Featured Health Business Daily Story, Dec. 28, 2012
Reprinted from AIS's HEALTH REFORM WEEK, the nation’s leading publication on the business implications of the massive changes for the health industry mandated by reform.
The maximum 3:1 ratio in age bands for premium setting in the individual and small-group markets beginning in 2014 under the health reform law could lead to “rate shock” among young people who may find the cost of health coverage too expensive. As a result, many of them likely will elect to pay a relatively modest non-coverage penalty instead, adversely impacting risk pools, several state insurance commissioners told CMS Center for Consumer Information and Insurance Oversight (CCIIO) Director Gary Cohen Nov. 30.
“I think it’s a valid concern that younger folks [who face] a weak penalty will stay out of the market until those penalties have increased to a point where it would make sense” to buy coverage, Kansas Insurance Commissioner Sandy Praeger (R) told Cohen during the fall 2012 meeting of the National Association of Insurance Commissioners in National Harbor, Md. Praeger, who chairs the association’s health insurance and managed care committee, asked whether HHS could find some “wiggle room” and gradually implement the 3:1 rating over a two- to three-year period by starting the maximum band at say, 5:1. “Anything would be helpful,” she later told HRW, adding that there is nothing insurance commissioners themselves can do about it.
Cohen responded to the commissioners that the 3:1 maximum age-band ratio is a provision in the Affordable Care Act and thus CMS doesn’t have power to change it. “The statute is pretty clear about its provision on this,” Cohen said. “We welcome comments on the rule, both as to the policy implications and the reasons why people would like to see a different outcome, but also as to what the legal pathway might be to get there.” Comments are due Dec. 20.
The 3:1 maximum is contained in a proposed rule on market reforms issued by HHS Nov. 20 (HRW 12/3/12, p. 1). The criticism of an age band as narrow as 3:1 is that premiums for younger people will be brought up considerably in order to compensate for older Americans, who typically use more health care services yet can have premiums that, at most, are three times higher than those for younger people, who typically are light users of services.
Forty-two states now have age-rating bands that are 5:1 or more, according to America’s Health Insurance Plans. To illustrate the issue with the 3:1 band, the trade group released an infographic Dec. 12 claiming that under a 3:1 band, a 24-year-old who now pays a $1,200 annual premium under a 5:1 band would see his or her premium spike 45% to $1,740 annually, while a 60-year-old who now pays a $6,000 annual premium would see his or her premium drop 13% to $5,220.
Praeger’s concerns were shared by many other commissioners, both Democrats and Republicans, California Insurance Commissioner Dave Jones (D) told Cohen. “We’re very concerned that you’re going to essentially create so much rate shock for young people that they are not going to purchase at all,” Jones said. “It is a big problem for those of us, like California, who are moving very aggressively [with the law] and want this to be successful.”
Brett Graham, managing director of Leavitt Partners, a Salt Lake City-based consulting firm founded by Michael Leavitt, a former Utah governor and HHS secretary, says that he believes HHS Sec. Kathleen Sebelius has the power to make changes.
“If Secretary Sebelius and the administration don’t want this rate shock [to happen], they have the power to allow markets to do things differently,” he tells HRW. Graham adds that HHS can issue waivers to states in the short term to sidestep the 3:1 age band “in the spirit of maintaining the stability of markets,” although a policy change would be the best solution.
Teresa Miller, a former Oregon insurance commissioner who now is acting director of the Office of Oversight at CCIIO, downplayed the potential for rate shock. The temporary reinsurance program will minimize the shock as it provides $10 billion in assistance for insurers in 2014 ($6 billion in 2015 and $4 billion in 2016), she said. Miller added that this funding will reduce rates in the individual market to between 10% and 15% below where it would be in 2014 without the program, although some insurers and actuaries question that (see story, p. 1).
Dave Tuomala, director of actuarial consulting at OptumInsight, a unit of UnitedHealth Group, tells HRW that any time you condense an age-band differential, you are going to create “winners” at the high end of the range — older enrollees — while those at the lower end of the range — younger enrollees — are the “losers” as their premiums will rise to compensate for the compressed differential.
He adds that many insurers may have a hard time with pricing in the first year of exchanges, given that “it’s a real change for carriers that want to participate to predict what that future risk will be.” And while programs such as risk adjustment and risk corridors will help to offset some of the potential risk, it won’t be a panacea, he asserts.
‘Fiscal Cliff’ Could Worsen Situation
The rate shock could deepen if the Medicaid eligibility age is bumped to 67, as is a possibility given the ongoing negotiations to avoid the “fiscal cliff,” says Carly Kelly, director in the health reform practice at consulting firm Avalere Health LLC.
If the eligibility age is raised to 67, it would mean 65- and 66-year-olds would go to exchanges for coverage and thereby “puts even more people at the upper end” of the 3:1 ratio, “potentially making the rate shock even worse,” she says.
One of the advantages of gradually moving to a 3:1 ratio is that it will help insurers out in pricing their plans, says Rich Stover, a principal and consulting actuary in Buck Consultants’ Secaucus, N.J., office.
By transitioning from a 5:1 to a 3:1 ratio “over a few years, carriers won’t have to build in as much risk or margin” into their rates, he tells HRW. “My gut feeling is that the rates for these plans [initially] are going to be so hard to predict.” He adds that given the pushback so far from many states, he wouldn’t be surprised if the 3:1 ratio is gradually phased in.
Carriers also will have a hard time setting rates since they will be unfamiliar with the new population that they will have to insure beginning in 2014, says Jean LeMasurier, senior vice president, public policy at consulting firm Gorman Health Group, LLC.
For insurers, “it’s probably going to be a gamble the first couple of years” in trying to appropriately price plans to account for risks, she tells HRW. “There’s not a lot of information in that first year for them to base their premium on….They’re getting a population that [now] doesn’t have insurance, and because they didn’t have it, they’re going to be sicker…and have pent-up demand” for services.
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