Summary of regulatory developments: Updates for April 2022
We highlight the latest noteworthy items in the life insurance industry from various regulatory agencies.
This article is intended to provide an overview of key considerations for a carrier to succeed in the Patient Protection and Affordable Care Act (ACA) market with the expectation that additional concrete and actionable details will be provided in future articles.
Although the first year of ACA exchanges in 2014 seems like yesterday, ACA exchanges are now old enough for grade school, and our understanding of the inner workings for this health insurance market has greatly improved. Initially challenged by revised regulations, changing parameters, market uncertainty, and evolving government support structures, the market has become more predictable over the past few years (with occasional curveballs: COVID-19, American Rescue Plan Act, state-specific regulations, etc.). Now that some of the new market uncertainties are behind us, it is becoming easier for both large and small health insurers to develop and implement successful ACA market strategies.
There will always be an element of risk in the ACA market—it is insurance after all—but there is a playbook of best practices carriers can consider to maximize their likelihood of successful outcomes.
ACA market players range from small startups to well-established insurance giants and success will look differently to each one. Being able to clearly define success allows a health plan to develop a laser focus for setting and achieving its goals.
For startups, goals in the first few years may be about doing everything in their power to stay in the game before ultimate success comes down the road once infrastructure is established. More established carriers may be better capitalized, so early goals may be set to gain market share through competitive yet profitable pricing.
Whether it’s lower loss ratios, higher profitability, increased membership, more accurate pricing, expanded delivery of quality healthcare, or any number of possible goals, each health plan must identify what it means to succeed. Even within an organization, different stakeholders may have different goals for their lines of business. Identifying these differences early on will help to ensure that everyone has aligned expectations.
The ACA has evolved into a market that allows for virtually any carrier to compete and many carriers have found ways to succeed. The increase in the number of competitors across all markets and states over the last few years highlights this; carriers typically only want to participate in any market when conditions support success.
Figure 1 below demonstrates the growth in carriers since the inception of the ACA—we can see a growing proportion of states with three or more insurers, as well as an increasing total number of market competitors since 2018.
While carrier participation and market growth were strong out of the gate for ACA marketplaces, many carriers dropped out in the years that followed because of unprofitability, reaching a low point in 2018. We are once again seeing market growth patterns, but this is no longer a new market and increases in market premiums and carrier sophistication have led many carriers to want to participate.
Every carrier is different and relies on its own unique characteristics to succeed in this market. The strongest contenders understand their strengths and weaknesses and use them to develop strategies specific to their markets and situations. The process begins with an assessment of capabilities and evolves into an approach and implementation plan that factor in carrier, market, and competitive dynamics, with results measured and adjusted accordingly over time. In this article, we outline a broadly applicable set of principles for success that take these carrier-specific considerations into account.
As we have worked with carriers across the country, we have identified the following seven key considerations for success in ACA marketplaces:
The remainder of this article covers each of these considerations in more detail.
The diversity of characteristics of successful insurers offering individual and small group coverage indicates that there is not just one successful strategy.
If there is one characteristic successful carriers have in common, it is that they all have a plan.
Goal setting begins with defining “success” (as discussed earlier) and identifying key performance indicators that will be used to measure it. Goal outcomes should broadly align with a carrier’s mission and vision statements. They should be short-term and long-term in nature, clearly understood and specific. Examples include membership counts, market penetration, revenue, and profitability. A pro forma (projection of results) of three to five years is helpful for tying goals together.
Once goals are established, the next question to address is “How do we get there?” Performing a carrier and market assessment helps to address this question.
In considering a carrier analysis, health plans need to be able to identify and play to their strengths to best position themselves in a market. The ACA is designed to be a largely commoditized market with standardized (or nearly standardized) choices. Because of this, carriers need to differentiate themselves, using other factors like their brand, provider network, benefit design, price, or customer experience. For example, a carrier should consider how strong its brand reputation may be for attracting members without being the lowest-cost in the market (although price seems to be a primary driving factor of enrollment and market share). A carrier should also consider if it has advantages in terms of provider contracts, network composition, risk adjustment, administrative costs, medical management, member experience, etc.
A market assessment is necessary to identify the target population that will likely enroll. Considerations include the plan’s premium, benefit design, network strategy, reputation, and customer experience. The “Know the market” section below covers certain market elements that present opportunities for enrollment, and the “Assess population” section discusses target population dynamics.
