Actuarial Analysis: Impact of the Affordable Care Act (ACA) on Small Group and Individual Market Premiums in Oregon

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2 Actuarial Analysis: Impact of the Affordable Care Act (ACA) on Small Group and Individual Market Premiums in Oregon Prepared on July 31, 2012 Prepared for: The Prepared by: Wakely Consulting Group Julie Peper, FSA, MAAA Luke Rodgers, ASA, MAAA Julia Lambert, FSA, MAAA Kelsey Stevens, FSA, MAAA Ross Winkelman, FSA, MAAA Jon Kingsdale, Ph.D Pyramid Court Suite 260 Englewood, CO Tel Fax

3 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY ANALYSIS OF THE OREGON INDIVIDUAL MARKET Summary of Individual Analysis Current Regulations and Market Composition Data Received ACA Impact on Individual Market Premium Tax Credits and Cost Sharing Subsidies Additional Requirements and Considerations How to Reduce Churning between the Individual Exchange and Medicaid? ANALYSIS OF THE OREGON SMALL GROUP MARKET Summary of Small Group Analysis Current Rating and Underwriting Rules in Oregon Current Coverage and Costs in the Oregon Small Group Market ACA Impact on Small Group Market Summary INDIVIDUAL AND SMALL GROUP MERGER IMPORTANT CAVEATS APPENDIX A ACA IMPACT ON PORTABILITY APPENDIX B ACA IMPACT ON OMIP/FMIP APPENDIX C ACA IMPACT ON HEALTHY KIDSCONNECT July 31, 2012

4 1. EXECUTIVE SUMMARY Wakely was retained by the state of Oregon to analyze the impact of the Affordable Care Act (ACA) on Oregon s individual and small group markets in This report presents the results of Wakely s work. All estimates presented in this report are specific to the state of Oregon and will likely be different for other states. The following components are discussed in this report: 1. Current Oregon regulations and market composition for the individual (non-group) and small group markets. 2. Analysis of the impact of the ACA reforms on the various Oregon markets, including the impact on benefit plan offerings, rating and underwriting, as well as the impact due to newly insured individuals and premium tax credits and cost sharing subsidies under ACA. This analysis was completed for the following markets: a. Individual b. Portability c. Oregon Medical Insurance Pool (OMIP) and Federal Medical Insurance Pool (FMIP) d. Healthy KidsConnect (HKC) e. Small Group f. Small Groups currently in associations 3. Impact of merging the various markets: a. Individual submarkets, which include the current individual market, OMIP/FMIP, portability and HKC. b. Small group submarkets, which include the current small group market and small groups currently in associations. c. Resulting new individual and small group markets. 4. Churning between the individual exchange and Medicaid. 5. Impact of increasing small group to 100 members. For the individual, portability, OMIP/FMIP, Healthy KidsConnect and small group markets, we received data from the largest eight insurers in the state. The data received includes: summarized plan benefit packages, premiums, claims, underwriting, non-benefit expenses, commissions, and current members demographic information. We supplemented this information with publicly available rate filings and survey information, data from other states, and information provided by the Oregon Department of Consumer and Business Services, Insurance Division (the Department). We reviewed this information July 31, 2012 Page 1

5 for reasonability, but did not audit the information. Any errors in this data may materially impact the results of our analysis. The following describes key results of the analysis. The full report should be referenced to fully understand the assumptions, approach and results. Individual 1. Wakely estimates that premiums for a combined individual, portability, OMIP/FMIP and HKC market will increase by approximately 24% (on average) due to the ACA changes, before premium tax credits are considered. However, approximately 7% of this increase will result in lower out of pocket benefit and cost sharing payments. In addition, the ACA offers premium tax credits and cost sharing subsidies. Therefore, Wakely s best estimate of ACA changes is a 23% decrease in individual market member out of pocket costs (premiums plus cost sharing). The table directly below details the premium impact to the average individual/portability/omip/ FMIP/HKC member. Table 1: Individual Market Average Member Impact on Out of Pocket Costs Average Member Impact 2014 Best Estimate ACA Requirements 24% Premium Tax Credits -27% Net Premium Impact -10% Out of Pocket Reductions Essential Health Benefits -5% Minimum Bronze -2% Cost Sharing Subsidies -8% Total Out of Pocket Reductions -14% Overall Change in Member Costs -23% 2. Premium tax credits will offer premium relief to approximately half of the currently insured market and almost 75% of the uninsured who are expected to enroll in the individual market in Before consideration of premium tax credits, Wakely estimates that average individual market premiums will increase by 27% to 55%. This increase is comprised of 2% to 30% due to ACA requirements and another 20% to 24% due to the addition of portability, high risk pool, and Healthy KidsConnect members into the individual market. Wakely estimates that out of pocket costs will decrease by 6% to 11% due to increased benefit and cost sharing coverage, prior to July 31, 2012 Page 2

