March Madness: With Scant Data, Actuaries Rely on Risk Models for Setting 2015 Rates

Reprinted from INSIDE HEALTH INSURANCE EXCHANGES, a hard-hitting newsletter with news and strategic insights on the development and operation of public and private exchanges. By Steve Davis, Managing Editor March 20, 2014 Volume 4 Issue 6 In May, insurance carriers will begin filing their 2015 rates for the products they intend to sell on government-run exchanges next fall. But actuaries are just beginning to analyze the limited information they have on the 2014 exchange enrollees, including their potential risk. While health insurers have more information about enrollees than they had a year ago, they still don’t have much to work with. The health risk profile of enrollees is still a bit of a guess. And there is an expectation that the healthiest people will wait until the last possible moment to sign up, which means carriers will have no information about those who enrolled in late March. A variety of factors could make double-digit rate hikes unavoidable for some products sold on exchanges. According to the latest enrollment numbers from HHS, exchange enrollees are a little bit older and include more females and fewer children than most carriers anticipated. And enrollment numbers are lower than they expected. Rate-setting actuaries must also factor in the insurance tax mandated by the Affordable Care Act (ACA), and the possibility that people in some states will be allowed to remain in non-ACA-compliant plans until 2016. “I think the health plans are still a little in the dark about what their risk will look like. And it doesn’t take much for premium rate increases to exceed 10%,” explains Chris Carlson, a principal and consulting actuary at Oliver Wyman. Carlson says the underlying risk, in a best-case scenario, will increase rates 6% to 8%. Lower-than-expected enrollment could add another 1% to 2%. The insurance tax, which became effective in 2014, may add an additional 0.5% to 1.0% to premiums for 2015 as the tax increases from $8.0 billion to $11.3 billion. The overall impact the insurance tax will have on 2015 rates, compared to what’s built into 2014 rates, is about 0.5%, Carlson says. The percentage increase is dependent on how much total industry premiums change in 2014 relative to 2013 and the mix between for-profit and tax-exempt insurers. “All of a sudden you’re over 10%, and I think that is where the greatest concern comes in.” Some regulators simply won’t approve rates above a certain level, he tells HEX. Carriers also will need to factor in the expected impact of the reinsurance, risk corridors and risk adjustment programs — the so-called 3Rs — when determining their pricing, says Jim O’Connor, a consulting actuary at Milliman. “Carriers will do relatively well for people with some conditions,” he tells HEX. While the temporary risk-corridor program is outside of the pricing formula, it might still be considered because it can protect against mispricing by limiting insurers’ losses and gains. Miscalculations May Cost Insurers During a March 7 session at America’s Health Insurance Plans’ (AHIP) Health Insurance Exchanges Forum in Washington, D.C., O’Connor and Carlson explained some of the strategies being used to price products for 2015. Carriers that miscalculated the average age of enrollees for 2014 could see a significant impact on their underwriting margins, which will affect how they price for 2015. In a model illustration where a health plan has 50,000 members, the carrier could expect to collect about $300 million in annual premium, and to spend about $264 million in claims. But if the average age of the enrollees is just two years older than predicted, the premiums collected grow to $316 million, but the medical loss ratio (MLR) increases by about 1.4%. The impact on the underwriting margin would be $2.3 million. “That’s a fairly significant amount considering the very slim margins for health plans,” Carlson told attendees. Moreover, health insurers with enrollment below the level predicted could face additional risk, he added. “Basically, you are collecting premium that is less than the expected cost of the individuals you’re enrolling,” Carlson tells HEX in a subsequent interview. For every individual that you enroll over the age of 55, you are expected to lose money on that person based on the uniform age-rating curve (prior to application of the 3Rs). Unless you have enough younger individuals to make up for that loss, it’s going to drive up your MLR, he explains, because the 3R risk transfer payments will likely be lower. “That is a concern if the risk adjustment system, coupled with the reinsurance, is over-biased for the unhealthy,” O’Connor