Don’t expect as much premium announcement shock for the midterms

Three weeks before the midterms Democrats should not expect to see nationwide headlines of 15% or 20% or 25% rate increases on the Exchanges.  There will be some states and some insurers with those types of rate increases, but there will be a number of insurers with either “normal” increases of less than 10% or actual rate decreases.

Insurers massively overpriced for 2018.

If insurers priced perfectly for 2018, we would expect the following factors to drive premiums for 2019:

  • Normal Medical utilization (+7%)
  • Repeal of the health insurance premium tax (-3%)
  • Repeal of the individual mandate (+10%)
  • Proliferation of association health plans and short term underwritten plan rule (+5%)
  • Further negative messaging/advertising/navigator cuts against the ACA (0% to 5%)

This produces a net 19% to 24% premium increase on top of the 18% (Gold/Bronze) and 33% (Silver) increases for 2018.

That is not the case.  In Tennessee, BCBST is projecting significant premium decreases (via Holly Fletcher at BirdDog:)

But, BCBST — one of the insurers in the U.S. with the most payments on the line, according to Axios — filed its request on the deadline: It requested an average 10.9 percent decrease although it had planned for an 18 percent decrease until the HHS announcement.

The insurer has been expecting $75.8 million in estimated payments from HHS in relation to the individual and small group plans it offered on the federal exchange for 2017 and 2018, said Danielson.

Insurers seem to have massively overpriced for 2018. We are seeing that with the initial MLR where insurers paid out 68% of their premium dollars in claims for the first quarter of 2018, down from a profitable 75% in 2017 and way down from the high 80s in 2015/2016. We are seeing insurers enter new markets because there is too much money on the table. We are seeing insurers react as if they masively overpriced in all dimensions.

With BCBST, the argument on the cost of sabotage becomes one of a counterfactual — “Prices would have gone down by 20% or 30% instead of 11% if things were different” That is a convincing argument for actuaries and academics. It is not a strong political argument in my mind.

MLR and Risk Adjustment games (a cynical take)

I was talking with another health insurance nerd last night.  We talked about the risk adjustment pause and a very cynical thought was developed — what if the Center for Medicare and Medicaid Services (CMS) instructs insurers to exclude risk adjustment flows from their Medical Loss Ratio (MLR) calculations that are due on July 31?

MLR requires individual market insurers to spend 80% of their net premium dollars (minus taxes and fees) on claims or qualified quality improvement activities.  Net premiums are after risk adjustment flows.  So insurers that pay out risk adjustment will see their net premiums be lower than their gross premiums.  Insurers that collect risk adjustment transfers will have their net premiums be higher than their gross premiums.

Some of the low morbidity insurers (Centene, Oscar etc) have very significant risk adjustment liabilities as part of their business strategy.  Some of these insurers like Centene pay very little in claims so their raw MLR is low.  It is only with the significant net RA payment that their MLR ratios are near to 80%.

However, if there is no risk adjustment payments, some of the insurers in a net payable position will have to cut some very large MLR rebate checks that will arrive just a few weeks before the election.

This builds on a CSR-MLR thought that I had last fall:

The rebates are sent in the following September after the end of the policy year.

And then in the fall of 2020, ambitious state insurance commissioners will be handing out rebate checks in late September as they are running for Governor or the Senate. Or if they are a bit less ambitious, they are supporting the incumbent party by handing out checks and injecting new federal money into the state and making the fundamental background economic picture a bit better than it otherwise would have been.

I might be getting too cynical today.

The outcome would be a significant front page splash of big federal checks going to people who bought policies from low MLR insurers just before the election.  This may be a cynical take but it is a plausible pathway.

Tax, Trade and Health Policy

Incentives to change behavior need to be targeted to be effective.

If this was to pass, I will be able to use the entire amount. This morning was a squat morning. Tomorrow is an off day and Saturday is a dynamic back and isometric core day. A tax incentive to go to the gym will not change my behavior. It will just increase my effective income.