6 any cost sharing subsidies. This results in a net average estimated cost change to the average member of 20% to 40% prior to any premium tax credits or cost sharing subsidies. 4. The impact of the ACA changes will vary greatly by individual enrollee. It is difficult to predict how these changes in premium rates will affect individual's choices regarding coverage options. Small Group 1. Wakely estimates that the range of average small group premium changes will be from a 5% decrease to a 16% increase due to the ACA reforms and merging of small groups currently in associations. Most of the uncertainty in this range is due to the inherent difficulty in estimating the number of healthy groups that may leave the market because of larger rate increases. 2. The impact of the ACA changes will vary significantly by group. The groups receiving the largest increases will have a disproportionate share of young, healthy employees. Individual / Small Group Merger 1. If the individual and small group markets are merged, Wakely estimates that premiums for the new small group market would decrease by approximately 4% and premiums for the new individual market would increase by approximately 4%. Because the ACA will increase the number of insured people, hospitals and physicians will be less likely to shift costs from individuals who cannot pay ( uncompensated care ) to the privately insured. The ACA also reduces federal payments available to hospitals for the Disproportionate Share Hospital (DSH) program. Therefore, the DSH program reductions provide a somewhat offsetting impact to the increase in insured individuals and groups. However, the overall expected impact of the ACA is an increase in provider funding. This increase may result in a decrease in provider payment rates, since some providers may not need to subsidize uncompensated care to the same degree they have historically. Results for each component of the analysis are included below. Please see individual sections of the report for descriptions of our methods, assumptions, data and inherent limitations with our estimates. Estimates of the impact of healthcare reform provisions are inherently uncertain because of the large number of forces affecting the insurance market, including actions by consumers and health plans. Also, many structural decisions regarding the exchange and the insurance market have not been decided by the state and federal regulations and guidance are still pending; such decisions, regulations and guidance may significantly impact premiums and product offerings. A summary of the results and conclusions is listed below. Detailed results and discussion begin in Section 2 of this report. 1.1 Overview - Individual Market under ACA Under the ACA the current individual market, OMIP/FMIP, portability, and Healthy KidsConnect are expected to comprise the new individual insurance market. Throughout the report the impact of the July 31, 2012 Page 3

7 ACA requirements to each submarket will be separately discussed, followed by the impact of merging the submarkets into one larger market. Individual Market Estimated changes to individual market premiums due to ACA regulatory reforms, as compared to the current Oregon market (as of 2011) are shown in Table 2 below. Each of the ACA changes included in Table 2 is discussed in detail in this report. Note that Table 2 below represents the estimated 2014 impact; Table 3 provides a comparison of best estimates, by year, from 2014 to As shown in Table 3, the estimated impact of some of these changes, such as reinsurance, vary considerably by year. The best estimate of the increase in premiums is approximately 38% above what it would be without the ACA changes. This reflects the change in the premium required to cover the health risks of the expected population after the ACA changes and changes in costs including benefit changes required under the ACA. It can also be viewed as the expected change in the filed rates of an insurer. The following table shows the components of this change: Table 2: Individual Market Premium Impacts under ACA (2014 compared to 2011) Individual Premium Impacts Average Premium Impact ACA Requirement Low Best Estimate High Essential Benefits Requirement 5% 6% 7% Bronze Minimum Act. Value (includes Max OOP limit) 1% 2% 3% Minimum Loss Ratio = 80% -2% -1% 0% Morbidity Change (due to new insured/uninsured) 10% 15% 25% Age Slope Limited to 3:1 0% 0% 0% Provider Fee 1% 1% 1% Reinsurance Program -9% -8% -7% Elimination of OMIP Assessment -2% -1% 0% Subtotal (ACA Requirements) 2% 13% 30% Individual Submarket Merger 24% 22% 20% Total Premium Impact 27% 38% 55% As shown above, we estimate that average individual market premiums will increase significantly due to the ACA reforms and the influx of newly insured individuals. The increase in premiums is mostly driven by benefit increases and the morbidity (or population risk) changes from newly insured individuals entering the market. Some of the impacts, such as age factors, have no overall expected impact but the impact to a particular insured can be significant. The impact from merging the individual submarkets is July 31, 2012 Page 4

