How will Madison insurers rate?

The 2016 health insurance premium environment is still sorting itself out, but some healthy premium increases are forthcoming.

From the pages of In Business magazine.

For health insurers, the Affordable Care Act is a good news-bad news proposition. The good news is the ACA mandates that employers and individuals buy their product or pay a tax. The bad news is that price moderation remains elusive.

Based on recent reports, medical insurance premiums will be on the rise in several national markets, but greater Madison’s 2016 experience remains somewhat of a mystery. We’ll know more this fall, after the fate of ACA-compliant plans offered on the state and federal exchanges, with 10% or greater rate increases, are determined. The law mandates that health insurers planning to increase plan premiums above 10% must submit their rates to either their state or the federal government for review.

According to the Wisconsin Office of the Commissioner of Insurance (OCI), several Wisconsin companies offering insurance plans under the ACA have notified the Centers for Medicare and Medicaid Services that their ACA-compliant plans will carry premium rate increases of 10% or more for the 2016 plan year. They include two insurers that operate in the Madison market — Unity Health Insurance and Wisconsin Physicians Service Insurance Corp.

Proposed increases were submitted in June and are subject to change, but several of the health insurers that serve Madison — Dean Health Plan, Group Health Cooperative of South Central Wisconsin, and Physicians Plus Insurance Corp. — did not have to submit their ACA rates to the CMS, meaning they are not above the 10% threshold for their ACA plans. How close they come to a 10% increase, which would still be five times more than the Federal Reserve’s goal for the overall rate of inflation, will also be known this fall.

OCI is not announcing specific rate proposals, but any company that intentionally or unintentionally low-balled rates in 2014 or 2015, when insurers admittedly were “flying blind” in identifying risk selection for ACA-compliant plans, might have some explaining to do if they have to raise 2016 rates a lot higher than most. Through mid July, there were about 650 cases of proposed year-over-year increases above 10%, according to the U.S. Department of Health and Human Services.

The rate environment is better for groups than for individual consumers buying coverage on health insurance exchanges, which includes the self-employed. “Some of the increases in the group market that I’ve seen for 2016 so far have been very, very good,” states John Healy, partner and senior account executive for M3 Insurance in Madison. “I have seen some that haven’t been quite so good, but I’d say that on balance, the increases do appear to be moderating slightly for 2016.

“Now, for individuals, I don’t believe that’s the case because individuals are facing a much different kind of a landscape. We’ll probably be seeing double-digit increases across the board, and I’m not the only person who has that opinion. People going to the exchanges are definitely going to be seeing increases.”

In this look at health insurance, we survey the premium outlook for 2016 and beyond, including whether premium increases for transitional health insurance products, created before the ACA was passed, will be somewhat similar to ACA-compliant products, and we examine the prospects for a sustained period of more affordable rate increases.

Rates at a premium

Insurers have until late September to file rates for transitional plans, which are plans that existed before passage of the ACA and can be continued through at least 2017.

Al Wearing, chief insurance services officer for Group Health Cooperative of South Central Wisconsin, believes GHC-SCW’s level of premium increases for its transitional plans should be close to those of its ACA-compliant products. The cooperative actually did go over 10% on its individual product and had to write a separate justification for the Health Insurance Oversight System, but its small group rates will remain “well below” the 10% threshold.

“I don’t think those (transitional) premiums are going to be a whole lot different,” Wearing states. “The issue is that benefits are significantly different, which drives utilization a little bit on the current types of benefits we have versus the ACA-compliant benefits. Generally, trend is trend, and that will be in the same neighborhood.”

Citing regulatory approvals that must be secured that prohibit Dean Health Plan from disclosing information at this time, Frank L. Lucia, president and CEO, declined to provide specific rate proposals. However, he states that Dean Health Plan is well positioned to “continue to offer competitive plan designs and pricing.”

“While both ACA products and non-ACA products are subject to many of the same forces that impact premium levels, each product has its own unique forces as well,” Lucia adds. “Because ACA and non-ACA products are separated into different risk pools when setting premium levels, the unique forces in each of the risk pools will not necessarily lead to premium increases that mirror one another.”

