Members of the Individual and Small Group Markets Committee include: Karen Bender, MAAA, ASA, FCA, chairperson; Barbara Klever, MAAA, FSA, vice-chairperson; Eric Best, MAAA, FSA; Philip Bieluch, MAAA, FSA, FCA; Joyce Bohl, MAAA, ASA; Frederick Busch, MAAA, FSA; April Choi, MAAA, FSA; Sarkis Daghlian, MAAA, FSA; Richard Diamond, MAAA, FSA; James Drennan, MAAA, FSA, FCA; Rebecca Gorodetsky, MAAA, ASA; Audrey Halvorson, MAAA, FSA; Juan Herrera, MAAA, FSA; Raymond Len, MAAA, FCA, FSA; Rachel Killian, MAAA, FSA; Kuanhui Lee, MAAA, ASA; Timothy Luedtke, MAAA, FSA; Barbara Niehus, MAAA, FSA; Jason Nowakowski, MAAA, FSA; James O’Connor, MAAA, FSA; Bernard Rabinowitz, MAAA, FSA, FIA, FCIA, CERA; David Shea, MAAA, FSA; Steele Stewart, MAAA, FSA; Martha Stubbs, MAAA, ASA; Karin Swenson-Moore, MAAA, FSA; David Tuomala, MAAA, FSA, FCA; Rod Turner, MAAA, FSA; Cori Uccello, MAAA, FSA, FCA; Dianna Welch, MAAA, FSA, FCA; and Tom Wildsmith, MAAA, FSA.
Major Drivers of 2017 Premium Changes
SUNSET OF REINSURANCE PROGRAM FUNDS. The ACA transitional reinsurance program provides payments to plans in the individual health insurance market, with payments declining over the three years of the program, from 2014 to 2016. The year 2017 will be the first year in which there is no reinsurance in the individual market supported by contributions from health plans under the ACA.1 By offsetting a portion of claims, the reinsurance program lowered premiums, and each year the gradual reduction in reinsurance funding resulted in a corresponding increase in premiums. The final impact of the program on premiums will occur in 2017, when projected claims are expected to increase by 4 to 7 percent due to the reinsurance program ending in 2016.
HEALTH INSURER FEE. The health insurance provider (HIP) fee was enacted through the ACA. The HIP fee is scheduled to collect $11.3 billion in 2016, and insurers built this cost into their premiums. The Consolidated Appropriations Act of 2016 included a moratorium on the collection of the health insurer provider fee in 2017. Insurers will remove the cost of this fee in their 2017 premiums, resulting in a reduction in expected premiums by about 1 to 3 percent, depending on the size of the insurer and their profit/not-for-profit status.
CHANGES IN PROVIDER COMPETITION AND REIMBURSEMENT STRUCTURES. Consolidation of health care providers has been ongoing in many local markets, largely for the purpose of increasing providers’ negotiating power. This trend is likely to continue. Any increased negotiating power among providers could put upward pressure on premiums. On the other hand, mergers of health care plans can have the opposite effect if they increase health plans’ negotiating leverage with providers. It is also notable that insurers are pursuing changes in provider reimbursement structures that move from paying providers based on volume to paying based on value. For example, accountable care organization structures offer incentives to provide cost-effective and high-quality care. Such efforts could put downward pressure on premiums, at least in the short term.
CHANGES IN ADMINISTRATIVE COSTS. Changes in administrative costs will also affect premiums. For instance, changes can result from increased costs associated with ACA implementation or from spreading fixed costs over a different enrollment base than projected. Moreover, as the ACA reforms have gone into effect, the important role that brokers can play has been acknowledged, and reductions in commissions that may have been expected generally have not been realized. However, some plans have decided to eliminate or dramatically reduce commissions for marketplace sales, at least outside of the open enrollment period. This may help reduce premiums, not only because of the lower administrative costs, but also due to the expectation that there may be less adverse selection during the year. On the other hand, some health plans are finding that increased regulatory requirements associated with the administration of provisions in the ACA are increasing their administrative costs. These costs all need to be reflected in premiums. Depending on the circumstances in any particular state, these changes in marketing and administrative costs can put upward or downward pressure on premiums. However, the ACA’s medical loss ratio requirements limit the share of premiums attributable to administrative costs and margins.
