Health insurance rates get pumped up by ACA provisions
A recent study commissioned by Covered California to determine how individual health insurance rates will be impacted by the Affordable Care Act in California researched a variety of factors that influence health insurance rates. The Milliman [download id=”50″] study presents a picture of overall upward pressure on rates in California for health insurance. Because tax credits, cost sharing subsidies and other individual circumstances, many people that purchase health insurance through Covered California may actually realize lower monthly health insurance premiums compared to 2013.
Covered California Milliman Report
The study reports three areas that are drivers for health insurance premium increases
- Average trend of 9%: this is assumed to be the normal increases to cover higher health care costs.
- ACA market changes of 14%: the cost to cover to the uninsured entering the market because of the individual mandate.
- Increased coverage 16.9%: health insurance plans offered in 2014 will have more benefits, covered services, than older policies.
How average is the average trend?
The average trend of 9% maybe high because California has mandated several new health insurance elements for individual health insurance and carriers may have been spiking rates in advance of full implementation of the ACA. In the last couple of years California as mandated gender neutral health insurance premiums, required all plans include maternity coverage and treatment for autism. Consequently, filings for rate increases for individual plans may have been above the historical average.
The 14% increase to rates forecasted by the study for the newly insured certainly reflects the increased number of people that will take advantage of the “no charge” preventive office visits included in the ACA like mammograms, vaccinations and colonoscopies for people over 50 years old.
Bigger bag of benefits
Possibly understated to all Californians is the increase in rates from more comprehensive coverage. The new plans under the ACA offered by Covered California will feature more groceries in the health insurance bag. In other words, even the least expensive health insurance plans of the bronze level will have more value than current health insurance policies. The value comes from smaller deductibles and co-insurance, both of which are a primary driver of premiums.
Many plans will be required to change their cost sharing in 2014 due to the requirement that all plans provide an actuarial value of at least 60%, with the exception of the catastrophic plan. Current national and state surveys suggest that the average individual market plan offers an actuarial value of 55% – 60%, with many plans falling well below the 60% threshold.14,15,16
Various changes to health insurance
The whole health insurance market place is in a state of flux as provisions of the ACA are built into existing and new plan offerings.
- Gender neutral rates: no rate change for being either male or female
- Maternity coverage on all plans regardless of gender
- No cost preventive office visits for many screenings to prevent disease
- Medical Loss Ratio: 80% of collected premiums must be spent on care and improvement
- Age rating ratio of 3:1, a 64 year old can be charged no more than 3 times a 21 year old
- Mental health benefits
- Prescription drug coverage
Downward pressure on health insurance rates
The study suggests downward pressure on insurance rates will come from a couple different areas. First, insurance companies must participate in a reinsurance protection program.
The Reinsurance Program enacted in the Affordable Care Act will reimburse carriers for 80% of claim costs in excess of $60,000, up to a reinsurance cap of $250,000. This program is financed through a fee on all insurance policies, including large group employer policies, with the resources only used for reinsurance for the non-grandfathered individual market, both on and off Covered California.
The Milliman study expects this protection against claims will help reduce premiums by 9.1%.
Second, an unknown cost saver to insurance companies will be the elimination of their underwriting department for individual health insurance. Currently, the underwriting department scours applications for rate adjustments or denial. Guarantee issue of all health insurance plans will eliminate this administrative cost. In addition, there is the cost of 3rd party nurse interviews for new applicants and the cost of paramed exams for new applicants that have not seen a doctor in over 5 years.
The evil middleman commission
Covered California may be under the illusion that insurance company costs may also be trimmed by reduced broker or agent commissions when plans are sold through the exchange.
The Exchange shared anecdotal information with us that in the current California individual health insurance market, commissions are in the range 13-15% of premiums. Our independent research identified 8-12% first year commissions and 4-6% annual renewal commission for a major California carrier depending on volume.
The Milliman study is correct on the commissions. Insurance companies slashed commissions for individual health insurance to agents back in 2011 to the 4-6% range. Commissions for dental and vision can be around the 10% range but those products have only $30 – $60 monthly premiums, far less than the monthly cost of health insurance. Kaiser pays a flat $100 commission regardless of the monthly premium.
Overall, the study forecasts reduced administration expenses should reduce health insurance premiums from 0% – 7%.
California is a big state
Another layer of premium factors are regional differences. California is a geographically large state with a mix of hospitals, providers and income levels. It just costs more to provide the same level of care in a rural setting than it does in an urban setting. An urban hospital might be able to run several times more people through their MRI machine than their rural counter part. The higher utilization of the machine reduces the costs to operate it. Consequently, rates must necessarily reflect the disparity of provider costs.
The study suggests that there might be as much as a 15% difference from the statewide average rate depending on a person’s location. This means a 50 year old real estate agent in Shasta County will probably have different health insurance premium as the 50 year old real estate agent in Orange County based on location.
Leveling the rate landscape
What is particularly good news is that small businesses and employees making up to 400% of the Federal Poverty Line get tax credits and potentially help with cost sharing. The subsidies to reduce the actual health insurance premiums could possibly help rural families stay in the area they love.
Individuals with incomes lower than 250% of FPL will have federal premium tax credits to reduce their insurance premiums and will also have federal cost sharing subsidies to reduce their cost sharing. Because of these federal tax credits and subsidies, these individuals will pay very little in premiums and out of pocket spending. Individuals with incomes between 250% and 400% of FPL will have federal premium tax credits to reduce their insurance premiums, but will not have federal cost sharing subsidies to reduce their cost sharing.
Attract employees, stay in your location
The regional pricing differences already exist and will continue as noted in the study. But the ACA tax credits and cost sharing subsidies help smooth out the disparity between individuals in various parts of the state. This could help rural employers maintain or increase their pool of qualified employees for their business.
High risk individuals
More problematic for the study was estimating the impact on rates from people currently in high risk health insurance programs such as the Managed Risk Medical Insurance Pool, Pre-Existing Condition Insurance Plan and AIDS Assistance Program. The approximately 58,350 Californians in these programs transitioning to health insurance under the ACA provisions could influence rates any where from 15% – 40%. But it remains to be seen how many people will be Medicaid eligible or choose other insurance options based on income levels.
Will ACA kill the COBRA?
A similar group of individuals on COBRA or guarantee Issue HIPAA insurance, that usually health conditions, will more than likely opt for less expensive Covered California plans. These folks, even without any tax credits or cost sharing help, will see their monthly premiums reduced under the new health insurance plans. But their utilization of services will put upward pressure on rates for all Californians in their respective plans.
California is not average, we’re too big
The Milliman study gives a nice overview of all the various factors influencing health insurance rates in California. It also points out the highly individual nature of health insurance rates for each Californian. They estimate that 2.3 million Californians will qualify for some sort of tax credit or cost sharing help. This help along with expanded Medicaid means that a good chunk of folks will be some what insulated from increasing health insurance hikes while providing affordable health insurance to California’s work force. Even if the average health insurance rate in California rises because of the ACA, there are plenty of people that will benefit from lower premiums from provisions built into the ACA.