explains in a telephone interview with HEX. The model, based on more than 300 million member-months, indicates that the 3Rs might go further than expected to mitigate risk, he says. Carriers could see a drastic change in the profitability of certain enrollees once the 3R calculations are applied. Traditionally high-cost populations, such as women of child-bearing age and older adults, become more profitable, while young adult males move from being very profitable to being less profitable or even slightly unprofitable, O’Connor told attendees. “And then as the males age, they become pretty attractive after the 3Rs,” he said. The amount of profits will vary by carrier. According to the latest enrollment data from HHS, 55% of exchange enrollees are female, but 53% of the uninsured population is male. Also under the risk-adjustment program, enrollees who have all but nine of the 127 medical conditions identified by CMS could translate to higher profit margins, O’Connor told attendees. Moreover, when combined with the reinsurance program, people with certain conditions could mean a double payment for carriers, he added. Based on one of Milliman’s illustrative models, the average profit margin for a member with certain medical conditions was about 23%. But the margin for enrollees who didn’t have one of those conditions was between -5% and zero. These results were based upon a specific set of assumptions that will likely differ somewhat from actual results, given the demographic distributions emerging on the exchanges. However, directionally they indicate the importance of the 3Rs to the pricing process, he tells HEX. “The problem is that no one really knows, at this point, the real adjustment they’re going to have…because that depends on the health status of the entire state pool for either individuals or small-group,” O’Connor says. Carriers don’t yet know their own risk profile, nor do they know the state’s overall risk profile. Through the use of self-reported health assessment surveys conducted by the federal government, actuaries have attempted to estimate the risk of enrollees, but the results likely won’t be very reliable. Some carriers will have a better handle on their risk than others, O’Connor tells HEX. A Blues plan, for example, might already have 80% of a state’s individual market, and might have a good understanding of the state’s risk factor for the uninsured. But smaller carriers will have a difficult time estimating the risk. For example, Consumer Operated and Oriented Plans (CO-OPs), which have no enrollment history, will find it very difficult to set rates for 2015, O’Connor says. Some carriers decided to be neutral in terms of risk when setting their 2014 rates and might opt for the same strategy for 2015. But O’Connor says that might not be a wise strategy. Two ‘Rs’ Are Better Than One The reinsurance program, which runs for three years, reimburses carriers for individuals who exceed $45,000 in medical expenses in 2014. The threshold was lowered in November — from $60,000 — after the White House gave states and carriers the option of extending non-ACA-compliant plans (HEX 12/19/13, p. 1). The threshold increases to $70,000 for 2015. Typically carriers have a reduction in their 2014 rates of between 6% and 15% because of the program. But those reductions were based on the original $60,000 threshold. Moreover, because the reinsurance program doesn’t coordinate with the risk-adjustment program, an insurer that has an enrollee with a high-risk profile who winds up with more than $45,000 in medical expenses in 2014 could be reimbursed through both programs for the same claim, O’Connor says. “HHS was aware of this, but thought it would be too complicated to integrate those two programs since the reinsurance program only lasts three years,” he tells HEX. ‘Grandmother’ Plans Factor in Allowing members to renew their non-compliant health plans as late as Oct. 1, 2016, is another factor actuaries need to consider when setting rates. Last month, the Obama administration said state regulators and health plans could determine if people now covered by non-ACA-compliant plans could continue that coverage (HEX 3/6/14, p. 8). There is an expectation that people in need of richer coverage will drop their existing coverage in favor of richer benefits on the exchange, while healthier people will continue with their existing plans — dubbed “grandmother” plans by some — until they’re forced to change. And low-income individuals — who tend to have higher morbidity — will migrate to the exchanges for the subsidies and the more comprehensive benefits, O’Connor says. http://aishealth.com/archive/nhex032014-02?utm_source=Real%20Magnet&utm_medium=Email&utm_campaign=36079962