The effects of the Patient Protection and Affordable Care Act (ACA) on the individual health insurance market continue to evolve. With 2014 being the first year of implementation, participating insurers have been scrambling to get pricing prepared for the plans they will offer on the state health exchanges, also commonly referred to as Health Insurance Marketplaces. With regulatory frameworks still being clarified, the entrance of new and potentially costly populations into the market, and many risks that simply cannot be measured with any confidence, forecasting can be quite challenging.

To succeed in this dynamic environment, insurers need to look as far ahead as possible. At first glance, it may seem that the information available to them for 2015 will not be any richer or more useful than what they have going into 2014. Yet there are several known regulatory and market differences that will become effective in 2015 that are almost certain to be relevant to pricing. For those that are unknown—particularly the morbidity of new populations of insureds—it may be possible to use available data to create useful estimates that can assist in managing pricing risk beyond 2014. It may be tempting not to consider 2014 experience in 2015 pricing; however, at the conclusion of this paper, we present a technique for incorporating 2014 experience that many insurers may find useful.

Known regulatory and market changes impacting 2015 estimates

Actuaries can incorporate certain known structural changes into 2015 pricing estimates now, without waiting for 2014 data. These include such items as reduction in the federal transitional reinsurance program and increases in the ACA insurer fees. Some of these are likely to increase rates, while others are likely to have the opposite effect. And, of course, their impact will vary by insurer.

Reduction of federal transitional reinsurance

To ease the transition to a guaranteed issue environment, ACA includes a federal reinsurance program to help mitigate the risk of extremely high-cost individuals entering the individual market. While the reinsurance program will be a significant help to insurers in 2014, its impact will shrink over time. The budget allocated for reinsurance payments will drop from $10 billion in 2014 to $6 billion in 2015. All else being equal, this will reduce reinsurance payments to individual health plans by 40%. Actuaries estimate that the reinsurance program has reduced premiums by 10% to 15% in 2014, so slimming it down will have a certain and material impact on pricing in 2015.

The bottom-line impact of this shift will depend on the size of the individual market in 2015. If individual market growth is significant in 2015, the transitional reinsurance program payments into the individual market may well go down more than 40% on a per-member basis, simply because the $6 billion budget will be spread across a larger individual market in 2015 relative to 2014. As a result, actuaries need to estimate the size of the (non-grandfathered) individual health insurance market in 2015.

There are reasons to think the market may increase materially, such as increasing tax penalties for remaining uninsured in 2015, as well as organic growth of the market as knowledge of and familiarity with the exchanges increases.

Rising ACA health insurer fees

While reinsurance for individual insurers under ACA will go down in 2015, health insurer fees will go up. The ACA mandates that the total fees collected will rise from $8 billion in 2014 to $11.3 billion in 2015. On the surface, this seems to indicate that health plans should expect to pay roughly 40% more in fees in 2015.

However, the true picture is more complicated. The 2015 fee will be allocated to each insurer based on its 2014 total health insurance premium revenue from all lines of business, with adjustments that depend on the size of the insurer, whether they are for-profit or not-for-profit, and the markets they serve. Thus, to accurately estimate their share of the $11.3 billion 2015 insurer fee, insurers will not only need to estimate their own premium volume for 2014, but also that of the entire 2014 health insurance market, taking into consideration the impact of the size and profit status factors on the overall market. Milliman has published an analysis of the impact of the insurer tax on the U.S. health insurance industry which includes detailed estimates by year out to 2023.¹

Morbidity changes

Many actuaries believe that the total morbidity of the 2015 individual market will improve relative to 2014 due to increasing participation in the market. This increasing participation will be driven by two factors:

• The U.S. population will have greater awareness and familiarity of insurance reforms, exchanges, and federal subsidies in 2015 compared to 2014. They will have had an additional year to digest the information that will become available as the exchanges come online. This may drive increased enrollment in exchange-based individual market plans.
• The federal tax penalty for not having health insurance coverage will increase from at least 1% of annual income (after a deduction) in 2014 to at least 2% in 2015. This will incent more individuals to seek coverage in 2015 compared to 2014.

As these factors drive increased participation in the market in 2015, overall morbidity is generally expected to improve, which will help to mitigate rate increases. The magnitude of the morbidity change will be far less significant than in 2014, but will require modeling and assumptions similar to what went into 2014 rate development.

An additional consideration will be the impact of the employer mandate, scheduled to come into play in 2015, having been delayed from 2014. All else being equal, this may reduce the size of the individual market by driving some employers to begin offering employees coverage in 2015. With many variables in play, the impact this will have on the overall morbidity of the individual insurance market is uncertain, but the subject may be worthy of further consideration and modeling by actuaries.

Wear off of pent-up demand

While the morbidity shifts in the post-ACA individual insurance market are generally seen as a permanent phenomenon—reflecting the true long-term underlying healthcare needs of the population—many insurers anticipate that a related but relatively short-term driver of increased health costs is relevant in the early years of ACA implementation.

Known as pent-up demand, this factor reflects the temporary increase in health-related expenditures as previously uninsured or underinsured individuals seek care that was delayed due to a prior lack of adequate coverage.² Many believe that the impact of pent-up demand lasts a year or less. Thus, as the proportion of the 2015 population that was previously uninsured is expected to decrease—as many uninsured individuals will have obtained insurance in 2014 thanks to ACA—the impact of pent-up demand on claim costs is also expected to decrease relative to 2014. This should help to mitigate 2015 rate increases in the individual market.

