Evidence of Rate Shock on the Individual HIEs: Weak at Best

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Richard Evans / Scott Hinds / Ryan Baum

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@SecSovHealth

September 4, 2013

Evidence of Rate Shock on the Individual HIEs: Weak at Best

  • In 8 of the 10 states for which we have useful data, today’s (2013) premiums for individual coverage are (after being inflated by 6 pct to account for 2013 – ’14 health cost growth) very much on par with 2014 premiums for individual coverage offered on the health insurance exchanges (HIEs). More specifically, in these 8 states 2013 premiums (adjusted for 6 pct health cost inflation) are roughly equivalent to the cost of bronze or silver coverage in 2014
  • In only 2 of the 10 states (Montana and Colorado) is there even partial evidence of significant premium inflation in 2014 relative to 2013. In Montana the cost of bronze coverage for a 25-y.o. is roughly 19 pct higher than the 2013 basis, and the cost of bronze coverage for a 60-y.o. is approximately 15 pct higher than the 2013 basis. For 40-y.o.’s in Montana, bronze coverage is actually 9 pct cheaper than the 2013 basis. In Colorado, as yet we only have data for 40-y.o.’s, where bronze coverage is approximately 27 pct more expensive than the 2013 basis
  • Thus far, the river of data pouring out of states’ efforts to launch HIEs supports two conclusions: 1) the supply-side of the market appears healthy (there are plenty of underwriters offering plenty of options); and 2) after modest assumptions for underlying health cost inflation, 2014 premiums for individual coverage shouldn’t be awfully different from 2013 premiums
  • Accordingly, whether the HIEs succeed depends on the demand side of the market – i.e. on whether the currently uninsured seek coverage in large numbers. We continue to believe demand will be limited, and that adverse selection will be a key result, forcing further reforms
  • Ultimately the market for individually-purchased coverage is a small percentage of the commercial market (currently a little more than 6 pct, and growing to at most 7 ½ to 8 pct in the next five years), where the more important questions are: 1) whether the large national account-oriented underwriters can maintain their overall enrollment shares as employer-sponsored beneficiaries move to private exchanges (where they can for the first time buy local plans); and 2) whether average contract values begin to fall rapidly as employer sponsored beneficiaries are offered wider ranges of coverage ‘generosities’ (including less generous plans than have previously been offered). Our expectation is that the larger commercial insurers (e.g. UNH, WLP, CI, AET) ultimately will lose enrollment share and see average contract values fall
  • In contrast, we see enrollment gains and rising average contract values for the Medicaid HMOs (especially CNC, MGLN, and WCG), which we strongly prefer over their commercially-oriented peers

Summary and Investment Conclusion

There is very little evidence that provisions of the Affordable Care Act (ACA) are producing a sharp rise in 2014 average premiums for health coverage purchased by individuals, as compared to 2013 ‘pre-ACA’ average individually-purchased premiums. Emphasis is placed on the ‘average’ basis of the pre- and post-ACA comparison; it’s clear the ACA will inflate premiums for some (e.g. persons who were buying plans cheaper than those that are creditable under the ACA), and reduce premiums for others (e.g. older beneficiaries in states that currently allow larger age-based premium differences than will be in place under the ACA)

We compared known 2014 HIE rates to our estimates of average rates in the current market, which we inflated to 2014 levels at the presumed (6 pct) rate of health cost growth for commercially-insured beneficiaries. Of the 10 markets[1] (9 states plus D.C.) for which we have reasonable data, we find that our estimates of current average individual market premiums (inflated to 2014) generally are on par with premiums for the bronze and/or silver coverage that will be offered in 8 of these markets’ health insurance exchanges (HIEs) in 2014. In only 2 of the 11 markets (Montana and Colorado) do we find evidence that 2014 gross (i.e. before subsidy) premiums may be substantially higher than the current-market basis

Thus of the many impacts to be felt by commercial health insurance markets in 2014, sharp increases in individual coverage premiums (aka ‘rate shock’) doesn’t (at least yet) appear to be one of them