8 also significant; this impact is discussed below in the subsection titled Combining the Individual Submarkets. The component Morbidity Change (due to new insured / uninsured) in the table above reflects the average risk change to the current individual market due to the migration of some members out of the individual market and into Medicaid, as well as migration from the uninsured and small group market into the individual market. The impact of the risk corridor provision is not included in the estimates above. While the risk corridor provision will clearly affect plans and insurers differently, it is impossible to predict this impact in advance. While many of the changes increase premiums, they also decrease out of pocket expenses for individuals. For example, while the essential benefits requirement is expected to increase premiums by 6%, this increase will be offset by a decrease in out of pocket expenses as these additional benefits will be covered post-aca. Excluding changes that decrease out of pocket expenses, since these have offsetting effects, results in a range of overall health cost impacts of 20% to 40%, with a best estimate of 27%. This is prior to any further relief due to premium tax credits and cost sharing subsidies. Table 3: Individual Market Premium Impacts under ACA ( ) Individual Premium Impacts Average Premium Impact ACA Requirement Essential Benefits Requirement 6% 6% 6% Bronze Minimum Act. Value (includes Max OOP limit) 2% 2% 2% Minimum Loss Ratio = 80% -1% -1% -1% Morbidity Change (due to new insured/uninsured) 15% 15% 15% Age Slope Limited to 3:1 0% 0% 0% Provider Fee 1% 1% 1% Reinsurance Program -8% -4% -2% Elimination of OMIP Assessment -1% -1% -1% Subtotal (ACA Requirements) 13% 19% 21% Individual Submarket Merger 22% 20% 18% Total 38% 42% 42% As shown in Table 3, the estimated impact of reinsurance varies significantly by year, from approximately -8% in 2014 to an estimated -2% in The provider fee also varies by year but by a small amount that is not seen due to rounding. July 31, 2012 Page 5

9 Portability Coverage through the portability market is relatively rich. The ACA requirements will not impact members in this submarket as much as it does members in the current individual market. Wakely estimates that 2014 portability premiums will increase from 42% to 59% due to ACA changes, with a best estimate of a 50% increase (excludes the impact of any premium tax credits). The primary driver of the estimated premium changes is the current subsidization of portability premiums. Since the portability market is subsidized and many insurers experience loss ratios above 100%, these members would likely experience premium increases due to more appropriate pricing. However, the submarket merger (discussed below) is estimated to decrease premiums to portability members by a best estimate of 39%, which offsets these increases. After the submarket merger, portability members are estimated to have an overall premium impact of an 8% decrease. The change in the age slope will not impact average premiums significantly, but will have a large impact to some individual members. Current age slopes vary by insurer, with one insurer varying rates by gender. Most insurers use premium age slopes that vary by less than the 3:1 ACA requirements for portability coverage. Assuming these members join the individual market starting in 2014 which will be subject to a 3:1 age ratio limit, many portability members will see premium impacts opposite of what the current individual market will experience (outside of other changes, older portability members will see a rate increase while younger ones will see a decrease due to ACA age ratio limits). Oregon Medical Insurance Pool/Federal Medical Insurance Pool Similar to the portability market, OMIP/FMIP plans have relatively rich benefits and cost sharing. Therefore, impacts due to ACA requirements are nominal. The impact of ACA regulatory reforms on OMIP/FMIP premiums is estimated between +100% and +159%, with a best estimate of +141%. Elimination of the OMIP/FMIP assessment is the primary driver of the estimated premium changes with potential offset due to the submarket merger. The submarket merger is estimated to decrease OMIP/FMIP premiums by 67%, for a resulting overall premium decrease between 12% and 38% with a best estimate 21% decrease. Also similar to the portability market, the change in the age slope will likely not have an overall premium impact, but expected changes in the age slope under the ACA will have the largest member impact. Current age slopes for OMIP/FMIP premiums are close to 2:1, so the expansion to an assumed 3:1 in a combined individual market will decrease rates for the younger members and increase rates for the older members. Healthy KidsConnect Market It is not known if the HKC members will migrate to the Medicaid or individual market (likely some of each). For discussion purposes, we have assumed they will move to the new individual market. July 31, 2012 Page 6

