Last week the Department of Health & Human Services publicly posted health insurance companies’ proposed rate increases of 10 percent or more for the 2016 coverage year as part of its “commitment to transparency and robust rate review.” Jac Joubert with Oliver Wyman’s actuarial practice reviewed the list and has these observations to share:
What stands out is the length of the list. More than 480 products across over 100 issuers in the individual market are requesting increases of over 10%, suggesting that higher increases were at least somewhat pervasive. Additionally, the list includes Blue Cross or Blue Shield entities in 22 of the 30 healthcare.gov states where these entities offered individual exchange products. The widespread need for rate increases is not totally unexpected – S&P analysisshowed that 30% of issuers studied booked an expected receipt from the risk corridor program, indicating significantly worse than expected financial performance.
Then there were the headline-grabbing high increases. The 65% requested by Blue Cross of New Mexico was only a single case among the 30% of the product rate increases included in the listing that were for issuers requesting increases over 30%. Also, large increases were not limited to a specific business model: in addition to the Blues entities, the list included integrated health plan Geisinger Health with requested rate increases of over 40% for its HMO products, and the mutual Co-Ops such as those in Tennessee, New Hampshire, and Utah with requested increases as high as 59%. This suggests that rate increases are at least partially due to initial mispricing and an evolving environment, rather than a case of overcharging of consumers by a specific subset of issuers.
All increases are not created equal. Clearly the impact of a large increase on a high-priced, off-exchange-only issuer with limited enrollment in 2015 is different from the same increase on the market leading silver plan on the exchange. The list as published includes both types. We performed a simplified analysis, comparing the products with large increases against the 2015 listing of exchange premiums for states with a federally facilitated marketplace (FFM). In each state, we looked only at silver plans in the most populous county in the state. We found that in 14 of the 33 states, the lowest cost silver plan was among those included with increases considered potentially unreasonable (i.e. >10%).
But what does that mean for the consumer going into 2016? We know from prior exchange data and research that the majority of individuals covered on the exchanges qualify for subsidies, that subsidized individuals tend to prefer these lower cost plans, and that the impact of rate increases tend to be leveraged for those individuals receiving subsidies, sometimes significantly so. This suggests that a majority of consumers in a material subset of markets may face substantially increased net premiums after subsidies, come January 2016.
Complicating matters further, open enrollment periods continue to be moved closer to the start of the year. In 2016 open enrollment is scheduled to end on January 31, 2016, limiting the time individuals would have between when the first increased premium is payable and open enrollment closes (in 2017 and beyond open enrollment is scheduled to end on Dec 15 of the prior year). Even with the slightly longer open enrollment period in 2015, CMS data shows that 47% of returning individuals were auto-enrolled into their plans in 2015.
The conclusion is clear. Those interested in limiting the impact on consumers, or those offering competitive alternatives in the market cannot rely on price exclusively to drive individuals to their products. Effective market segmentation and outreach is critical to help these individuals make the right decision. And consumer impact goes beyond out-of-pocket premium costs after subsidies. Being able to maintain care during a transition between plans in a market increasingly characterized by narrow or tiered networks is a challenge in and of itself.
What should we expect for 2017 and beyond? What does that mean for participating issuers? The 2016 rate increases represent a departure from recent history of depressed trends. We don’t expect that this represents a new longer term shift towards high double-digit increases. Nevertheless there are a couple of reasons to believe that the 2017 rate changes may be above medical trend levels again, creating additional disruption in the market. Consider:
- In the 2016 market, individual ACA plans will have some of the expense related to high-cost claimants covered by a $4B transitional reinsurance fund, which will be completely phased out in 2017. The $4B funding reduction will have to be offset with premium increases.
- Regulators will likely approve lower rate increases for 2016 than those requested by issuers to fully compensate for increased costs. Issuers may find that they continue to need the amount originally requested, and will likely attempt to obtain some of these amounts as part of the 2017 rate submission.
- Some of the newer entrants, or those with limited 2014 enrollment, would have had little real data to use for 2016 pricing. It is significant that a number of the market price leaders and larger issuers are also among those requesting larger premium increases. Some of the issuers with more limited experience prior to 2016 pricing may find that they too need to increase rates to cover increased costs in 2017.
With time, as market knowledge increases, the expectation is for rate increases to become less variable and to be driven more by competitive dynamics than pricing uncertainties. I see this as holding important implications for health plans as they look forward to the 2017-2020 period:
- The likely pricing disruption in 2017 provides a final chance for those health plans with a previously conservative strategy around participation in the exchanges to aggressively enter the market in select areas.
- As pricing matures, it becomes increasingly important that issuers understand the population profiles that they can serve most efficiently and profitably (after risk adjustment transfers). Plans need to invest in the analytic capabilities to understand their population, not just at a claims level, but also in terms of their purchasing profiles and willingness to adopt desired behaviors, and ultimately the lifetime value of different consumers.
- As market knowledge improves, risk margins on average are expected to come under pressure. Plans with capabilities to drive product designs to better serve target segments, and to implement demand-based pricing within the constraints of the law, will be better able to protect and maintain margins over time.
As of now, the 2016 rate increases are just a part of the larger story around the transformation of the individual market. Market leaders have been building out these capabilities, but the lack of market maturity to-date has meant that these plans have not yet been able to fully apply capitalize on these investments. Competitors should expect that the plans will increasingly leverage their understanding of the price sensitivities and purchasing preferences of cohorts in the market to optimize portfolio design and pricing, and attract target individuals to solutions they value highly.
The ACA has been the impetus for much change since 2013. Only at the end of 2016, do we see the final phase-out of the transitional reinsurance and risk corridor programs, the initial crutches to stand up the new market. Only now are we seeing the market start to mature, as the risk level in the market is becoming known to issuers. This presents health plans with both the opportunity and the imperative to fine-tune their product and pricing capabilities beyond the initial market testing and compliance phase, and to focus on those areas where they can outperform peers over the medium term.