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.