10 Healthy KidsConnect premiums are expected to decrease between 12% and 5% due to the ACA changes, with a best estimate of a 9% decrease. Overall, most of the regulatory requirements should have very little impact on average premiums. The most impactful requirements are reinsurance (especially in 2014) and the minimum loss ratio. HKC benefits encompass almost all of the essential health benefits requirements, including pediatric dental. Age slope requirements should not impact this market. The submarket merger is estimated to have minimal impact on the HKC market resulting in an overall premium decrease of 14% to an increase of 3% with a best estimate of a 5% decrease. Combining the Individual Submarkets The merging of the current individual market with the portability, OMIP/FMIP and Healthy KidsConnect markets will create a larger individual market; hereinafter, this combined market will be referred to as the new individual market. To understand the impact of merging these markets we compared the normalized allowed (before cost sharing) costs for the various submarkets, all adjusted for the impact of ACA requirements, including the migration from the uninsured into the current individual market. Costs were further normalized to account for any differences in age, geographic concentrations and other rating variables. We estimate that merging these submarkets into the new individual market will change post-aca premiums as follows: 1. the current individual market will increase by 22%, 2. post-aca portability premiums will decrease by 39%, 3. post-aca OMIP/FMIP premiums will decrease by 67% 1, and 4. Healthy KidsConnect premiums will increase by 4%. A shown above in Table 2, combining the merging of the individual submarkets with the impact of ACA requirements results in the following (2014) post-aca premium changes: the current individual market will increase by 38%, post-aca portability premiums will decrease by 8%, post-aca OMIP/FMIP premiums will decrease by 21% and Healthy KidsConnect premiums will decrease by 5%. Premium Tax Credits and Cost Sharing Subsidies Beginning in 2014, some lower income individuals and families will be eligible to receive premium tax credits and cost sharing subsidies to make health insurance more affordable. It is estimated that the 1 Since OMIP/FMIP and portability premiums are currently subsidized, the premium impact shown is related to the full premiums that would need to be charged to cover expenses rather than the impact to the currently subsidized premiums. July 31, 2012 Page 7

11 premium tax credit subsidies would result in an average premium decrease of 10% for the combined individual market. This impact is based on the following assumptions: 1. Best estimate assumptions; 2. The new individual market which includes the current individual market, Portability, OMIP/FMIP, and Health KidsConnect; 3. An estimate for the second lowest silver plan premium; and 4. An assumption that individuals and families with incomes less than or equal to 133% of the Federal Poverty Level (FPL) will not be enrolled in the health insurance exchange. The impact to any one member or family is significantly affected by the income of that member or family. Therefore, while premiums are expected to decrease 10% on average, the premium impact on any given member or family will vary from this value, potentially significantly. While our primary focus is on the premium change to the currently enrolled members, it should be noted that the average premium and cost sharing subsidies vary significantly when looking at the currently enrolled and the newly enrolled. The newly enrolled population is expected to have lower incomes and thus receive higher premium tax credits (on average). Individuals who qualify for premium credits and are enrolled in a silver plan in the exchange will also be eligible for assistance in paying their cost sharing. Using similar assumptions as those listed in this section (above), it is estimated that the cost sharing subsidies will decrease the cost sharing in a silver level plan by an average of 23%, which translates to an estimated 8% decrease to average premium. 1.2 Overview - Small Group Market under ACA Small Group Market Table 4 below includes estimates of ACA changes to small group market premiums (on a PMPM basis) beyond current legislation in-force in Oregon. The impact of the ACA requirements that have already gone into effect, such as the dependent definition expansion to age 26, are not included in the table below. The impacts below do not vary significantly from 2014 to 2016 with the annually decreasing reinsurance assessment the key driver of any differences. July 31, 2012 Page 8

