of the program, and Risk Adjustment thereafter, was supposed to provide insurers with comfort as they deliberated whether to enter an untested market for health insurance in which most of their conventional underwriting mechanisms were prohibited. And, indeed, the Transitional Reinsurance program does reduce risk. Based on my computations, it reduces the standard deviation of losses for Bronze policies from $16,403 to $11,430 and for Platinum policies from $17,215 to $11,598.

If one conceptualizes the transitional reinsurance program merely as a risk reduction policy, it makes sense to phase it out as insurer experience with the purchasing pools in the ACA.  Insurers gain confidence in how to price their policies.  But what appears to have been forgotten in that calculation is that these reinsurance subsidies also save insurers lots of money.  And insurers will need to respond to the phasing out of these substantial subsidies by raising premiums.  Whether that tunnel vision in conceptualization contributes to an implosion of the ACA, at least in some states, remains to be seen.

 

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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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