By William G. (Bill) Stuart
Director of Strategy and Compliance
June 9, 2016
Are nongroup (individual) medical insurance markets imploding before our eyes?
That’s the conclusion that some observers are drawing following UnitedHealthcare’s decision not to continue to participate after this year in nongroup markets in most of the 34 states in which it sells products. In addition, more than half the health plan coops established under the Affordable Care Act, or ACA, have failed, leaving hundreds of thousands of customers forced to find new plans offered by different carriers.
At the same time, a White House spokesman and industry observer have described the impact of UnitedHealthcare’s departure as a “routine changes and adjustments” and a “nothingburger.” They point to low premium increases (average 8%) that individuals re-enrolling in the nongroup market in 2016 faced.
So, who’s right?
Let’s start with a quick overview of a functioning insurance market. Whether the market is for medical, auto, homeowner’s or life insurance, insurers need to offer products that attract a cross-section of the population – both those who are more likely to incur claims and those unlikely to incur claims. A life insurer then prices policies individually so that a 60-year-old man with a heart condition pays a higher premium for coverage than a 30-year-old woman who’s a regular at the gym, while auto insurers quote a higher premium to a young driver with two moving violations than to a 50-year-old man with no tickets during the past 20 years. Insurers then collect premiums, pool funds and pay claims as policyholders incur them.
Unfortunately, nongroup medical insurance markets don’t work this way, for several reasons.
First, insurers can’t underwrite their products to price them according to risk. The ACA doesn’t allow it. Insurers must calculate a community rate that reflects the total claims experience of everyone in a given community, divided by the population. Insurers then can adjust those premiums to reflect location and age, but these adjustments don’t begin to reflect different projected claims costs between 25-year-old men and 63-year-old women, for example. The ACA doesn’t allow insurers to charge a differential between highest and lowest premiums of more than 300%, even though the actual claims difference is often 600% or more. As a result, premiums for older consumers are lower than they would otherwise be, and younger consumers subsidize those policies by paying much more in premiums than they’re expected to incur in claims reimbursements.
Medical Insurers and Restaurateurs
As an analogy, consider two restaurants serving a near-identical menu in the same town. Ash Street Café keeps a running tally of a diner’s order and presents a check of perhaps $15 or $35 per diner, depending on food and drinks ordered, at the end of the meal. Birch Street Chow calculated its total revenue divided by number of diners last year and charges a flat fee of, say $25, to each diner this year, regardless of what combination and quantity of food and drinks a diner orders. Do the same people frequent each restaurant, or do those who order steak and three mixed drinks flood to Birch Street Chow for the flat fee below what they’d pay if charged individually, while those who typically have a bill of less than $25 frequent Ash Street Café?
Now you see the problem.
As light eaters abandon Birch Street Chow, they no longer subsidize the big eaters and drinkers. The restaurant has to raise its price to $35. At that point, moderate eaters and drinkers flee as well, since they’re no longer getting their money’s worth. By contrast, Ash Street Café doesn’t need to adjust its prices since individuals pay for what they actually order.
Only about 40% of those who are eligible to purchase insurance in the nongroup market actually buy policies, according to healthcare analyst Bob Laszewski. Since individual insurance markets act like Beech Street Chow, in which lighter eaters and drinkers subsidize those who consumer larger quantities, do you care to guess which types of consumers make up the 40% who buy nongroup medical insurance? You’re right – they’re disproportionately higher utilizers.
As a result, their population in no way resembles a cross-section of the population, as other insurance markets (and Ash Street Café) do. In fact, claims per member covered in the public marketplaces are 22% higher than claims per member in employer-based coverage, according to the Blue Cross Blue Shield Association. Lower utilizers might buy insurance if they could purchase a plan with a combination of benefits and price that they find attractive – such as a catastrophic policy if they’re young and healthy. Unfortunately, insurers are barred from offering those plans. Similarly, lighter eaters might try Birch Street Café if they had an option to purchase a salad and half sandwich for $12, rather than subsidize the more prodigious appetites of other diners.
Insurers across the country reported losses of more than $2 billion in nongroup markets in 2015. Think about that. With government regulation of the market and restrictions on what products medical insurers could offer and what they could charge for those products, they collectively lost more than $2 billion. Blue Cross and Blue Shield Association member medical plans posted a net loss for 2015, the first time the plans collectively finished in the red in more than half a century. All medical insurers based in Massachusetts reported overall losses in 2015, with much of those losses attributable to the individual markets in which they participate.
Obama administration officials downplay the UnitedHealthcare decision to abandon most nongroup markets after this year because UHC’s total nongroup membership of less than 1 million members represents about 8% of total individual market members. In most states where UHC is pulling out, consumers will still have a choice of at least two health plans in the individual market (though residents of nearly 600 mostly rural counties will have at most one insurer offering products). In these officials’ eyes, UnitedHealthcare’s departure is no big deal. And that opinion is echoed by other observers and thought leaders (here and here), who concede that insurers are losing money but contend that markets will stabilize – just not as quickly as the authors and supporters of the ACA had projected.
