High rates of ‘deferred and cancelled care’, anticipated rebound heighten the unknowns of the pandemic’s impactThe American Academy of Actuaries will host an online briefing on June 26, 2020, “Effects of COVID-19 on 2021 Health Insurance Premiums,” examining the factors actuaries consider in setting premium rates for 2021 and how COVID-19 has affected these factors. Registration available here.
The 2021 individual and small group health insurance premium rate filing process is underway. Actuaries develop proposed premiums based on their projections of medical claims and administrative costs for pools of individuals or groups with insurance. Projected medical claims reflect unit costs and utilization levels, as well as the mix and intensity of services, all of which can vary by geographic area and from one health plan to another.
The composition of risk pools is also important, as medical claims will reflect the health status of individuals in the risk pool. Laws and regulations—such as benefit requirements, issue and rating rules, and risk-sharing programs—can affect the composition of risk pools and projected medical spending, as well as the amount of taxes, assessments, and fees that need to be included in premiums.
The COVID-19 pandemic has introduced new uncertainties into the development of premium rates for 2021. Each year, the American Academy of Actuaries Individual and Small Group Markets Committee publishes a public policy issue brief outlining the major factors driving premium changes for the next plan year. Unlike those previous issue briefs, this year’s issue brief focuses primarily on the impact of COVID-19 on the 2021 premium rate filings.
The typical rating factors still apply, but issues surrounding the COVID-19 pandemic are a major consideration for rate setting and will impact both the individual and small group markets. To date, the effects of the pandemic have varied significantly by region, both in acuity and duration. While this issue brief broadly addresses COVID-19 considerations, we anticipate that the actual impact of these considerations on rate filings will reflect specific regional and market conditions.
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%. Cost-sharing for COVID-19 testing and related services is being waived pursuant to federal legislation. Some carriers are additionally waiving cost-sharing for COVID-19 treatments and/or certain telehealth services as well.
Direct spending for COVID-19 will be offset, at least in part, by reductions in other services. The pandemic has led to significant social distancing requirements, and utilization of many services such as office visits has declined dramatically. In addition, non-emergency hospital services, which include elective surgeries that typically generate significant revenues for providers, have also declined, due to social distancing, state restrictions on elective procedures, and a desire to free up space for COVID-19 patients. Emergency services have experienced a decline, possibly due to patient concerns around contracting the virus. Some practices have expanded availability of telehealth services in order to fill in some of the gaps in office visits. However, many services cannot be provided through telemedicine, particularly those elective surgeries that help support hospitals’ and physicians’ financial stability.
Due to the widespread nature of social distancing requirements, there is evidence that the decrease in costs due to deferred and avoided services has occurred across the nation and is not limited to areas hard hit by COVID-19. However there is significant variation at the state and local level as to when and how medical providers may begin offering these services again and many providers may be subject to capacity restrictions.
Additionally, it is unclear how many of the missed services will return and how many will be eliminated outright. While there are still many sources of uncertainty as to the long-term impact of COVID-19 on other medical care, it is clear at this point that these deferred and avoided services have reduced health care utilization in the first half of 2020. To date, it appears likely that the impact of deferred and avoided care has outweighed cost increases in the commercial market related to direct COVID-19 diagnosis and treatment costs, including cost-sharing waivers in most areas.
While medical care has been significantly affected in early 2020, prescription drug spending appears less likely to be significantly impacted, at least for now. Pharmacy spending could decrease if people are unable to afford their prescriptions due to loss of income and if patients continue to avoid going in for office visits. On the other hand, prescription drug spending could increase if there are new COVID-19 drug therapies and/or a vaccine becomes available.
Future In Health Insurance & Care
It’s unknown how trends will continue through the rest of 2020, but high rates of deferred and canceled care could continue, even as the availability of non-emergent care is increasing in many geographic areas. The arrival of another COVID-19 wave in the second half of the year could further increase care deferrals. Claims levels are likely to be impacted by the continued duration and severity of the COVID-19 pandemic, the degree of compliance with social distancing guidelines and any resulting deferred and avoided care, utilization levels of COVID-19 testing and related cost-sharing waivers, the duration of the coronavirus public health emergency, and other factors. To date, the prevalence of COVID-19 has varied dramatically by region, indicating that the costs of covering COVID-19 related claims may also vary by region. These same considerations may affect net impacts on 2021 expenditures as well.
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.
Changes in Risk Pool Composition Due to Economic Impacts of COVID-19
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.
Even if the net enrollment change is small, the underlying morbidity level may change depending on the characteristics of those leaving and those entering the market. Individuals with employer coverage are generally thought to be healthier than people with coverage in the individual market. On the other hand, coverage transitions can result in adverse selection. For instance, when individuals lose coverage, they must decide whether to purchase coverage, and less-healthy people are generally thought to be more likely to purchase coverage than healthy individuals. During the Great Recession of 2008–2009, COBRA8 coverage was subsidized by the federal government.
Although similar subsidies are being considered as part of current legislative efforts, as of this publication, such a provision has not been part of any of the coronavirus relief legislation passed into law. In the absence of significant COBRA subsidies that facilitate the ability of workers losing jobs to maintain their prior employer coverage, previous COBRA experience may be an appropriate proxy for the morbidity of members moving into the individual market. However, the COVID-19 pandemic may have increased the perceived value of insurance, thereby reducing adverse selection among people moving from employer coverage to the individual market. In addition, healthy uninsured individuals could be more likely to obtain coverage.
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 employees9 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.
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The American Academy of Actuaries will host an online briefing on June 26, 2020, “Effects of COVID-19 on 2021 Health Insurance Premiums,” examining the factors actuaries consider in setting premium rates for 2021 and how COVID-19 has affected these factors.