How COVID-19 introduces both positive and negative cost pressures on the health-care system
A new Issue Brief from the American Academy of Actuaries reveals new uncertainties and complexities to development of next years health insurance premium rates.
—As health insurers file proposed premium rates for 2021, a new issue brief from the American Academy of Actuaries reveals how the COVID-19 pandemic has brought new uncertainties and complexities to the development of the rates insureds will pay next year.
“Premium changes are based on how costs of care, enrollment, and other factors are expected to change relative to insurers’ assumptions that were used in setting premiums for the current year, and the COVID-19 pandemic has brought new unknowns and opposing trends into the mix,” said Academy Senior Health Fellow Cori Uccello.
“The pandemic has introduced both positive and negative cost pressures within the health care system, and uncertainties to key projections such as claims that could be sensitive to possible subsequent waves of infection and illness.”
- The issue brief, Drivers of 2021 Health Insurance Premium Changes: The Effects of COVID-19, explains that COVID-19 will affect 2021 premiums dependent on assumptions related to:
- Should there be an emergence of subsequent COVID-19 waves in 2020 or in 2021.
- Whether non-COVID-19 utilization continues to be deferred or eliminated in 2021 or whether treatment deferred in 2020 is provided in 2021.
- The pandemic’s economic effects on shifts in insurance coverage and risk pool composition.
- COVID-19 testing and treatment costs, the availability of new treatments and vaccines, increases in mental health and substance treatment needs, changes to tele-health utilization and costs, and changes to provider reimbursement rates.
Excerpts From The ‘Drivers Of 2021 Health Insurance Premium Changes: The Effects of COVID-19
COVID-19 Impact on 2020 Claims Experience
The Affordable Care Act (ACA) rate review process typically requires issuers to develop premium rates based on the plan year of experience, which is two years prior to the pricing plan year, adjusted to reflect expected differences between the experience plan year and the pricing plan year. Thus, 2021 rate development will primarily be based on 2019 (pre-U.S. pandemic) experience with adjustments to project the experience forward to 2021. Issuers consider emerging experience from the current plan year while setting rates, so 2021 rate development would normally be informed by year-to-date 2020 plan experience. COVID-19 has introduced considerable uncertainty into that 2020 experience, and this uncertainty is extremely likely to continue into 2021.
COVID-19 is resulting in high-cost hospitalizations, and these costs have the potential to be material. Direct COVID-19-related health spending is highly dependent on the percentage of the population that is infected and the percentage of those individuals who are hospitalized. For instance, the USC-Brookings Schaeffer Initiative for Health Policy estimates that a COVID-19 infection rate of 5% could increase claims in the commercial insurance markets by about 1%; while a COVID-19 infection rate of 60% could increase commercial claims by 4% to 11%.2 Cost-sharing for COVID-19 testing and related services is being waived pursuant to federal legislation.3
Drivers of 2021 Rate Changes
When developing 2021 health insurance rates, insurers are likely to run multiple scenarios involving different assumptions on if any new COVID-19 waves will emerge later in 2020 or in 2021, the degree of deferred and avoided services, the amount of testing (including antibody testing), the cost and availability of vaccines, and other factors relevant to their enrolled population to inform their premium development.
Greater degrees of uncertainty could lead to more conservative assumptions and risk margins for some insurers. In many states, health insurers are permitted to file updated rates on a quarterly basis in the small group market, which could reduce the need for conservatism. However, individual market rates are filed annually and cannot be updated during the calendar year.
Individual Market
The composition of the 2021 individual market is likely to be volatile and may see significantly different underlying experience than in 2019; there is likely to be some level of influx of individuals who lost employer-sponsored coverage due to the economic downturn resulting from the COVID-19 pandemic.
While many individuals who lose income may qualify for Medicaid, some will not, particularly in states that have not expanded Medicaid. An increase in enrollment may be partially offset by individuals who leave the individual market, particularly non-subsidy-eligible individuals who leave the individual market due to unaffordability or subsidy-eligible individuals who become eligible for Medicaid.
Small Group Market
Small employers are less likely to offer coverage than large employers, and the economic downturn has the potential to accelerate this trend. During past recessions, some insurers have seen increased morbidity in insureds among employers that retain coverage, suggesting that employer plans that stayed in force had less-healthy members than those that lapsed. The ACA’s single risk pool provisions create additional exposure to insurers beyond what was present during past recessions, particularly if small employers with healthier workers are more likely to drop coverage.
Morbidity increases could also occur if less-healthy COBRA-eligible employees who suffer job losses are more likely to sign up for COBRA. This effect could be magnified with the extension of the COBRA election period as well as the extension of the window for timely premium payments during the national emergency period generated by COVID-19.10 As with the individual market, adverse selection in the small group market might be reduced due to the health-related nature of this particular crisis, with more value being placed on retaining health coverage, even if the small group market shrinks due to small employers going out of business.
Medical Loss Ratio (MLR) Impacts
To date, claims in 2020 have widely been reported to be significantly below priced levels. If claims over the full year continue to remain below expectations, premium rebates may be required under the MLR. The MLR calculation is done as a three-year average. 2018 and 2019 saw significant MLR rebates in the individual market, which could increase the potential for rebates if 2020 claims levels are lower than expected. Also, the MLR is one sided: Carriers do not receive payments if claims come in significantly higher than 2020 expectations.
Issuers may consider projected MLR rebates when setting their 2021 rates, especially given the level of MLR rebates expected for 2019.15 This consideration could be given additional weight if the issuers anticipate owing rebates for 2020 given their expectations regarding the net impact of COVID-19. For instance, issuers could reduce the level of conservatism in rate filings to reduce the possibility of owing rebates for 2021.
On the other hand, issuers may be less concerned about having rates that end up being too high, relying on the MLR to return any excess premiums to enrollees, particularly in markets where an issuer is able to maintain a competitive position without significant reduction to rates.
Read the complete issue brief, developed by the Academy’s Individual and Small Group Markets Committee, and learn more about the Academy’s health policy work under the public policy tab at actuary.org.