Lucia noted that each insurer is projecting pricing with only one year’s (2014) experience from the exchanges. Since limited information on 2015 was available before the deadline for 2016 rate filings, uncertainty over premium rates remains. With respect to the exchange business, he says carrier pricing was distinct to each health plan’s products, claims experience, and view of future experience (risk pool), among other factors.

“The average rate increases released so far are not about who is better at controlling cost trends,” Lucia explains, “but how well anyone can accurately predict the impacts of new entrants and lapses in the ACA risk pools, including the split of the risk pool with transitional business. Rate changes are not always indicative of cost trends, but also assumptions about product portfolio, who chooses what products, and how they compare to other carriers’ products and premiums.”

Meanwhile, WPS has submitted proposed rate increases of 10% or more for WPS Health Insurance (off-exchange) and its Arise Health Plan (on-exchange). The off-exchange plans, branded as WPS Health Insurance, include a small group PPO (preferred provider) plan with a requested rate increase of 11.54% and an individual PPO product with a requested rate increase of 32.89%.

The Arise plans offered on the exchange include an individual HMO plan with a requested rate increase of 18.33%, an individual POS (point-of-service) product with a requested rate increase of 19.24%, and a small-group HMO plan with a requested rate increase of 10.49%.

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In submissions for the individual plans, WPS cited the increased cost in providing medical care, increased utilization by consumers, and the impact of “numerous additional taxes and fees imposed upon our plan.” In the submission for its group plans, the company cited medical and prescription drug inflation, aging and expected changes in benefit utilization, the adoption of costlier new medical procedures and technology, and changes in administrative expenses.

WPS notes that for the first time since the ACA took effect, insurers are basing their 2016 premiums on a full year’s worth of ACA claims data. Partially as a result of the ACA’s transitional policy, which has kept many thousands of healthier individuals on non-ACA plans and raised the average cost of ACA-compliant plans, WPS says actual costs for 2014 turned out to be much higher than expected. In addition, the company notes the ACA’s federal cost subsidies weaken in both 2016 and in 2017, which will exacerbate premium trends.

Mike Hamerlik, president and CEO of WPS, which is rolling out a new brand portfolio under the umbrella of WPS Health Solutions, does not expect the level of premium increases for transitional products to closely mirror those of ACA-compliant plans. He notes they have a different set of benefits — ACA-complaint plans must have “essential health benefits” as defined by HHS — and transitional plans are based on recent medical underwriting, so their loss ratios typically would be lower and rate increases would be more moderate.

The term loss ratio refers to total claims losses divided by total premiums earned. An insurance company that pays $85 in claims for every $100 in collected premiums would have a loss ratio of 85%. Conversely, its gross profit ratio would be 15%, a portion of which would be used to cover operating costs. Anything left over would be its operating profit.

Hamerlik notes there are 16 rating regions or markets across the state of Wisconsin, and different insurers start at different places in different markets. “From a competitive standpoint, in some of the markets we were high and in some of the markets we were low,” he states. “Everybody was in different places where they had different experiences. There are a lot of variables at play, but it’s mostly driven by loss ratios.”

The most difficult variable to gauge, Hamerlik adds, was the pent-up demand for health services among enrollees. “It was not a healthy population,” he notes.

Troy Caraway, CEO of Physicians Plus Insurance Co., which last year enrolled 51,573 people in Dane County, expects its renewals to be in line with or slightly lower than those of the recent past. Caraway notes that Physicians Plus has focused on securing improved provider contracts that help hold down medical costs, which is one part of the equation. On the utilization side of the equation, Physicians Plus is trying to improve its product portfolio to promote self-insurance and “engaged” wellness programs. “Utilization of services is just as critical, if not more so, and working with employers and providers to effectively manage utilization is a challenge for all insurers,” he states.

The Sauk City-based Unity Health Insurance, which enrolls more than 108,000 in Dane County, did not make a spokesperson available to In Business. Unity is seeking 10.3% and 18.3% increases, respectively, for two individual plans offered on the exchange. In its submission on healthcare.gov, Unity cited the need to maintain a reasonable relationship between premium and expenses, and notes the rate increase is based on past claims experience for its individual risk pool.

Is 2016 an outlier?

