A view from the Center

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Seeing double: Insurance premiums increase as expected

There’s been a lot of talk about premium price increases in exchanges lately. I am a bit surprised that large premium increases weren’t expected. Last year we explained in our paper, The 10 percent problem: Future health insurance marketplace premium increases likely to reach double digits, that the ability to get to more moderate premium rate increases is dependent on attracting younger and healthier enrollees. With the lack of continuing growth in the exchanges it’s no surprise that exchange membership disproportionately reflects those with health issues.

In the public health insurance marketplaces health plans have faced one of the most challenging pricing scenarios in recent history. New rating rules, significant regulation, a highly competitive environment, lack of experience with this newly insured population and a mix of enrollees that skews towards the sicker end of the spectrum have contributed to extreme difficulty in setting pricing assumptions.

Using Deloitte’s Health Care Reform Premium Stabilization Projection (HCRPSP) model, which incorporates multiple variables, such as cost trends, public policies, and marketplace factors, we concluded:

• Health plans that bid accurately in the first year of the marketplaces would likely have average increases of 10 percent over each of the next three years to maintain profitability in 2017*
• Health plans that bid too low could have significantly higher increases with averages of 15 percent or more needed each year to reach profitability by 2017*

All this being said, the premium subsidies shield the premium impact for many enrollees. I’m cautiously optimistic that a “death spiral,” where the market gets into a cycle of increasing premiums and smaller, higher cost enrollment pools will not happen. However, attracting and retaining younger, healthier segments of the uninsured populations will likely be critical to stabilize these markets.

While the Affordable Care Act (ACA) established three programs – risk adjustment, risk corridors, and reinsurance – to cushion health insurers’ risks in this uncertain environment, it hasn’t gone as planned. In 2015, insurers requested $2.87 billion in risk corridors payments for 2014, but only received $362 million, or 12.6 percent of that amount. Rates had already been set for 2016, giving few options to respond to the unanticipated shortfall. This means that premium rates have to increase more in 2017 and beyond to make up for the difference. The risk corridor and reinsurance program are set expire after 2016, which contributes additional premium increase requirements. Modifications are being made to increase the accuracy of the remaining risk mitigation program, risk adjustment. These modifications include incorporation of RX data and approaches to reflect the impact of members only in the plan for part of a year.

Previous insurance market reforms have demonstrated that premium stabilization mechanisms are necessary, at least until markets are stable with a reasonable mix of enrollees.

Medicare Part D uses a risk corridors program as the fallback mechanism that insurers need in order to participate. Additionally, it relies on a permanent risk adjustment strategy to maintain a stable marketplace for participating insurers.
• The Medicare Advantage program pays capitated payments to participating health plans each month. These payments comprise a base rate calculated for enrollees with average risk and a risk score that reflects each enrollee’s risk compared with the average beneficiary.
State Medicaid programs have opted for different approaches to risk adjustment, such as systems that use individual or aggregate calculations, prospective and concurrent risk adjustment, and a number of different risk adjustment models (e.g., CDPS, ACG, DxCG, and ACG). Some states incorporated temporary risk corridor provisions to further help stabilize the market.

It’s a difficult situation for many health plans and consumers. To some extent, material rate increases are currently unavoidable, as health plans can’t continue to lose the amount of money they are currently losing on exchanges. Large premium increases can exacerbate the health selection issues, reducing the appeal of these products for the healthier segment of the population, and contributing to a worsening risk pool for insurers. However, there are strategies health plans can take, and are taking, to try to reduce the size of these increases. Health plans should still consider developing multi-year, multi-faceted strategies. These strategies should consider value-based care purchasing, analytics to target care management efforts and sophisticated approaches to measuring physician performance to educate physicians and refine networks. The most common approach plans are taking steps to mitigate the necessary rate increases quickly is the development of “high value” networks. These networks are comprised of physicians that are already practicing in a manner to maximize value vs. volume.

Ultimately, large premium increases are not an effective solution. Other approaches, as indicated above, may be necessary to get a stable cross section of the population in the exchanges or the exchanges will likely not achieve their aim of providing an affordable option for the uninsured.

*Based on a Deloitte analysis

Author bio

Jim is the national leader of Deloitte Consulting LLP’s health actuarial practice. With over 20 years experience, he specializes in managed care, including accountable care (opportunity identification, payment innovation), exchanges (product development, retail), M&A (financial valuation, portfolio assessment) and analytics (performance assessment, predictive modeling). Jim has experience in commercial, Medicare, Medicaid and has led projects for plans, providers, employers and the government.