Techniques and approaches for adjusting morbidity assumptions in the absence of claims data

The largest uncertainty about the post-ACA individual market is morbidity. This is true for both 2014 and 2015. When comparing figures from internal Milliman modeling, client modeling, and publicly available analyses, the estimated impacts of this item vary widely among different sources. Many of these estimates for a given state differ by more than ±10%. Thus, there is by no means a common consensus on this issue among actuaries. Fortunately, there are ways to gain additional insight on morbidity for 2015 pricing compared to the approaches used for 2014.

One way is to examine morbidity assumptions of other insurers from 2014 rate filings. The availability of filings, and the details contained therein, will vary among states. Oregon, for example, has posted all 2014 individual market rate filings online for public viewing. Most of these filings clearly outline the morbidity assumptions used for pricing. For states like Oregon, insurers can explicitly compare their morbidity assumptions to other competitors in the market to see if they stand out as high or low. Of course, competitor assumptions are not necessarily correct, so actuaries will need to use good judgment and reasonability tests when reviewing such data.

For states where rate filings are not publicly available, or do not contain the needed details for this analysis, insurers will at least be able to compare premium rates to those of their competitors on the exchanges. Premium rate differences will be attributable to a number of reasons in addition to morbidity, such as provider reimbursement rates, the breadth of the provider network, and degree of healthcare management. This will make it more difficult to gain a clear picture into competitor morbidity assumptions compared to reviewing rate filings, but it may still give some insight on morbidity differences. A murky picture is better than no picture at all. Milliman is preparing a 2014 rate database using publicly available rate data that could be used for such an analysis; for more information, contact your local Milliman consultant.

Another source of insight will be the number of individuals that actually enroll in exchange products. A greater participation rate in the exchanges is generally believed to correlate with lower overall morbidity levels. This is because the costs of the most morbid individuals, who presumably are among the first to obtain coverage due to their immediate medical needs, becomes spread across a larger population. Most insurers will have assumptions regarding the size of the market underlying their overall morbidity estimates. If the actual size of the market comes in much higher or lower than anticipated, this would be a clear indication that morbidity assumptions should be revisited.

Cohort studies: estimating morbidity using actual 2014 data

Finally, we come to a more analytical approach to looking at actual emerging 2014 morbidity, which can help inform assumptions for 2015. Actuaries spent the first half of 2013 working feverishly at estimating what might happen in 2014, but in a few short months we will start to see actual experience data. However, claims data will be incomplete and of limited use to most carriers to meet the spring 2014 filing deadlines for 2015 rates.

A technique that we believe will be useful to many carriers is examining the risk scores of cohorts of the individuals which make up their 2014 insured populations. Risk scores based on prescription drug data are likely to provide the most accurate estimates, since that data will be far more complete at that point compared to medical claims data. Prescription drug risk scores can be calculated for each enrollee based on the few months of 2014 data that will be available. These partial-year risk scores can then be adjusted based on analyses of risk score development and completion patterns from prior years, taking into consideration potential differences in completion patterns for new vs. existing enrollees. These adjustments will allow comparisons of 2014 risk scores to prior year risk scores on a more “apples to apples” basis.

Once risk scores are estimated, the membership can be split into cohorts of new vs. existing members for both 2014 and prior year data. Comparisons can then be performed to help answer the following questions:

• How has the overall risk score of our 2014 population changed compared to 2013?
• How do the risk scores of new 2014 enrollees compare to existing members?
• How do the risk scores of new 2014 enrollees compare to new enrollees in 2013 and prior years?
• Has our existing member block risk score increased significantly due to lapses of younger/healthier individuals?

The answers will be very valuable when developing 2015 premium rates.

It is important to note that, due to the ACA risk adjustment program, assumptions regarding the morbidity of the entire 2014 individual market are necessary for pricing—not just one particular insurer’s members. While the latter is valuable, it does not provide a complete picture. To provide the most value, actuaries will need to make assumptions regarding:

• How the morbidity of the insurer’s 2013 population compares to the 2013 market average. Some insurers participated in statewide risk score simulation studies to help answer this question for 2014 pricing. This information will remain relevant when reviewing 2014 data.
• Whether or not the morbidity of the insurer’s new 2014 enrollees reflects new enrollees market-wide. Are there reasons to believe any particular insurer would attract subsets of the previously uninsured population that exhibit greater morbidity? This assumption will be important when interpreting the results of the cohort study.

Consequently, the most valuable cohort studies will be those performed by the largest insurers in a given state, who will have more accurate answers to the questions above because of their larger market share.

There are limitations to such a cohort study that should be taken into consideration:

• Pharmacy detail and therefore risk scoring data will be incomplete, with newly insured individuals needing time to visit a doctor before getting prescriptions. This uncertainty can be partially addressed by reviewing the behavior of new members relative to existing members from more complete prior-year data and adjusting risk scores accordingly.
• Open enrollment does not end until March 2014, meaning a significant portion of business may simply be too new to accurately capture what is going on.
• This approach will work for existing insurers only. Insurers who are just entering the individual market in 2014 will not have a cohort of existing policyholders to compare to.
• Small insurers may have difficulties producing usable results if they are unable to account for relativities to market averages.

Nevertheless, in the dynamic world of post-ACA individual insurance, some insight into future pricing is better than none. Insurers should take advantage of any data source or analytical tool at their disposal to maintain a competitive advantage in a world of new frontiers and shifting markets.

¹ Doucet, M. & Yahnke, J. (April 2013). ACA health insurer fee: Estimated impact on the U.S. health insurance industry. Retrieved October 1, 2013 from http://www.milliman.com/insight/healthreform/ACA-health-insurer-fee-Estimated-impact-on-the-U_S_-health-insurance-industry/.

² Damhler, R. (August 2009). Experience under the Healthy Indiana Plan: The short-term cost challenges of expanding coverage to the uninsured. Retrieved October 1, 2013.