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Maximize Value Infographics August 19, 2020

The New Normal for Health Coverage

Part 4: State-by-State Market Impact

Partner, Health and Life Sciences, Oliver Wyman
Principal, Health and Life Sciences, Oliver Wyman
Partner, Health and Life Sciences, Oliver Wyman
Partner, Oliver Wyman Actuarial Consulting
Senior Consultant, Oliver Wyman
Key Takeaway
Our modeling finds differences in pre-COVID-19 unemployment numbers, unemployment growth, demographics, and employer coverage dynamics by industry, wage level, and firm size all drive a spectrum of impacts across states in employer-provided coverage levels. #OWHealth

Editor’s Note: This article is an extension of our ongoing Oliver Wyman Health series on the healthcare industry’s response to COVID-19 – Unemployment’s Tipping Point and the New Commercial Mix. We last left off with Part 3 – What a New Member Mix Means for Payers – where we explored COVID-19’s implications on potential health coverage mix shifts under various unemployment scenarios and posed key questions around impact drivers at the regional and local level. Read our full series here.

COVID-19 and Economic Lockdowns Hit Some Markets Much Harder Than Others

We’ve been following COVID-19’s progression across both the United States and the world and tracking pandemic-led recession impacts across our economy. Employment has rebounded substantially since April when real unemployment was briefly near Great Depression-era levels. But unemployment still hovers above 10 percent nationally. Its trajectory remains uncertain, shown in projections by Federal Reserve Board members and Federal Reserve Bank presidents ranging between seven and 14 percent. However, early indicators show migration in the health coverage mix is already starting to occur, and the impact spectrum at the state and market level has been very uneven.  

Take Hawaii, Nevada, and Michigan, for example, which all saw unemployment above 20 percent in April. This was while the country was at 14.7 percent unemployment, later on in June remaining five percentage points higher than the national median (recognizing data caveats).

What drives the wide disparity and what can we glean about follow-on recovery and health coverage mix shifts? Naturally, the industry mix looms large. Hawaii and Nevada, for instance, are heavily reliant on out-of-state tourism. Or, consider Michigan, which is heavily reliant on manufacturing. The halo effect seen in these states from disruption to their anchor industry was large and immediate. We observe these effects at the market level as well, such as how Orlando – also heavy in tourism – saw much higher unemployment increases than Florida did overall.

On the other side of the spectrum, cities like Jacksonville or Gainesville that skewed more towards less-impacted industries like government or have a high military presence saw lower unemployment impacts. Within states, unemployment impacts have disproportionately impacted lower-wage jobs, sub-populations of workers like women and minorities, and small businesses. 

Small businesses, in particular, are still seeing 25 percent of their employees yet to be called back to work. We expect a forthcoming “white-collar wave” will drive higher impact to high wage jobs and larger businesses as companies are forced to right-size their cost structure top-to-bottom in response to the hits to financial performance. 

What Does This Mean for Commercial Group Coverage?

Our modeling finds that differences in pre-COVID-19 unemployment numbers, unemployment growth, demographics, and employer coverage dynamics by industry, wage level, and firm size all combine to drive a spectrum of impacts across states in employer-provided coverage levels – if June unemployment levels were to sustain to year-end. (We hope this is not the case, but have chosen to use June just as an anchor for illustration.) 

Even after controlling for the total unemployment level, the impact on some states is twice as large as that of others.   

Six Factors That Dictate Coverage Sought After Job Loss 

States will see considerable differences in coverage mix shifts, even controlling for job loss impacts. The below six factors explain the bulk of variation across markets regarding what kind of coverage people seek after losing their jobs, and corresponding employer-provided insurance:

  1. Inherent preferences to seek insurance: Consumer preferences and risk tolerances vary across geographies, leading to quantifiable differences in proactivity in seeking coverage.
  2. Medicare eligibility: Naturally, anyone who is over age 65 and loses their job and employer-provided coverage can sign up for traditional Medicare or a Medicare Advantage plan. In most markets, this is a small portion of the workforce. 
  3. Alternative family members with employer coverage: Many dual-income families will be able to retain coverage through their spouse’s employer. Those under age 26 who lose their jobs may be able to seek it through a parent’s coverage. Depending on the market, the portion of people who retain coverage through a family member may range from 44 percent to over 60 percent. 
  4. Medicaid eligibility and expansion: Medicaid expansion status and eligibility requirements lead to stark state-level variations in destination coverage. Non-expansion states can see as low as 36 percent of the rate of movement to Medicaid after job loss compared to the national level.
  5. The number of household children: One unexpected finding of the analysis was the relevance of the average number of children in a family for non-expansion states in particular. All states have basic Medicaid coverage for children. Markets with higher rates of children see higher shifts to Medicaid. For example, Houston is predicted to see 29 percent of lives that drop from Commercial Group move to Medicaid. In contrast, Austin is predicted at 16 percent. 
  6. Affordable Care Act (ACA) exchange dynamics: General acceptance of the ACA markets and affordability of ACA premiums net of subsidies can vary. In one state, a major metro area saw premiums net of subsidies cost the consumer only $139 per month, while the net cost in another metro of the same state was well over $350 per month. The cheaper market is predicted to see nearly 70 percent take-up by those losing commercial coverage. In comparison, the higher cost markets will see as low as 30 percent take-up. Eligibility for subsidies is a factor here, as well. 

Notably, coverage mix shifts from unemployment will occur on a lag. We are in a unique time with a significant portion of the unemployed being on furlough and retaining their employer-provided coverage, at least temporarily, until they are brought back or formally laid off. Some impacted households are likely deferring the purchase of new coverage amid high ambiguity and limited awareness about eligibility and available coverage options. 

We expect these factors to largely resolve themselves in the final quarter (Q4) of 2020. Other drivers of delayed shift will occur over a longer horizon. For example, the lack of awareness on Medicaid eligibility may lead some to remain uninsured indefinitely or until a health event occurs and they are signed up at point-of-care, or the election of COBRA coverage during the administration’s extension of the election period.   

Four Implications for Healthcare Leaders

1. Factor health coverage mix shift into your financial projections and strategic planning. With unemployment likely to remain high at least through the end of the year, most markets will see some meaningful coverage mix shift. The factors above can be used to estimate your market’s relative risk. Payers must focus and invest differently across lines of coverage and consider new benefit designs to meet changing employer and consumer needs. Care providers may also consider hyperlocal dynamics to estimate how risk to individual sites will vary from the market risk – such as the demographics of the local market served, the strength of brand and service lines to retain patent draw, and even potential migration in or out of the immediately surrounding community due to economic hardship.

2. Consider second-order effects from impacts to other stakeholders. This recession is impacting every stakeholder group in the healthcare ecosystem (and beyond), resulting in material follow-on effects. For consumers, shifts towards Medicaid and uninsured may drive congestion in emergency departments and increase demand for behavioral health services. The explosion in demand for virtual warrants a rethinking of the care model. For the government, states will cut Medicaid rates, benefits, and/or eligibility as they look to relieve budget pressure. Longer-term, states could and likely will cut capitation rates to Medicaid managed care organizations (MCOs), reduce benefits, and/or change eligibility requirements to align spending with state budgets. However, as long as the national emergency continues, they receive an enhanced match from the federal government (an additional 6.2 percent) and a condition of receiving that money is that they can’t reduce benefits, change eligibility to be more restrictive, or remove people from the program when they are no longer eligible. For payers and providers, pressure on margins brought on by a decline in commercial enrollment will translate to tougher reimbursement rate negotiations and more aggressive medical cost management tactics. For employers, revenue and margin pressure will drive some to reduce benefits, encourage adoption of price shopping tools and navigation services, and expand narrow network offerings.

3. Plan for multiple contingent futures. The path forward is still highly ambiguous. Leadership teams will be best prepared by equipping themselves to respond to the evolving environment by casting multiple scenarios for the future and setting contingent management plans for those scenarios. This will create clarity and alignment that will enable more rapid action as is needed.  

4. Reconsider investment strategies for the new normal. Provider service line profitability will rotate as health coverage mix shifts, as will payer lines of business. Previously profitable services may no longer be sustainable and investments with a robust business case pre-COVID-19 may no longer have a justifiable return on investment. Assess future service line profitability and realign amongst the executive team on what investments and portfolio of initiatives will best foster future success. 

The Future

The road ahead will continue to be challenging but proactive planning for the economic consequences of the COVID-19-led recession and health coverage mix shifts will help organizations remain sustainable and improve their chances of a quicker return to growth after the pandemic subsides.  

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