Note: In addition to Christopher Koller, Sabrina Corlette coauthored this post.
The rates are coming, the rates are coming.
While there seem to be fewer “latest verdicts on the ACA,” breathlessly reported in the popular press, as we move through the second half of 2014, the filing of 2015 rate requests for individual and small group products on the health insurance exchanges offer one more piece of catnip for pundits.
Who is up? Who is down? How much? Is this the dreaded death spiral for the ACA? Or its vindication?
Paucity of data. Insurers’ 2015 rate projections are being filed five or six months into 2014, based on at most the first two months of claims. That is a mighty small base. With limited claims data, insurers must rely on basic demographic characteristics of who enrolled in their products in the first two months and compare them to their predictions. The other drivers of premium trend – such as medical trend, actual versus predicted effects of cost-sharing and administrative costs, to name the big ones – have virtually nothing to do with the insurers’ experience with the ACA.
This is a judgment call. Insurers’ product pricing is not on known costs but on their best guesses. There remain more things to estimate with the ACA. Who will enroll in the remaining months of 2014? What will be the effects the reinsurance, risk sharing and risk corridor provisions? What will my competitors do? How badly do I want market share through the exchange? How are my other lines of business, such as Medicare Advantage, large and small group, and Medicaid plans performing?
Rate review matters. Particularly when insurers are operating in less-than-competitive insurance markets, the business tendency will be to answer the above questions in ways that err on the side of caution and to pad estimates to protect reserves. Comprehensive, independent, public scrutiny of the requested rate increases and the insurers’ justification for them is absolutely necessary to find a healthy balance between product affordability and insurer stability. A recent report from the U.S. Department of Health and Human Services concluded that state and federal rate review efforts saved consumers an estimated $1.2 billion in premium costs in 2012, compared to the rates that insurers had originally requested. But not all insurance regulators have the statutory authority or the intestinal fortitude to do this work.
The new health insurance exchanges are small ball. With the exception of Medicaid managed care plans and Co-op plans who entered the commercial market via the marketplaces and the ACA, the small group and individual markets are small potatoes for commercial insurers. The fully insured large group markets and self-insured are where the bulk of their commercial business exists. Insurers will presumably coordinate their pricing strategies across these markets, and it will be the job of regulators to make sure less powerful purchasers –those in the individual and small group markets – do not get the short end of the stick.
In the end it is trend. The cost of medical care makes up eighty to eighty five percent of our insurance premium. Insurers, with public accountability, can shave profit and administrative costs and shift costs between consumers and themselves and between products. They have proven pretty helpless however at influencing the underlying utilization patterns of whole populations and, particularly in concentrated markets, the prices of hospitals, physicians and other providers. When insurers propose different rate increases within a market, it likely reflects different pricing strategies, characteristics of their covered populations and cost estimation decisions – not a differential ability to lower the cost of medical care.
Unit price and utilization are what drive medical trend and thus much of the underlying price changes in insurance. All stakeholders – regulators, providers, purchasers and the general public – would do well to stay focused on what is happening with medical trend and what sort of reform will keep costs in check and less on the ability of insurers to shift these costs between various products and purchasers. A well-overseen, more transparent market as envisioned by the ACA is a good step in this direction.