12 Table 4: Changes to Small Group Market Premiums under ACA (2014 compared to 2011) Average Premium Impact Range of Group Impact ACA Requirement Low Best Estimate High Low High Compliance with MOOP, deductible 0% 0% 0% Varies Varies Essential Benefits Requirement 1% 2% 3% 1% 3% Bronze Minimum Act. Value 0% 0% 1% 0% 6% Removal of OMIP and Portability Assessment -3% -2% -1% -3% -1% Minimum Loss Ratio = 80% 0% 0% 0% -6% 0% Age / Gender Slope 1, 5 0% 0% 0% -10% 50% U/W - Participation 1,2 0% 0% 0% -14% 8% U/W - Contribution 1,3 0% 0% 0% -7% 4% U/W - Health Status 4 0% 1% 3% -5% 5% Morbidity Change -5% 0% 5% N/A N/A Provider Fee 0% 1% 1% 0% 1% Reinsurance Assessment 1% 1% 1% 1% 1% Subtotal (ACA Requirements) -5% 3% 14% -37% 95% Submarket Merger 0% 1% 2% 0% 2% Total -5% 4% 16% -37% 99% 1 Premium changes due to the potential impact of selection are not included in this analysis. 2 Two carriers were unable to provide distribution data. They have been excluded from this analysis, though results could be material. Additionally, one carrier does not consider employee participation in rating. 3 Four carriers do not consider employer contribution in rating. 4 Two carriers were unable to provide data. They have been excluded from this analysis, though results could be material. Additionally, one carrier does not consider health status in rating. 5 This reflects moving from a 5:1 to a 3:1 age/gender slope. Using one insurer s data, for example, 85% of groups fall between -5% and 10%. As shown above, we estimate that small group market premiums will increase as a result of the ACA requirements by approximately 3% under best estimate assumptions, with a range shown for the most uncertain estimates and overall results. Employer behavior in light of the significant market changes that will take effect in 2014 creates the most uncertainty with respect to our estimates. Some of the impacts, such as age factors, have no overall impacts but the impact to a particular group can be significant. Due to the law of large numbers, the smallest groups will experience the most significant premium impacts. Each of the requirements outlined in Table 4 are discussed in detail throughout this report. July 31, 2012 Page 9

13 Small Group in Associations All of the ACA requirements expected to impact small groups will also impact small groups currently being covered through associations. Under current law association groups are permitted to use experience rating techniques. Since these rating techniques will no longer be permissible under the ACA, these groups may experience more significant impacts to premium levels. As mentioned for the traditional small group market, the smallest of these groups will experience the most drastic premium changes. Combining the Small Group Submarkets Under the ACA, the current small group and the small group association markets will merge, thereby equalizing premium levels. To understand the impact of merging these markets we compared the normalized allowed costs for the two submarkets, adjusting each for the impact of ACA requirements. Costs were further normalized to account for any differences in age, geographic concentrations and other rating variables. We estimate that merging these submarkets into one new small group market will change post-aca premiums as follows: the current small group market premiums will increase by 1% and post-aca small group association premiums will decrease by 6%. 1.3 Overview - Merger of the Individual and Small Group Markets Using the best estimate normalized post-aca allowed costs for the new individual and small group markets, premiums for the new small group market are estimated to decrease by approximately 4% and premiums for the new individual market would increase by approximately 4% if these markets were merged. Note that if the high estimate premiums are used for the new individual market then the post- ACA premiums for the new small group would decrease by approximately 1% and the premiums for the new individual market would increase by approximately 1% (assuming the two markets were merged). These estimates should be viewed as a comparison to if the markets were not merged post-aca, rather than a comparison to the current rates in the markets. These results are based on enrollment projections showing the new small group market would make up just over half of the merged individual and small group market. This impact accounts only for the differing morbidity of the markets. The pricing assumptions applied to administrative loads and the net impact of reinsurance will affect the actual results. These factors are discussed in more detail in the report. July 31, 2012 Page 10