The outcome of the carrier and market assessments will likely lead to implementation strategies. These strategies must not be considered in isolation, but rather in a broader perspective. For instance, lower-priced plans will generally win members; many prospective enrollees will choose the lowest-premium plan with little consideration for other features. However, plans must also be easy to understand and provide sufficient access to care. The “Calibrate pricing levers” section below discusses considerations for implementing a plan and pricing strategy.
It is also important to note that carriers must continually adapt their past implementation strategies for succeeding in the market. Getting healthier members isn’t enough and offering the lowest-cost plans won’t result in profits if they are mispriced. Carriers must pay for extra benefits and comprehend the structural obstacles inherent in the system.
Measurement is the final strategic component and is critical to recognizing success and identifying opportunities to make adjustments. The “Establish a feedback loop” section below provides an overview of this.
Setting strategy requires a broad perspective encompassing carrier, competitor, and market dynamics. The right strategy establishes decision-making criteria and objectives for evaluating other considerations described in this article.
Flexibility is critical. Carriers must be strategically and operationally able to react to situations that arise from sources outside of their control. They must also be responsive, as timing requirements can be stringent.
Market dynamics can change very quickly. Carriers enter and exit markets each year and can change the competitive landscape within areas. Markets must be managed with this in mind, and products need to adapt to the landscape in which they exist to ensure that the strategy remains intact.
Often, regulations are not released within a desired lead time for implementation or new ones are released with little or no notice. It is important to keep an awareness of them and plan to be nimble. Changing circumstances can introduce a variety of operational and strategical considerations the carrier must adapt to, such as:
These considerations may require a carrier to modify its benefit offerings, filings, communication plans, and forecasts to maintain profitability.
As with any market, it is important to ensure that ACA marketplace carriers are equipped to cover the basics. They could include effectively servicing the customer while meeting all state and federal compliance requirements, basic sales distribution capabilities, and member-based (customer experience) services.
A review of operational capabilities is necessary, which includes ensuring the carrier’s infrastructure is capable to service and support exchange-based requirements for filing plans and rates with the state and Centers for Medicare and Medicaid Services (CMS). An actuarial team well-versed in the nuances of ACA rating is essential, along with a claim processing system capable of adjudicating complicated benefit designs and providing timely data, and an operational team to ensure smooth plan administration under a tight administrative expense budget. A competent provider networking team is needed to build a network that meets access and adequacy standards under profitable contract terms, as well as a sales, marketing, and customer service team to attract and retain the target client base.
It is easy to gloss over these items (and many inexperienced carriers do). No one gets credit for meeting these requirements, but it may become obvious quickly if a carrier does not. We think of this as the basic hygiene of operating a health plan.
While broad requirements for ACA rating are generally consistent across states, nuances of the regulations and market dynamics in each state must be considered by carriers.
Although federal regulations apply to all states, the level of state involvement and applicable state legislation differ greatly. In our experience, state-based exchanges tend to exhibit greater variation than federally facilitated marketplaces and are more likely to require significant amounts of additional information from carriers throughout the filing and rate review process. State departments of insurance have varying levels of oversight and may require specific pricing assumptions and adjustments for carriers. Some states provide opportunities to reduce premiums by providing subsidized reinsurance through 1332 waivers with different attachment points and coinsurance. Essential health benefits (EHB) benchmark plans will differ by state, and some have additional required benefit coverages or prescribed cost sharing for specific services.
Not only do state regulations matter, but market dynamics also differ significantly by state. Key differences include carrier competition, provider system coverage, population density, and pricing. The level of competition varies by state, too. Carriers should identify which segments of the market are underserved by existing carriers and plans. The number of provider systems and strategy for network development and contracting varies by state. The ability of members to access care varies by state. Some states may have underpriced plans where success is harder (if not impossible) for all carriers. If the market in a state is priced correctly, multiple carriers can be successful.
Product design, network composition, and care management strategies all have the potential to dramatically alter the benefit and administrative cost profile of ACA coverage. In this way, these and other coverage characteristics act as pricing levers, which can be calibrated to balance price point with market appeal and overall strategy. Thoughtful calibration of these levers is a critical component toward ACA marketplace success.
Product design is specific to each carrier and its goals—some want ease of administration and adjudication, offering coinsurance-only plans with a small, concise portfolio. Others elect to offer many different plan designs with various copay options for each metallic level, allowing for greater market segmentation. Cost sharing can be adjusted to drive member behaviors and attract specific types of members. For example, offering zero-cost primary care and generic drugs can attract members who are likely to engage in lower-cost settings with the reduction in out-of-pocket cost barriers. Even selecting the metallic levels offered can be an important decision, as seen through the decrease in availability of platinum and catastrophic plans over the years.