I’m also at an age and physical condition where going to the gym won’t produce immediate changes to either my health outcomes or my health expenditures. Hell, I’m more likely to incur incremental medical expenses because I impinged my shoulder stabilizers than had a preventable heart attack in the next twelve months. Maintaining good conditioning and strength in my late thirties may have positive health and functional impacts in my fifties and sixties, but that pay-off is both probabilistic and deeply discounted.

To evaluate whether or not this is a good health expenditure, first we would need to assess how many new/incremental gym memberships/work-out regimes are bought and then how many incremental work-outs actually occur (as we don’t care about the substitution of someone changing from going on a walk around the neighborhood to watching TV on a treadmill at the local Planet Fitness). And then from there, we need to see how much health changes from the incremental work-outs. Or far more simply, we can evaluate it as a give-away to the upper middle class.

Now onto booze:

Kentucky makes a lot of bourbon. Bourbon is a targeted retaliatory tariff item because it makes the constiuents of the Senate Majority Leader worse off and their pain may actually create screams that a decision maker will hear and care about.

What does a trade-war targeting bourbon do to the number of DUI and injuries/deaths due to alcholol related crashes? As I see it in the short term, Kentucky distilleries had projected a certain demand for their slow to produce products. That demand was the sum of domestic demand and foreign demand at a given price. Now the tariffs are a shock. Foreign demand will go down significantly as bourbon is significantly more expensive than all other booze alternatives. Kentucky bourbon inventories will be higher than expected so distilleries will have several short run choices. First, they can cut future production or transform some of their projected 2019 seven year bourbon releases into eight or nine year bourbons. Secondly, they have the choice of paying to warehouse some of the unanticipated surplus or discounting it to get rid of the extra bottles on the domestic market. If there are bourbon discounts, we should expect some combination of consumers shifting from other booze types to the cheaper bourbon and some new consumption. We don’t care about the shift but we care about the increase in consumption due to cheaper booze. So will retaliatory bourbon tariffs lead to higher DUI and drunk driving crashes with injuries?

Revisiting Alexander-Murray copper

Alexander-Murray was a fairly straightforward proposal.  It was an honest attempt to solve problems.  Almost every section I could read through the bill and do the following:

  • Identify what problem the new language was attempting to address
  • Identify a clear pathway to resolve that problem
  • Assess a reasonable likelihood that the identified problem would be resolved in a manner favorable to the advocates of that section.

I may not have liked all of the sections on policy grounds (Iowa 1332 waiver revision section for instance) but mechanically the bill made a lot of sense.  The Problem-Change-Solution chain was clear and strong.

However there was one instance where Underpants Gnomes were involved.  And that was the section on expanding Catastrophic plans that would then be renamed Copper plans.  This never made sense to me.  The problem that the bill was trying to solve was to offer more low premium plans to more people while also bringing the Catastrophic plans into the Metal risk adjustment process.

The 2017 risk adjustment data shows the morbidity differences between Catastrophic and Bronze plans quite well (Figure 5)

Catastrophic plans are, from a benefit design viewpoint, merely funny looking Bronze plans. Catastrophic plans have a pricing advantage over Bronze plans because they have a massive risk adjustment advantage.  Catastrophic plans only risk adjust against themselves.  As you can see, Catastrophic has perhaps a third of the morbidity of Silver plans.  This is because Catastrophic plans are mostly limited to people under the age of 30.

Bronze plans are APTC subsidy eligible and they also contribute net risk adjustment payments to the rest of the Metal plans.  A portion of the Bronze premiums are in excess of Bronze claim costs as that money is shifted to cover some of the claims incurred by people who bought Silver, Gold and Platinum plans.

I could see the logic of expanding Catastrophic plans with split risk adjustment as a means of offering more people lower cost premium plans.  It would be attractive to most off-Exchange and some on-Exchange Bronze buyers.  Average morbidity in the Catastrophic pool would increase but the new entrants would see premium savings as they would not be paying risk adjustment to other metal plans.  Incumbent Catastrophic buyers would be worse off as the morbidity increase would lead to premium increases.  Silver, Gold and Platinum buyers would see higher premiums as significant risk adjustment support from Bronze would disappear.