14 1.4 Overview - Important Caveats Estimates of future premiums and programs over three years into the future under a set of changes as sweeping as the ACA are inherently uncertain. The following issues were most notable in creating this uncertainty: 1. Our analysis was completed with 2011 market information. Even in the absence of ACA changes, the market will change significantly over the course of three to six years (2011 to 2014/ 2016). 2. Important decisions have yet to be made regarding the health insurance exchange (HIX), including how active of a purchaser the state will be, oversight responsibilities, adverse selection avoidance strategies, risk adjustment methods, and others. These decisions will all affect competition among carriers, carrier rate setting methods and assumptions, and member behavior. 3. Pending guidance and regulations from the federal government may affect the appropriateness of our estimates. 4. Rates, especially in 2014 through 2016, depend on how health plans think costs will change under the ACA reforms and population expansions, not necessarily on how costs actually change. Results and information as presented in analyses such as this are important to communicate with the health insurance carriers. Feedback from these carriers on information they will find useful (e.g., state rules around rate review, information on the uninsured population, risk adjustment simulations, and others) will be critical to avoid irrational pricing. 5. Rate changes in the small group market and other financial incentives may drive employers to make unanticipated decisions around coverage. 6. The currently uninsured population will likely represent a significant portion of the individual insurance market in While migration assumptions were made, a more detailed Who Goes Where analysis should be completed based on current ACA requirements to better understand expected migration under the ACA. Shifts in enrollment may occur differently than what has been projected if the rate changes in the small group market and other financial incentives drive some employers to drop coverage. 7. Pent up demand has been shown to significantly increase costs in the first year of enrollment for those previously uninsured. Our estimates do not reflect estimates for pent up demand in 2014, since the effect is uncertain and may be offset by reduced utilization as members may not fully understand new or increased coverage. 8. Due to the limited scope of our work and timing requirements, we requested and received summary level market information from the carriers, rather than detailed data which would have allowed more validation and refined estimates. We did not audit the data supplied. 9. The behavior of individual members and employers is difficult to predict. 10. It is difficult to predict the number and impact of grandfathered plans. The more individuals and small groups that stay enrolled in grandfathered plans, the less of an impact the ACA guaranteed issue rules will have. However, the more grandfathered plans that remain, the higher the absolute level of non-grandfathered rates since grandfathered plans are assumed to have favorable risk July 31, 2012 Page 11

15 pools. Further, the impact of merging the individual and small group market could be skewed if the proportion of enrollment in grandfathered plans is very different between individual and small group. 11. Any adjustment to costs and premiums resulting from revised contracting post ACA was not considered. Reduced contract costs might result from eliminating the level of uncompensated care for uninsured residents or increases in contracting may be necessary because of provider capacity limits. 12. We did not attempt to model the impact of state mandatory benefits above and beyond the federal requirements of essential benefits, including how they will be reflected in the small group and individual markets after implementation of the ACA. 13. We have assumed that associations consisting of small employer groups will become part of the new small group market. 14. We have assumed that Oregon will move forward with Medicaid expansion despite the recent Supreme Court decision which no longer makes this expansion mandatory. 15. We have assumed that the Healthy KidsConnect members will become part of the new individual market. 16. There may be additional assessments, such as an assessment by the Health Insurance Exchange to fund the operation of the Exchange. 17. Some individuals may enroll in catastrophic plans, which have less restrictive cost sharing requirements. The impact of these plans on the estimates of the ACA changes is not expected to be significant, but would lower the premium increase estimates. July 31, 2012 Page 12

