Why there will be rate shock stories this fall

Earlier this week, we reviewed how small group underwriting currently works.  Most small groups are underwritten on either an experience review of claims history or statistically rated based on a review of risk factors.  One of the larger cost risk factors is being female. 

PPACA is changing the means of how groups are underwritten for non-grandfathered policies that went into effect on or after January 1, 2014. The new policies are underwritten based on a modified community rating system that allows for consideration of the age of people in the underwritten group, their locations (which can still tie a lot of statistical probabilities of cost and health status) and smoking status.  The community that they are rated against is the entire pool of small groups that an insurance company insures.

Yesterday, we looked at why actuaries and underwriters like big groups.  Healthcare cost distribution is extremely lumpy. 

Small groups and individuals are almost impossible to accurately price.  Big groups allow statistical approximations to approach population realities while the error bars on a small group are massive.  Massive error bars make underwriters and actuaries cry…Random noise becomes more important in small group sizes.

Right now under experience and/or statistical underwriting, there are significant premium differentials between groups with members who are the same age, location and smoking status.  This system has its own set of entrenched winners and losers.   

Why should we expect to see hundreds of stories of rate shock this fall?

Al’s Autobody covered seven guys and gets a great rate.  Clara’s Choral School and her fourteen sopranos sees a decent rate.  Center City Cancer Survivor Support Center with its policy of only hiring cancer survivors as peer counselors pay a horrendous rate.  Statistical and experience underwriting gives better rates to groups that historically have lower health care costs.  Those groups tend to have more men then women, and fewer than typical number and severity of pre-exisiting conditions for each age cohort.  Conversely, groups that have more women than men and have greater than expected number of people with expensive conditions, tend to get much higher rates than average and median. 

Community underwriting elimintates gender as a factor of underwriting so men now have to bear some of the cost of pregnancy risk.  It also spreads the cost and risk of pre-exisiting conditions throughout the entire universe of small groups covered by a single insurer in a state.  This is a major change that will have people screaming this fall as rates resort for the 2015 open enrollment period.

Al’s Autobody will see a rate increase as more of his premiums will go to cover the pregnancy cost risk of Clara’s Choral School and an even larger chunk of his premiums will cross subsidize the Center City Cancer Survivor Support Center risks of remission.  Clara’s Choral School will see a normal increase when she renews her policy in December.  Center City Cancer Survivior Support Center will see their premiums collapse as other groups are taking on more of their remission risk.

On average, the total cost of premiums to insure the same people in the same groups with experience or statistical underwriting versus community underwriting will be the same.  However the distribution of those costs will be wildly different.  Groups that are more male and/or healthier in general will see significant rate increases due to underwriting changes.  Groups that are more female or statistically likely to be sicker than average will see flat rates or decreases. 

There are winners and losers in the change to community underwriting. The losers will scream much louder than the winners will sing. 

 Update 1:  Most small and medium size groups that thought they would pay more under community underwriting had the option to renew their policies one last time with a December 2013 start date.  This stretched out the underwritten policies and avoided the price hikes for 11 more months.  This is why we have not seen many of these stories yet.

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19 replies
  1. 1
    RSR says:

    What number of members generally constitute small, medium and large groups?

    And large groups won’t see dramatic changes because their size already smooths out the differences, right?

  2. 2
    RSR says:

    Also, Richard, if you have time, could you give us your thoughts on the AOL benefits issue? It doesn’t pass the sniff test based on what I’ve read already, but when I read it last night, I was curious what you’d have to say on the matter. Thanks.

  3. 3
    Richard Mayhew says:

    @RSR:
    Small 2-50
    Medium 51 to 500 (or so — depends on state/insurance company)
    Large 500+

    And yeah, as you get to bigger groups, the smoothing effects of large numbers come into play.

  4. 4
    Richard Mayhew says:

    @RSR: Sounds like BS — 2 million dollar plus claims out of an employed population of 5,600 people works out to $350/person/year —

    That is the type of claim a large group should be able to absorb fairly easily especially if they have any stop-loss or reinsurance contracts for very large claims.

    AOL is doing this because it can because the labor market is wicked weak and labor has absolutely no power to get better wages. Obamacare is merely a convienent target of a 2 minute hate.

  5. 5
    flukebucket says:

    Why should we expect to see hundreds of stories of rate shock this fall?

    Election year. We were going to hear them whether they were or were not true stories. I am sure Hannity has quite a few folks lined up already.

  6. 6
    Richard Mayhew says:

    @flukebucket: But this time, it should not be too hard to fine stories where the details actually check out unlike the SOTU response $700 increase for my insurance claim.

  7. 7
    Irony Abounds says:

    Anyone thinking this isn’t going to hurt the Dems big time in the mid-terms is just whistling past the graveyard. It will be an easy story to tell (“RATES GO WAY UP FOR LOCAL SMALL BUSINESSES”), easier to exploit in 30 second ads, and more difficult to explain why it isn’t bad.

  8. 8
    KithKanan says:

    Richard,

    Off-topic, but how often does an enrollment get lost during processing? That supposedly happened to my 1/1 effective enrollment in my small employer’s plan, and because the insurer was very backed up with processing 1/1 enrollments, nobody noticed until now.

    They’re resubmitting, still with 1/1 effective, but this whole thing is driving me crazy since I cancelled my grandfathered individual policy at the end of last year I had been holding on to for dear life since 2006 and I feel uncovered even if I know I will have been covered eventually.