CHANGES IN GEOGRAPHIC FACTORS. Within a state, federal rules allow health insurance premiums to vary across geographic regions established by the state. Insurers can use different geographic factors to reflect provider cost and medical management differences among regions, but are not allowed to vary premiums based on differences in health status (which should be accounted for by the single state risk pool construct and risk adjustment process). An insurer might change its geographic factors due to changes in negotiated provider charges and/or in medical management of some regions compared to others. A decision to increase or decrease the number of regions in which the health plan intends to offer coverage in 2017 within a state could also result in a change in its geographic factors. Another key reason for changes in geographic factors could be new provider contracts that reflect different relative costs. A realignment of these differences could result in changes across the rating regions within a state.
PREMIUM CHANGES FROM A CONSUMER PERSPECTIVE
Premium changes are often the most visible and discussed aspect with respect to the ACA impact on health insurance. However, premium changes can be measured using different approaches, making it difficult to compare premium changes among health insurers, among plans offered by an insurer, or among consumers.
In addition, the average premium change within a specific insurer may not represent the premium change experienced by a particular consumer. The ACA requires that premiums vary only by age, tobacco use, geographic location, family status, and benefit design. Premium changes from a consumer perspective can then result from underlying medical trends and other aggregate premium factors, as well as changes in these consumer-specific factors. The following situations could result in a premium change a consumer experiences differing from the average premium change reflected in a premium rate filing.
Changes in Age
All insurers are required to use a prescribed age rating curve (either the federal default curve or a state-established curve) when determining how to vary premiums by age. In other words, premium variations by age are the same regardless of insurer. Most individual consumers will experience a premium increase each year, due to aging one year. Such a change (on the order of 2 to 3 percent per year for individuals older than 24) is rarely included in insurer-level premium change calculations because it does not represent a change in the underlying factors. But it is a change a consumer would experience.
In most states, insurers are allowed to charge smokers more than similar nonsmokers, and this surcharge can vary by state and by age. In other words, older smokers can face higher surcharges than younger smokers (or vice versa). In plans that vary the surcharge by age, consumers who smoke will see a premium change due to the change in the tobacco use surcharge. In addition, consumers who have either started or stopped using tobacco products could see a premium change.
Changes in Geographic Location
All states require the use of rating areas prescribed by the CMS. Insurers are not allowed to change the rating areas but are allowed to change how premiums vary across areas due to differences in relative provider charge levels and differing levels of medical management. Such a change may or may not be included in the average aggregate premium change from the insurer’s perspective, but it is a change a consumer would experience depending on where they live. If a consumer moves from one rating area to another, that also may result in a premium change.
Changes in Benefit Design
A plan’s benefit design encompasses both the benefits covered as well as the associated cost-sharing requirements (e.g., deductibles, coinsurance, copayments). Consumers who switch to a new benefit design or are re-enrolled in a different plan due to discontinuance of a plan could experience a premium change due to the benefit design change. If an insurer discontinues offering plans at a metal level, such as platinum or bronze, consumers in those plans may be re-enrolled in the next higher or lower metal level plan, which could significantly impact the premium. Insurers also might change covered benefits or cost sharing (subject to uniform modification provisions of guaranteed renewability) in order to offset medical trend or maintain the metal level.
The ACA allows premiums to vary by family size. Family premiums reflect the premiums for each covered adult plus the premiums for each of the three oldest covered children younger than 21. Therefore, consumers with family coverage who experience a change in family composition could face a premium change.
The ACA provides premium subsidies in the individual market based upon household income. Changes in income alone can result in upward or downward changes in the net premiums that any specific consumer may have to pay, even if there is no change in the underlying premiums. A change in available plans offered in the market also could affect the subsidy an individual receives.