Early Look at 2015 HIE Rates: Avg. Increase = 10%

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Richard Evans / Scott Hinds / Ryan Baum

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@SSRHealth

June 17, 2014

Early Look at 2015 HIE Rates: Avg. Increase = 10%

  • 11 states have disclosed insurers’ proposed rates for plans to be sold on the health insurance exchanges (HIEs) in 2015. The enrollment-weighted average rate increase thus far is 10.0%. These states’ 2014 HIE beneficiaries represent 14.6% of nationwide 2014 HIE enrollment
  • Although it’s too early in the process to know how 2015 actual rates will shape up nationally, it’s notable that proposed rate inflation outstrips the underlying medical cost trend (+/- 5.4%) in all 11 states except Maine, which suggests insurers are facing greater-than-expected claims costs
  • If realized rate increases are on par with early figures, growth in net premium costs will easily outpace income growth for subsidy-eligible households, owing to the Affordable Care Act’s (ACA) subsidy indexing provisions. This imbalance would further diminish the value of HIE coverage for younger / healthier enrollees – who are already under-represented on the HIEs – resulting in mounting adverse selection pressures
  • In this case, HIE-related gains in per-capita demand intensity and hospitals collections are likely to disappoint; and HIE rules and regulation ultimately must be modified by (re-)allowing greater premium differences based on age, (re-)allowing higher out-of-pocket maximums, reducing the scope of mandatory benefits, increasing subsidies, increasing penalties, and/or forcing the merger of adverse HIE risk pools into larger, better balanced risk pools

As of this week 11 states have disclosed rate filings for plans to be sold on the health insurance exchanges (HIEs) in 2015. The enrollment-weighted average rate increase thus far is 10.0% (Exhibit 1). These states’ 2014 HIE beneficiaries represent 14.6% of nationwide 2014 HIE beneficiaries; and, there is significant variation across and within the 11 states whose filings are public (lowest increase is Maine at 1.2%; highest increase is Maryland at 21.8%). Because of the relatively small sample, varied levels of rate inflation, and preliminary status of these filings, actual 2015 v. 2014 HIE rate inflation could still be substantially higher or lower than the current 10.0% running average

This having been said, it’s notable that every state except for Maine posted an average proposed rate increase that is greater than the current +/- 5.4% underlying rate of medical inflation. This suggests claims costs may be at least somewhat higher than underwriters (other than those in Maine) anticipated. However it has to be emphasized that because of slow / late HIE enrollment, underwriters’ 2014 HIE claims experience was extremely limited as they calculated 2015 proposals, thus the spread between the average proposed rate and the current rate of medical inflation certainly contains at least some additional risk premium

Wage growth in the subsidy-eligible income ranges looks to average between 2.2 and 3.0 percent in 2014, thus if the 10.0% rate increase in this limited sample ultimately is reflective of national premium inflation, subsidized households are likely to see their 2015 net premium costs grow substantially faster than their incomes[1]

Subjectively, we sense that younger and/or healthier beneficiaries are finding less value in their HIE plans than they expected – deductibles are higher and networks are narrower than many realized when they enrolled[2]. I.e., as younger and/or healthier beneficiaries gain experience (direct or indirect) with the actual benefits provided by HIE plans, we believe their perception of these plans’ value is falling, just as the price (even net of subsidies) for these plans is growing as a percent of their incomes. Younger and/or healthier beneficiaries already are under-represented among HIE enrollees[3]; we expect this imbalance to worsen if premium growth exceeds income growth by the margin suggested in current filings

Beyond the obvious conclusion that gains in per-capita demand intensity and hospital collections – at least as these relate to HIE enrollment[4] – may be smaller than expected, the investment relevance of our adverse selection thesis is that the HIE ‘rules’ ultimately must be modified if the HIEs are to survive, much less succeed. It is too early to predict specific changes to policy, but we believe the options are limited to: (re-)allowing greater premium differences based on age, (re-)allowing higher out-of-pocket maximums, reducing the scope of mandatory benefits, increasing subsidies, increasing penalties, and/or forcing the merger of adverse HIE risk pools into larger, better balanced risk pools

  1. We encounter a common misperception regarding the impact of subsidies on the actual rate of net premium inflation experienced by households – namely that subsidies are geared to keep the household’s out-of-pocket premium costs at a fixed percent of income, so that net premiums grow no faster than income. In truth, in 2015 and after subsidies are indexed in such a way that households’ net premiums go up at least as fast as total premium inflation
  2. Please see: “Why Adverse Selection is Likely on the HIEs: A Simple Model of Enrollment Behavior” SSR Health LLC, December 15, 2013
  3. Please see: “Adverse Selection on the HIEs – It’s Not (Just) About the Federal Website” SSR Health LLC, January 20, 2014
  4. We continue to believe expectations ‘across the market’ for per-capita demand intensity are too low. We’re not relying on HIE enrollment here so much as we’re relying on gains in employment (and thus employer-sponsored insurance), and gains in Medicaid enrollment as Republican states expand eligibility to +/- 100 FPL in or around 2016
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