Premium Inflation on the HIEs – Case Study of the California Individual Market

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Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627 revans@/shinds@/


July 23, 2013

Premium Inflation on the HIEs – Case Study of the California Individual Market

  • Gross of subsidies, and controlling for medical cost inflation, 2014 individual premiums for the cheapest plan option in the California market are substantially (average 63%) higher than for the cheapest option in the current market. We believe much of the ‘cheapest option’ inflation is due to the fact that the Affordable Care Act’s (ACA) minimum essential benefits provisions result in 2014’s cheapest options being substantially more generous coverage than the cheapest options offered in 2013
  • The jump in premium costs is greater for younger than for older beneficiaries; we believe this is because the ACA narrows the allowable bandwidth of age-based premium differences. The practical effect is likely to be reduced participation rates for younger / healthier beneficiaries, with negative consequences for adverse selection
  • Importantly, even after accounting for subsidies (which are available in 2014 but not 2013), ‘out of pocket’ (OOP) premium inflation is considerable for many beneficiaries. This too implies a high likelihood of adverse selection on the individual exchanges, as well as low overall rates of participation as the individual HIEs begin operating

California’s individual health insurance exchange (HIE) proposed premiums are comprehensively (i.e. by carrier, tier, and age) and systematically disclosed and summarized; this contrasts with most other states, where disclosures either are not yet available, or are not sufficiently comprehensive for our purposes. Thus for the moment, our analysis is limited to the California market, though we believe the findings have at least some relevance to what is likely to occur at a national level

CA has 19 geographic regions across which rates are set by carriers; for each region the state discloses minimum 2014 HIE premiums by carrier by tier for a 25-year old, 40-y/o, 60-y/o, and family of four. We compared these to the lowest available current-year premiums, by carrier and by region (approximated using the most populous zip code of each region), for a 25-y/o, 40-y/o, and family of four. We assumed current-year rates would increase by 6% because of medical cost inflation, and compared these inflated 2013 ‘baseline’ rates to out-of-pocket 2014 HIE premium costs (i.e. premium costs after applicable subsidies). Premium growth rates by region were rolled up to statewide averages on a weighted (by the regions’ subsidy-eligible population sizes) basis

Exhibits 1 thru 3 show the change in the lowest available (2014) HIE OOP premium cost over the lowest available non-HIE (2013) total premium cost, by metal tier, by federal poverty level (FPL). In other words, in each region, the cheapest (2014) HIE OOP cost by tier across carriers was compared to the single cheapest non-HIE (2013) total premium across carriers; then the state weighted average was derived. The three charts show the results for the 25-y/o, 40-y/o, and household. Gross of subsidies (dotted lines), premium inflation is substantial across all three beneficiary types; we believe this is because the Affordable Care Act’s (ACA) minimum essential benefits requirement results in 2014’s cheapest option being substantially more generous coverage than the current market’s cheapest option. OOP cost growth is greater for younger beneficiaries than for older, presumably because the ACA narrows age-based premium differences

Despite subsidies, many beneficiaries (above roughly 225% of FPL for 25 and 40 y/o individual plans, and above roughly 300% FPL for a family of four) will experience higher OOP premium costs in 2014 than in 2013, even if choosing the cheapest option available in both years

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