But expanding Catastrophic plans that are rebranded as Copper plans and then bringing those plans into the Metal risk adjustment process makes no sense from any perspective.

This is 99.4% irrelevant to policy going forward as Alexander-Murray is dead but this has bugged me for months.

Actual vs. statistical

Just two very good points by two very smart people:

More on risk adjustment

This is a follow-up from my Saturday post on the risk adjustment freeze. There have been two major updates from the Center for Medicare and Medicaid Services (CMS).

1) CMS press release

On February 28, 2018, the United States District Court for the District of New Mexico issued a decision invalidating use of the statewide average premium by the Center for Medicare & Medicaid Services (CMS) in the risk adjustment transfer formula established under section 1343 of the Patient Protection and Affordable Care Act for the 2014 – 2018 benefit years, pending further explanation of CMS’s reasons for operating the program in a budget neutral manner in those years. The ruling prevents CMS from making further collections or payments under the risk adjustment program, including amounts for the 2017 benefit year, until the litigation is resolved.

It is a sign that the Trump Administration is not interested in making things work well or easily on the Exchanges but if it is few weeks this is not a major meteor of death but it is bad faith as Nick Bagley at the Incidental Economist outlines:

the court’s order remains in place. And so CMS says that the ruling “prevents [the agency] from making further collections or payments under the risk adjustment program, including amounts for the 2017 benefit year, until the litigation is resolved.”

That’s wrong. The truth is that the Trump administration has lots of options. It’s just choosing not to exercise them.

First and foremost, CMS could have moved quickly to adopt a rule to address the judge’s concerns. Indeed, it’s already done that for the 2019 risk adjustment year, where it proffered precisely the sort of explanation that the judge says he’s looking for. For prior years, CMS could have issued an interim final rule (i.e., one that took immediate effect) offering the same explanation for prior plan years, after which it could have solicited notice and taken comments. With that interim final rule in hand, it could have sought to vacate the district court’s decision.

Second, the Justice Department could have filed a notice of appeal (even while the motion for reconsideration is pending) and sought a stay pending appeal, first from the district court and, failing that, from the Tenth Circuit or even the Supreme Court. That’s what I expected the Justice Department to do: it’s a completely natural move for a litigator. And this is precisely the sort of case in which a stay would be appropriate. The district court’s decision is weak, the rule’s deficiencies can be easily addressed, and allowing the decision to take immediate effect would be immensely disruptive.

2) CMS released the 2017 Risk Adjustment payment flow report this morning

The critical question that I’ve been making when I’ve been talking with press over the weekend and this morning is how long is the suspension. If this is a couple of weeks or even a few months, I am not too worried.

This is a normal operational report. Insurers can use these numbers to book their liabilities and assets. Actuaries and insurers will use these numbers to modify their 2019 rate requests because those requests are partially informed by 2017 risk adjustment because that informs the morbidity of the covered population.

Right now, this is more of a possible problem than an actual problem. It is worth monitoring.

Risk Adjustment suspension

New ACA disruption and sabotage news was reported last night by the Wall Street Journal health care team.

The Administration is suspending risk adjustment payments for at least 2017 and 2018.

The Trump administration is expected to suspend an Affordable Care Act program that plays a key role in the health law’s insurance markets, a move that could deal a financial blow to many insurers that expect payments.

The suspension of some payouts under the program, known as risk adjustment, could come in the wake of a recent decision by a federal judge in New Mexico, who ruled that part of its implementation was flawed and hadn’t been adequately justified by federal regulators, people familiar with the plans said.

The Centers for Medicare and Medicaid Services, which oversees the program, may at least temporarily suspend the payments insurers expected to receive this fall, stemming from their 2017 business, and next fall, which would have reflected their 2018 business, the people said…

For 2016, risk-adjustment transfers were valued at 11% of total premium dollars in the individual market, according to a CMS report.

The biggest question is what does “suspension” mean. Is it a couple of weeks? If so, this is not that big of a deal. If it is several months/years this could be a big deal.
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