We would hasten to add that the individually-purchased and small group markets are distinct, and that the evidence in the small group market does support the conclusion that rates in this market should rise significantly in 2014. Knock-on effects include the likelihood of increasing numbers of smaller employers choosing to self-insure[2]

And, we would emphasize that on net, despite no ‘rate shock’ at the gross premium level, the dynamics in the market for individual coverage point toward relatively slow enrollment, and a high likelihood of adverse selection[3]. As regards enrollment, penalties for remaining uninsured in the first year of health insurance exchange (HIE) operation are very small (greater of $95 or 1.0% of taxable income), the penalties only go into effect in January 2014 (despite HIE open-enrollment which begins 3 months earlier on October 1, 2013); and, the initial open-enrollment period is quite long (extending from October 1, 2013 to March 31, 2014). Unless facing significant current medical expenses, there is almost no incentive for the currently uninsured to enroll before January, and very little incentive for the currently uninsured to enroll before March 31, 2014 – unless they have reason to anticipate significant medical expenses before open enrollment resumes 6 ½ months later (October 15, 2015). Subsidies make an enormous difference in the net cost of health coverage for those eligible; however even net premiums remain quite large – for many subsidy-eligible families, the net cost of health coverage in 2014 will be on par with the costs of financing a reasonable new car[4]. As regards adverse selection, the ACA narrows the allowed age-based differences in premiums, which has the likely effect of raising premiums for younger beneficiaries more than for older beneficiaries – and the exchanges need the benefit of younger beneficiaries (whose premiums tend to exceed health costs) to subsidize the care of older beneficiaries (whose health costs are more likely to exceed premiums). The effect of age-band narrowing on squeezing out younger beneficiaries is potentially compounded by a flaw in the formulae for calculating subsidies. Irrespective of the coverage an individual actually chooses, subsidies are based on premiums charged for the second-cheapest silver plan that individual would qualify for. Since the applicable silver premium is influenced by the individual’s age, older beneficiaries get larger absolute subsidies than younger beneficiaries. Healthier beneficiaries are more likely to choose cheaper (i.e. bronze) coverage; as it turns out, bronze premiums net of silver-based subsidies can be substantially larger in absolute terms for younger than for older beneficiaries[5]

Details …

As states publish the premiums consumers will pay in 2014 for health coverage purchased on the health insurance exchanges (HIEs), we’ve struggled to determine whether these rates are higher, lower, or comparable to rates in the current market

The challenge has been creating an apples-to-apples comparison between 2013 and 2014; because the Affordable Care Act places multiple new requirements on plans in 2014, it’s been impossible to find, across all (or even most) age groups and levels of coverage, existing 2013 plans that will be sold again on the exchanges in 2014

Our first attempt[6] (in California) compared the cheapest available coverage options (for a given age group in a given region) in 2013 and 2014 – and we concluded the cheapest options in 2014 would be much (63 pct) more expensive than in 2013. The obvious problems here are that the cheapest plan in 2014 is going to be more comprehensive than the cheapest plan in 2013; and, the cheapest 2013 plan is not necessarily representative of the average plan being purchased in the current market (the mix of beneficiaries by age and health status is unknown, as is the mix of plan ‘generosities’ purchased). For these reasons, we can’t rely on the ‘cheapest to cheapest’ framework to determine whether premiums are in fact inflating for the typical beneficiary

A number of sources provide estimates of average premium levels in each state’s individually-purchased markets; however no source that we’re aware of provides sufficient granularity regarding key characteristics of currently purchased plans (e.g. deductibles, scope of coverage). However, a recent Society of Actuaries study[7] provides data showing both the age mix of beneficiaries in the individually-purchased market, by state, and the relative health costs of each age group; by cross-referencing these with the maximum age rating bands allowed by state as well as total premiums by state, we can estimate the average current-market cost of individually-purchased coverage, by age group and by state. We can then compare this current market estimate to the known premiums being offered in 2014

