To limit effects of COVID-19’s new uncertainties for health insurers
WASHINGTON—The COVID-19 pandemic is affecting the U.S. health care system in numerous ways, many of which will affect health insurers. This includes impacts due to uncertainties surrounding changes in the utilization of health care services, shifts in enrollment, and the duration of the pandemic. A new issue brief from the American Academy of Actuaries outlines various risk mitigation mechanisms and assesses their implications for addressing the increased risks health insurers face due to COVID-19.
“As policymakers consider different risk mitigation mechanisms, it’s important to understand how they would work and what risks they are intended to address,” said Cori Uccello, the Academy’s senior health fellow and primary drafter of the issue brief, Health Insurance Risk Mitigation Mechanisms and COVID-19. “Depending on how they are structured, risk mitigation mechanisms such as risk corridors could help with the increased uncertainty health insurers face due to COVID-19. But they won’t address other risks in the health system such as declining provider revenues and increased pressures on state Medicaid programs.”
Conclusions of the issue brief include:
- Risk mitigation mechanisms could help address the increased uncertainty health insurers face due to COVID-19.
- One-sided risk corridors can shield insurers from unusually large losses due to COVID-19; two-sided risk corridors would also protect against unusually high insurer gains.
- Reinsurance can offset the costs of high-cost enrollees, regardless of whether the insurer faced unexpected losses.
- Medical loss ratio (MLR) requirements could provide a backstop on unanticipated insurer gains under either one-sided risk corridors or reinsurance.
Risk mitigation efforts directed at insurers won’t address other risks in the health system, including declining enrollment in employer-sponsored insurance, increased pressures on state Medicaid programs, and declines in provider revenues that threaten their financial stability and patient access.
Excerpts From the Issue Brief: Health Insurance Risk Mitigation Mechanisms & COVID-19
Pricing risk can result in premiums that are not adequate to cover actual claims. It can also result in unintended windfalls to insurers if premiums are set too high relative to actual claims. Notably, insurers cannot increase future premiums to recover past losses. Health insurers set premiums based on their best estimates of who will enroll in their coverage (i.e., the distribution of enrollees by age, gender, health status, etc.), the expected health care utilization of their enrollees (e.g., number and type of office visits and surgeries), and the anticipated costs associated with that utilization (e.g., the prices paid to providers, prescription drug costs). There will always be uncertainty regarding these factors, and insurers typically build some uncertainty into their projections. They also build up surplus specifically to be prepared for unexpected events.
But there are sometimes situations when uncertainty is higher than usual, exposing insurers to more pricing risk. For instance, when a new insurance program begins, it can be especially difficult for insurers to set premiums when their data on health spending for potential enrollees is limited. This was the case during the early years of the Medicare Part D prescription drug program and in the individual market after implementation of the ACA market reforms. Pricing risk also arises because it is not always possible to foresee the availability of new treatment options, as was the case when new and expensive hepatitis C treatments became available.
Risk corridors can be used to limit insurer losses and/or gains if claims experience is very different from what was expected when developing premiums. Risk corridors can be one-sided—the government pays insurers if their losses exceed a certain threshold, or two-sided—including a provision for insurers to pay the government if their gains exceed a certain threshold. By limiting insurer losses, risk corridors can encourage competition during periods of greater uncertainty and can protect insurer solvency if unforeseen events cause claims to be much higher than expected.
Two-sided symmetric risk corridors are currently used in the Medicare Part D program. Private Part D plans bear the full risk if actual spending is within 5% of expected spending. If actual spending exceeds expected spending by more than 5%, the federal government reimburses the insurer for a share of the losses. If actual claims fall below expected claims by more than 5%, the insurer pays the federal government a share of the gains. Notably, these risk corridors are not constrained to be budget-neutral—there could be a net cost or a net revenue to the federal government.
Plan-Specific Adverse Selection Risk
When insurers are prohibited from denying coverage or charging higher premiums based on health status or expected health care needs, they are exposed to greater adverse selection risk, which occurs when individuals or groups who anticipate higher health care needs are more likely to purchase coverage than those who anticipate lower health care needs.
Even if adverse selection is minimized in an insurance market as a whole, a particular plan could end up with a disproportionate share of enrollees with higher health care costs. If payments to the plan do not reflect this, then the plan could be at risk for large losses, which in turn gives them incentives to avoid enrolling people with higher than average costs. Risk adjustment is the primary mechanism to address plan-specific adverse selection risk.
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About the American Academy of Actuaries
The American Academy of Actuaries is a 19,500-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.