Yesterday, I mentioned that insurers can’t rely on the assumption that 2021 will look very similar to 2019 in terms of population health and usage patterns. There are too many fundamental unknowns that are being caused by the COVID-19 pandemic. Insurers are comfortable handling statistically quantifiable risk. This is risk that has an expected distribution pattern and predictable outcomes even if there are extreme tail risks. An insurer is more than willing to back a $1 billion dollar prize for a small premium if the prize is awarded if a 40 something male with bad knees can run a sub 2 hour and 10 minute Boston Marathon after 2 years worth of training. That is a quantifiable risk that is extremely unlikely to require a pay-out. Insurers hate uncertainty where they can not even think about quantifying reality.
Insurers within the ACA market space have two major types of responses in the face of significant uncertainty.
The first choice is to not take on uncertainty. This means insurers leave markets. We saw this in the run-up to 2018 as insurers did not know what the rules of the road were going to be. Some insurers looked at Repeal and Replace as well as the potential termination of CSR payments and decided that they could not afford to risk the company on the basis of policy uncertainty. Going into 2018, about 42% of the counties in the country were monopolies. These monopolies were more likely to be in rural regions. Monopolies are not necessarily bad as Coleman Drake, Jean Abraham and I showed in a recent Health Affairs article. Monopolies with smart silver-gapping strategies can lead to low net of subsidy premiums for subsidized individuals.
The other choice for insurers when they see uncertainty is to raise rates. Covered California has a scenario that sees a 40% rate increase for fully insured lines of business next year. If a company jacks up rates too high, it is a low enrollment, low risk year especially if risk adjustment is directionally decent. If a company does not increase rates high enough, they will get all the price sensitive enrollment at premium levels that are too low. This logic dominated early rate filings in 2017 when insurers were trying to figure out what was going to happen with Repeal and Replace as well as CSR payments for 2018.
But things get a bit odder when all carriers agree but get the government action wrong. If the carriers think the government will pay but the government does not, the outcomes are unequal. The carrier with the absolute worst value proposition is not hurt that much. No one wants to buy that product anyway. It is a minor hit for an ugly plan.
Now if a insurer offers a very attractively priced plan with a good network and good customer service, they attract all of the membership. That usually is a good thing! Not in this case. Offering the most attractive plan means that plan takes all of the losses. And if that plan goes under, the special enrollment period refugees will choose the next most attractive plan, sending it under. This is an odd winner’s curse scenario.
If there are multiple insurer and they disagree the dynamics are interesting. Insurers that assume they won’t be paid CSR always survive. They won’t get much membership as they are massively overpriced for the market. They will keep some portion of their sickest membership so they will be net risk adjustment recipients and their administrative costs relative to premiums will be very high. But they survive.
In this split decision making scenario, the carriers that are optimistic that CSR will be paid are in an all or nothing scenario. If they are right and the government pays CSR, they get almost all of the membership in the market. Assuming they priced appropriately, they should make good money for the year. If they guess wrong and CSR is not paid, they get all of the membership and the state regulators shut them down due to either a premium deficiency reserve (PDR) event as they have to come up with an extra 20 points of actuarial value that is not being compensated by the government, or there is a risk based capital problem as they have too many members to be safely covered by their current reserves
The COVID-19 pricing problem is structurally similar to the CSR termination pricing problem from the Spring of 2017. The safe, don’t lose the company bet in a multi-insurer market is to price really high.
Assuming that my logic is right that CSR uncertainty is an isomorph of the COVID19 pricing problem, we should expect a significant increase in both premiums and single insurer counties in 2021.