As proof of progress, they note that the average premium increase for consumers renewing coverage in 2016 was about 8%. Laszewski has skewered this analysis, pointing out that the comparison is between apples and oranges. The typical renewing consumer had to renew coverage on a plan with more restrictions (HMO vs. PPO, a smaller network or higher deductibles and coinsurance) to reduce the premium increase to 8%. And the analysis doesn’t include those who didn’t renew their coverage in 2016, perhaps because they couldn’t find a plan that they could afford even after insurers altered the plans. These folks aren’t a blip on the radar – they represent more than 700,000 individuals covered in 2015 who didn’t renew their policies in 2016. (Some may have found employer-based insurance coverage in 2016.)
These observers have completely misread the crisis in nongroup medical insurance markets. Insurers priced their 2014 nongroup plans – the first year of the new ACA regulations – in early 2013, based on assumptions about the mix of policyholders whom they would attract. They submitted 2015 rates to regulators after only about one month of processed claims, so again they had to make utilization assumptions based on their overall covered population. They submitted their 2016 premiums after tracking nongroup claims for more than a full year and understanding the utilization of the population that they insured.
Thus, in 2016, insurers, like the owners of Beech Street Chow who increased their flat fee from $25 to $35, based their pricing not on historical consumption across the population, but rather consumption specific to the individuals who actually participated in the market. With a covered population whose claims (or appetites) far exceed the market norm, medical insurers (and Birch Street Chow owners) had to increases prices dramatically to cover their costs.
Health Insurance Coops
Look at coops, the not-for-profit insurers who received start-up funds from the federal government to offer an alternative to for-profit insurers in many markets. In 2014, 23 coops sold nongroup policies. They had no experience pricing products and no cash reserves (other than through taxpayer loans) to survive mistaken assumptions. An accounting trick allowed them to reflect losses far less than the actual cash shortfalls that they experienced. By the end of 2015, 12 of the 23 coops had failed, leaving more than a million members to find other coverage quickly.
None of the remaining 11 showed revenues greater than claims when measured by traditional accounting methods. Most of those remaining 11 coops are on life support, and many observers doubt they’ll remain in business into 2018. Truth be told, they never had a chance. They were prohibited from placing individuals with insurance experience on their boards of directors. They couldn’t raise capital. And they couldn’t scale their operations to offset the investment in fixed expenses like system development and marketing.
The ACA includes mechanisms designed to compensate insurers who ended up with sicker members. As we discussed in our last blog (The ACA’s Wardrobe Includes Many Suits), insurers who expected ACA protection to cover their losses when their claims experience in the nongroup market was worse than projected collected only about 13% of the reimbursements to which they believed that they were entitled. This discrepancy should be another sign to ACA supporters that nongroup markets are broken with no fix in sight.
What of the Future?
So, what happens next?
First, insurers have filed their 2017 rates with state regulators, and we’re beginning to get a glimpse of those filings. Expect sharp increases – probably averaging 15% or more if Virginia, Oregon and Washington state are typical. These increases are a function of higher utilization, more expensive prescription drugs and insurers’ attempting to compensate for losses incurred during the first three years of ACA individual markets (or merely preventing additional losses in 2017).
Second, other insurers will begin to abandon specific states’ nongroup markets because regulators reject their premium increases. They may never be able to compensate for the losses incurred between 2014 and 2016, but if they don’t see a path toward not losing money in the future they’ll likely abandon the market in some states. Some insurers will continue to serve state nongroup medical insurance markets in which they lose some money because they make money overall and rely on the volume of nongroup patients to spread their fixed costs and negotiate with providers from a more powerful bargaining position.
Absent those business considerations, though, insurers are not charities (even not-for-profit medical insurers, which are businesses without owners – far different from organizations that accept donations and distribute money and services to clients rather than customers), and they’re not going to continue to absorb $2 billion or more of costs associated with government regulation. They’ll exit unprofitable nongroup medical insurance markets and focus their efforts in markets in which they can make a return on their capital invested. (For-profit insurers’ capital, we might add, comes from – and thus profits flow to – ordinary Americans who own stock portfolios, college savings funds or retirement plans and those who are entitled to pensions – not the stereotypical fat cats dining on caviar.)
As early as 2017, we may see states in which only one insurer remains in the individual market. In some states, there may be no insurance company willing to participate in the public marketplaces either statewide or within rural counties (in addition to the projected 600 counties in 2017 with only one insurer).
At that point, legislators and regulators in affected states will have to decide whether to redistribute taxpayer wealth to stabilize markets, offer a single-payer solution (as Colorado is proposing in a 2016 ballot initiative), apply for waivers under Section 1332 of the ACA or convince Congress to write a new set of rules for the nongroup market.
It’s unfortunate the level of collateral damage and the lives harmed while regulators continue to conduct their grand experiment to manage one-fifth of the US economy from the top down. They can pass and amend laws, alter regulations and allocate funds, but they are learning one stubborn truth – neither legislators nor regulators can overturn the laws of economics.
What We’re Reading This Week
A lot is going on in the benefits world. Here are some of the articles that we’re reading this week:
Having trouble keeping track of all the changes that Congress and the Obama administration have made to the Affordable Care Act? The Galen Institute has you covered here. And the head of the institute provides more information on the latest issue here.
Are you ready to implement the new overtime rules in a way that makes sense for your employees, your business strategy and your bottom line? You can read about it here, review the rules in their entirety in the Federal Register here or watch a recording of a Dept. of Labor Webinar here.
The federal government recently issued final regulations on wellness programs. If you have a program in place or are considering implementing one, you need to understand how to structure your program so that it falls within regulatory guidelines. Read more here, here and here. You can access the actual regulations here.