Network plays a significant role in the pricing of plan offerings. Generally, plans with narrow networks win on price, giving them a competitive edge against their counterparts. On the other hand, broad networks are generally preferred by members who often value choice among many providers as a health plan feature. Because provider reimbursement reflects directly on price and is one of the only remaining unknowns in otherwise transparent ACA markets, the relevant strategy needs to be carefully selected to optimize fit with an insurer’s capabilities.
Care management is another pricing lever. Many carriers have programs and protocols in place to gain efficiencies in care delivery, lower costs, and increase the quality of healthcare provided to consumers. It is important to ensure that these programs align with the strategy in place. They must target the desired population and achieve results within the time period of expected enrollment, understanding that the ACA market is price-sensitive and plans see high turnover rates.
The combination of product, network, and care management will largely determine pricing and ultimately influence the population likely to enroll. Carriers must be established with a strategic objective and evaluated in consideration of the market and competition.
Understanding the target and expected population for a specific plan portfolio in the ACA market is crucial. Population dynamics can significantly affect overall claim costs as well as the portfolio’s risk adjustment transfer and ultimate profitability.
Individual market populations will have differing characteristics based on whether or not the state has expanded Medicaid, and what percentage is receiving advance premium tax credits (APTCs). Characteristics include younger (or older) purchasers and whether certain or no chronic conditions are present. Small group market populations will differ based on the various industries most prevalent in a rating area, as well as how densely populated a specific area might be. Carriers offering plans in a market should be aware of these characteristics and measure the likelihood of enrollment in each of their plans.
Determining the anticipated enrollment and estimating the financial impacts cannot be done without also considering risk adjustment. New entrants must understand the dynamics of who’s paying into and receiving from the program in each market, and why.
Carriers should take actions to ensure that all possible diagnosis codes are accounted for to avoid unexpected transfers that may not reflect the true morbidity of their population. These actions include chart reviews, prospecting, provider education, and provider coding incentives. In addition, carriers should ensure their processes comply with risk score documentation and audit requirements.
A keen understanding of the risk adjustment program and its impact to transfer amounts is critical to supporting and determining success in the ACA marketplace. Carriers should develop rates and assess profitability with risk adjustment in mind, as well as consider the timing of transfers and the resulting impact on financials, especially if the carrier’s population significantly differs from the state average.
As with any repeating process, understanding each carrier’s specific dynamics and adjusting strategies based on continuous feedback is instrumental to success. Insurers should monitor results throughout the year—looking at enrollment, claims, and risk-adjusted loss ratio patterns, as well as emerging risk scores and any other parameters that affect the ultimate performance of the plan. This data should be made accessible across departments and decision guidelines established as a framework to act upon.
Over the long term, health plans need to adapt to evolving markets, and be ready, willing, and able to make the necessary changes to succeed. Establishing a feedback loop containing actionable information helps to ensure that plans are equipped to recognize and adapt to information as it becomes available.
Two key parts of establishing a feedback loop are to:
This creates a proactive approach to identifying areas of improvement as opposed to a commonly employed reactive approach when timing constraints make it difficult to effectively identify and correct issues.
As part of this feedback loop, carriers should explore areas of uncertainty (know what you "don’t know" and learn what you "don’t know you don’t know"), as well as learn from past mistakes and the mistakes of others. Many insurers have entered the market or expanded into states expecting to get ahead due to potential arbitrage and have shifted focus away from the keys to success in the market. In some cases, these efforts have led to challenges, creating opportunities for all carriers in the market to learn and improve. While success often stems from new approaches and ideas, carriers in the ACA market can still be successful by refining and improving upon existing strategies in the market.
Success is possible—the market is growing and there are enough strategies for various types of carriers to achieve their goals. After defining success, each carrier has key considerations to continuously evaluate in order to meet objectives in the ACA markets. Focusing on these areas will not guarantee perfect outcomes but will set up any insurer for success in the ACA.
1 McDermott, D. & Cox, C. (November 23, 2020). Insurer Participation on the ACA Marketplaces, 2014-2021. Kaiser Family Foundation. Retrieved February 23, 2022, from https://www.kff.org/private-insurance/issue-brief/insurer-participation-on-the-aca-marketplaces-2014-2021/.