  9. 9
    Richard Mayhew says:

    @KithKanan: It happens often enough. I can’t give you a number as I don’t know the percentage. However, I know that my company has a small team of people whose primary jobs is correcting issues with lost enrollments (changing claims from being denied because the member was not covered to being paid at regular rates for that member, soothing feelings, figuring out where the process failed etc)

  10. 10
    KithKanan says:

    @Richard Mayhew: Thanks. Good to know that it’s just a SNAFU, I guess.

    I’m going to laugh at the next person who tells me how the private sector is always faster and more efficient than government, though. In my experience so far large bureaucracy is equally shitty no matter who it supposedly works for.

  11. 11
    KithKanan says:

    More on-topic, if the legal pre-ACA range of RAFs in our state ran from 0.9-1.1 and our RAF was 1.075, are we likely to benefit from the move to community underwriting at our next renewal?

    I’m still expecting rate shock because our insurer dropped their entire 2013 policy line-up and the 2014 plans have significant coverage/deductible/etc differences I’m assuming are for ACA compliance.

  12. 12
    Pseudonymous Bosch says:

    Most small and medium size groups that thought they would pay more under community underwriting had the option to renew their policies one last time with a December 2013 start date. This stretched out the underwritten policies and avoided the price hikes for 11 more months. This is why we have not seen many of these stories yet.

    My company took advantage of this; but they made sure to let us know that our costs would have “about” tripled if they hadn’t. I immediately went online and checked the exchanges — if they mean my oop will triple, then I can get a decent broad network gold plan for that cost (I am 50 with family). If they mean their costs triple (and they pass even more of the cost onto me,) then I am in the platinum neighborhood.

  13. 13
    pseudonymous in nc says:

    Law of large numbers, innit.

    And the very best group is one that covers the entire population, more or less.

    I still don’t know how it’s possible to communicate how people’s desire for special-snowflake health coverage (“I don’t need maternity / mental health” etc.) is at odds with the benefits of large pools and standard terms. If you want to be treated as a unique flower for healthcare, go ahead and send a DNA swab to an insurer and see what rate they’d quote you.

  14. 14
    EthylEster says:

    I can’t speak to the sticker shock for employer plans until mine gets replaced. But our small company (5 employees) has gotten a letter informing us that our plan will be going away…due to ACA requirements. So we are awaiting info about possible replacement policies.

    BUT I can comment now on the Washington State Exchange website, etc. I visited it to get an idea of how much it would cost me if I were to stop working right now (at age 63). Because I’m one of those folks who continues to work mostly because of the health insurance coverage I get through my job.

    First, I was disappointed in the site itself. They have checkboxes where there should be radio buttons! Good god, how can no one have fixed this by now? And they don’t trap this error so who knows what the meaning of the info is when you check TWO deductible amounts…maybe the amounts are “anded” but that seems counter-intuitive (to me).

    Second, it looks like for about five hundred/month, I can get a bronze policy with a $6k deductible. My company now pays about $650/month for a very nice policy (as far as which docs i can see, no need for referrals, etc) with a $2k deductible. I entered $45K as my income. I was shocked…I will not be quitting work and shouldering a $500/month premium. I would never reach the deductible unless I had a major illness/accident. I will work til I am 65.

    Now for a question that I could not find the answer to at the website: my current coverage pays something for everything covered but then leaves me with a portion to pay until I reach my deductible of $2000. Previously this was an 80/20 arrangement: they paid 80%, I paid 20%. Do the new policies being offered take the same approach? I want to confirm that a deductible of $6k does not NOW mean: pay 100% of the billed amount until it reaches $6k, then the insurance STARTS paying.

  15. 15
    David M says:

    @EthylEster:

    Would your income still be $45,000 after retiring?

  16. 16
    EthylEster says:

    @David M: Good point. I forgot to say that I was considering the scenario where I continue to work part time but go below 50%. Then the company is not allowed to cover me (under our current policy). But you are correct: my income will go down…not to zero but less than the approx 70% figure I gave.

    I guess my shock is about someone who DOES have an income of $45K…full-time. It just seems high to me compared to what my company pays now…especially with a $6k deductible. It’s not a level that encourages folks to quit their jobs and start a small business.

  17. 17
    David M says:

    @EthylEster:

    Yes, I just wanted to make sure you looked at the subsidies for the correct income level if you were working less. It’s probably useful to enter in several different incomes to make sure you know what all the options are.

    And yes, in general you have to meet the deductible before the insurance starts paying. There are some basic benefits all plans have to cover at no cost, and some plans have benefits that kick in before the deductible is met, so read the fine print.

    Your group plan is $650 / mo for everyone regardless of age. The individual plans do have age rating, and at 63 you are basically as expensive as it gets. Someone 30 years younger starting their own business will have much cheaper premiums.

  18. 18
    EthylEster says:

    @David M: thanks for the info. all good stuff to know.

  19. 19
    Paul@predictablefunk says:

    Sorry to come late to this. Richard, can these small businesses just send their employees to the exchanges, and if so, do you have a sense of the likely consequences,for the business or the employees?

  20. 20
    Paul@predictablefunk says:

    Sorry to come late to this. Richard, can these small businesses just send their employees to the exchanges, and if so, do you have a sense of the likely consequences,for the business or the employees?

  21. 21
    Paul@predictablefunk says:

    Sorry to come late to this. Richard, can these small businesses just send their employees to the exchanges, and if so, do you have a sense of the likely consequences,for the business or the employees?

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