One reason Healy (M3) believes that all groups are getting an increase of at least 4% is because of the ACA fees and taxes imposed on insurers, which are then charged back to employer clients on their plan renewals. Those charges include a fee to fund the Patient-Centered Outcomes Research Institute (PCORI), plus a reinsurance fee to help stabilize premiums for individual coverage (applied through 2016), and an annual fee assessed on health insurers to help fund premium subsidies for people who buy coverage on insurance exchanges.

Yet given that this is the first year since the passage of the ACA that health insurers have a full year of claims experience to go by, will the 2016 plan year be an outlier in terms of rate hikes? GHC’s Wearing concedes there may be an overall price shock when the final numbers are determined, especially with insurers who have not been conservative to start with. “Based on the reinsurance and risk adjustment calculations that CMS released, you can get a sense of who will have troubles and who won’t,” he says, noting the industry is in unchartered waters.

Other insurers might have more of an administrative load to pass on, but there are limits on that. Through a minimum medical-loss ratio on all insurers, the ACA limits the profits of health insurance companies by requiring health insurers in the individual and small-group markets to spend 80% of their premiums, after subtracting taxes and regulatory fees, on medical costs. Large groups must spend 85% of their premiums on medical costs.

These factors, however, pale in comparison to exploding costs linked to deteriorating health conditions of an aging population. Obesity, diabetes, and heart disease are the main culprits, and their prevalence in society does not bode well for containing costs. Cheryl DeMars, president and CEO of The Alliance, a Madison-based cooperative of self-funded employers, cited several factors that drive utilization costs, including resource use by hospitals and the prescribing patterns of physicians. However, DeMars noted that expensive health conditions add more to cost than ACA fees — by far.

“The administrative cost associated with providing health benefits are a fraction of what the price is, and it’s something that we focus on because it’s modifiable, and it’s within the scope of our influence, if not our control,” DeMars notes. “Diabetes, heart disease, obesity, and lack of exercise and activity are underlying cost drivers, and they are just harder to get at.”

According to Lucia, there likely will be additional adjustments coming in subsequent years as the pre-ACA and ACA risk pools converge and two of the “3R protections,” including reinsurance, come to an end. In that context, he does not see 2016 as an outlier “as there will likely be material adjustments as the market stabilizes.”

Caraway urged patience as the ACA unfolds. “Many experts have pointed to a ‘sicker’ cohort of individuals signing up for health care than was anticipated in price,” he notes. “We expect that this volatility in risk and rates will work its way through the system over the next few years, leading to stable rates.”

Hamerlik says one reason 2016 could be an outlier is that insurers don’t know how much consumers will “jump around” from plan to plan. “What we’re starting to appreciate more is that the market is just tipped on its head,” he states. “It’s going to take between five and 10 years to get it sorted out.”

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Marriages made in consolidation

The wave of consolidation of health systems is well established, but now the nation’s largest health insurers are catching merger madness. The five largest insurers are romancing one another, with Aetna and Humana the first to officially announce their engagement in the form of a $34.1 billion merger proposal.

Whether or not they actually walk down the aisle depends on a federal antitrust review by the U.S. Justice Department, which presumably will evaluate the impacts of such mergers on consumers and signal to other would-be lovers, such as Anthem and Cigna, whether it’s wise to resume their courtship.

Some cite the economics of the Affordable Care Act for the intensifying merger talk because the law, in their view, rewards scale over competition. But whatever sparks these budding romances, merger critics worry that industry nuptials, however confined to the publicly traded market segment, will reduce the number of choices consumers have in the medical insurance market, negatively impacting cost and quality.

While some believe that’s the million-dollar concern, John Healy of M3 Insurance does not even think it’s the right question. Healy notes the existence of exclusive provider organizations, or EPOs, which employers are willing to enter even though there are fewer providers. Why? Because they can get discounts on insurance rates. As a result, their premium increases may not be as high, or they may be lower to begin with.

Conversely, providers in narrow network plans are betting they will see more patients, Healy states, and they are willing to accept less. “A more important question is what are employer groups and individuals willing to accept from the standpoint of the number of providers they can see?” Healy notes. “If you talk about a narrow network of providers, will that result in lower costs? If you have a wide network of providers and the cost is not so low, but you narrow that down and you get a deeper discount from the providers that do participate, more people will be open to that.”