We still don’t know anything about the mix of coverage being purchased by a given age group, but we can at least see how the premiums across the mix of coverage offered in 2014 (bronze, silver, gold, platinum) compare to average age-group specific premiums in 2013[8]

Using California (Exhibit 1) as an example, the dashed lines and values labeled ‘pre-ACA’ reflect our estimate of the average premium paid for individually-purchased coverage in California for persons aged 25 (green), 40 (blue) and 60 (red). The ‘high-low-open’ bars for each age group reflect known values for premiums offered for that age group (by metal tier) on the exchange in 2014. Specifically, the data behind each high-low-open bar are the lowest premiums offered by each carrier for a given metal tier and age group, in a given pricing region[9]. The ‘high’ value in each high-low-open is the median of the lowest age- and tier-specific premiums offered in the state’s most expensive region; conversely the ‘low’ value in each high-low-open is the median of the least expensive age- and tier-specific premiums in the state’s least expensive region. The middle value (‘filled’ dot) in each high-low-open is the population[10]-weighted average of the lowest-premium medians across all regions. An example of our methodology is provided in the Appendix

In the cases of California, Oregon, Washington state and the District of Columbia (Exhibits 1 thru 4, respectively), 2013 (i.e. ‘pre-ACA’) estimated premiums (inflated to 2014 at the presumed 6 pct rate of health cost growth) are generally on par with bronze and/or silver HIE premiums for 2014. This is also generally the case for New Mexico (Exhibit 5), with the possible exception of premiums for older beneficiaries, where it appears 2014 gross premiums even for bronze coverage may be +/- 10 pct above the 2013 basis

Neither New York (Exhibit 6) nor Vermont (Exhibit 7) allows age rating of premiums in their current market, so in these comparisons the x-axis covers the spectrum of metal-tiers only. In both states, 2014 HIE premiums for silver coverage are on par with our estimate of ‘pre-ACA’ premiums (2013 premiums inflated by the presumed 6 pct rate of 2013 – ’14 health cost growth). Note Vermont has a single pricing region, thus the absence of mins and maxes for 2014 premiums

In its current market Rhode Island imposes no restrictions on relative premiums as a function of age[11], and the apparent variance by age is quite large (the ratio of premiums in the +/- 40 y.o. group to the +/- 20 y.o. group is greater for RI than for any other market in our sample). In contrast age-based premiums will be restricted to a 3:1 range under the ACA, thus we expect gross premiums to actually fall for older Rhode Island beneficiaries (Exhibit 8)

Thus far only Montana (Exhibit 9) and Colorado (Exhibit 10) offer solid evidence of premium inflation. In Montana, all 2014 premiums look to be well above the 2013 basis, with the exception of bronze coverage for 40-year olds. In Colorado we only have data for 40-year olds, however gross HIE premiums for all metal tiers in this age group are well above the 2013 basis

  1. California, Oregon, Washington state, the District of Columbia, New Mexico, New York, Vermont, Rhode Island, Montana, and Colorado
  2. Please see: “Why Smaller Employers Will Shift to Self-Funding; Who Wins and Loses” SSR Health, April 29, 2013
  3. “Buckle Up! A Summary of Adverse Selection Pressures on Health Insurance Exchanges” SSR Health, May 16, 2013
  4. Ibid 3
  5. Ibid 3
  6. “Premium Inflation on the HIEs – A Case Study of the California Individual Market” SSR Health, July 22, 2013
  7. “Cost of the Future Newly Insured under the Affordable Care Act (ACA)” Society of Actuaries, March 2013
  8. For comparison, we inflate the estimated 2013 premium by our assumption of the 2013 – ’14 rate of growth in per-covered-beneficiary health costs (6 pct)
  9. Many of the larger states, like California, break their insurance markets into multiple regions
  10. Simple population by region is used in our weighting calculation for all states except California, where the number of potential subsidy-eligible beneficiaries by region was readily available
  11. The only state in our sample to band premiums by age, in the current market, is Washington, which imposes a maximum age-based ratio of 3.75:1
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