Others take a more traditional approach to the prospect of merger mania, noting the likelihood of anti-competitive results. “I think all of us want to see as competitive a market as possible, with providers as well as insurers,” says Bill Smith, Wisconsin state director of the National Federation of Independent Business. “Those of us who believe in the power of market forces believe that you’ve got to have a system that has greater competition on the value, quality, and price of health care. To the extent you’re eliminating or limiting competition in the marketplace, that’s a concern to us.”

The Alliance’s Cheryl DeMars was even more blunt. “In general, in health care, consolidation does not lead to lower prices, whether it is consolidation of providers or consolidation of insurers,” she states. “I am not convinced that, in general, the interests of large insurers, and employers and consumers, are aligned.”

Al Wearing of GHC-SCW concedes that consumers would have fewer choices in the long run, but he also believes that large insurance companies will develop a strong base of leverage, and they will try to get health systems to be more efficient, leading to more cases of value-based (aka shared-risk) contracting. “Medicare, which is the largest payer in our country, talks about it,” he notes. “That’s what I thought the value in the ACA would be, that somehow better financing mechanisms would come out of that. Maybe these larger [insurance] entities can gain that leverage.”

Troy Caraway of Physicians Plus notes that partnerships and collaboration are definitely the ways of the future in health care, and Physicians Plus is open to exploring such opportunities. As for consumer harm, he cited Wisconsin’s insulating level of insurance competition. “Insurers have to satisfy their customers to remain viable,” he states, “so even if there are new partnerships, collaborations or consolidations, those arrangements will have to price their products responsibly in order to attract membership.”

Supreme subsidies

The U.S. Supreme Court’s recent validation of federal tax subsidies provided under the Affordable Care Act injected some long overdue certainty for both insurers and consumers, and might have prevented the ACA’s unraveling. The nation’s high court ruled the law’s wording allows the federal government to subsidize medical insurance coverage in every state, not just states that set up their own health insurance markets.

The ruling in favor of broader subsidies in King v. Burwell directly impacts roughly 6.4 million people in low- to middle-income households who can use subsidies to buy medical insurance coverage if they can’t get it through an employer. But what might have happened to the medical insurance market if the ruling had gone the other way?

For one, it prevented health insurers from having to go back to the drawing board in setting 2016 insurance rates, but that’s merely an inconvenience. The real impact might have been the ACA’s undoing, including a “death spiral” in which only the sickest people remain in the risk pool while costs keep climbing.

GHC’s Al Wearing believes Congressional Republicans would have voted to extend the subsidies and notes that most people who buy coverage on the exchanges qualify for a subsidy. “The whole concept of a death spiral could have occurred for the industry,” he opines. “If all we had left were the people who had to stay because they absolutely needed medical care because of a serious medical condition, whereas everyone else would have dropped out, it probably would have set us down that path.”

With no federal subsidies available, there would have been less likelihood of maintaining the fees that an employer would pay for not providing insurance that is either affordable or valuable, as defined by the ACA, and many parts of the law would have been difficult to enforce, according to John Healy of M3 Insurance. “Without those fees that would be levied on groups for not providing affordable and valuable coverage, it would have had a big impact on all markets of insurance,” Healy says.

Had the subsidies been struck down, Frank Lucia (Dean) believes states using a marketplace model may have tried to launch state-based approaches, and it’s likely that almost all exchange activity would have ceased. “The exact dynamics would have been state-specific, and some transitional approach would have been implemented,” he says. “Carriers would have reevaluated their participation in the individual insurance exchange market in those states without subsidies, as this was a key dynamic of the ACA.”

High-deductible plans on the rise

Is the ACA driving more people into behavior-modifying, high-deductible medical insurance plans? PricewaterhouseCoopers recently reported that 83% of American employers now offer high-deductible plans, up from 67% in 2014, and 31% say they are the most popular plans they offer, up from 17% in 2012. Under such plans, consumers pay most if not all of their health care expenses out-of-pocket, forcing them to be more price conscious and savvy consumers of medical care, according to advocates of market-driven health care.

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