16 2. ANALYSIS OF THE OREGON INDIVIDUAL MARKET The following sections focus on the analysis of the current individual market. Comments specific to the other individual submarkets (OMIP/FMIP, portability and Healthy KidsConnect) can be found in Appendices A, B and C. At the end of section 2.4, the impact of merging the individual submarkets is discussed. Section 2.5 (Premium Tax Credits and Cost Sharing Subsidies) is based on the entire new individual market. 2.1 Summary of Individual Analysis We expect ACA provisions to produce the following current individual market changes for 2014 compared to 2011: 1. Overall increase of 13% to individual premiums due to ACA, with possible outcomes ranging from 2% to 30%. Incorporating the impact of the submarket merger, the overall premiums are expected to increase 27% to 55%. The impact to each individual will vary significantly based on the benefit plan and type of rate they currently have with an insurer, and will vary as a result of premium tax credits that the individual may be eligible to receive. 2. Qualified low income individuals may also be eligible to receive cost sharing subsidies to offset out of pocket costs beyond the premium, if they enroll in a silver plan through the exchange. 3. A compression of rates due to changes in the maximum age rate difference. The current market has age ratios greater than the 3:1 ratio permitted under the ACA. While this change will not have an overall impact on the total premiums, at the individual member level it will cause rates for younger members to increase and rates for older member to decrease. 4. The individual market will see a significant influx of new enrollees coming mostly from the current uninsured population. While the estimated impact of this change contains the most uncertainty, it drives the majority of the overall expected change in premiums. While the rating approaches for the seven largest insurers analyzed are relatively similar, currently enrolled individuals will be impacted differently based on their insurer, as well as the variables noted above. 2.2 Current Regulations and Market Composition Market Composition Seven insurers make up approximately 90% of the Oregon individual market. There are other smaller insurers in the market but our analysis focused on the seven insurers with the largest market share. July 31, 2012 Page 13

17 Table 5: Insurers and Members in the Oregon Individual Market Market Enrollment Individual Portability OMIP/FMIP 2011 Average Members Healthy KidsConnect Total % of Total FMIP % Health Net 3,914 1, ,933 3% Kaiser 10,018 4,884-1,002 15,904 8% ODS 26, ,808 14% OMIP ,697-12,697 7% PacificSource 12, ,008 16,377 8% Premera / LifeWise 23, ,225 12% Providence 10,898 1, ,480 6% Regence 55,325 5, ,208 32% United % Other * 15,915 2, ,530 10% Total 159,149 17,500 13,598 4, , % % of Total 82% 9% 7% 2% 100% * Other is based on historical percent of members not covered by the largest seven insurers. Table does not include the Uninsured which are estimated to be around 636,000. Most of these uninsured will be eligible for other coverage (e.g. Medicaid). Comparing the detail data provided by the insurers to the overall market enrollment listed on the Department s website, the analysis presented in this report represents approximately 81% of the individual market, approximately 79% of the portability market and 100% of OMIP/FMIP and HKC. Note that the results of this analysis assume the remaining market and rating characteristics are similar to the insurers included in this analysis. Any variations could significantly impact the results. According to research conducted by the Kaiser Family Foundation, in , approximately 6% of the Oregon population was insured through the individual market, while 17% were uninsured, 49% were covered under group coverage, and 27% were insured through public programs (Medicaid and Medicare). 2 Note that the Kaiser Family Foundation also states that the number of individuals insured through the individual market was approximately 236,700 in This enrollment is consistent 2 Oregon: Health Insurance Coverage of the Total Population, states ( ), U.S. (2010), July 31, 2012 Page 14

18 with the Department s 2009 estimates for individual, portability and the Oregon medical insurance pool combined. A summary of individual market benefits, commissions and loss ratios (for 2011) is provided below. 1. Benefits Benefits are separated into the benefits covered and the actuarial value (AV), which reflects the relative richness of the plan design. The AV is calculated by dividing the insurer s expected claims cost by the total covered amount of health care expenditures under ACA, including any essential benefits. Maternity is a mandated benefit in Oregon and thus, there is no impact to this benefit being an essential health benefit (EHB) under ACA. Not all insurers currently cover prescription drugs and mental health/substance abuse (MH/SA) services in the individual market. Approximately 23% of members are in plans with no drug coverage while an additional 3% are in plans with limited generic only coverage. For MH/SA, 18% of members are in plans with no MH/SA coverage, another 18% have no MH but have SA coverage, 39% have coverage but with limited hospital days and office visits. Only 18% of the market has full parity MH/SA benefits. No plans currently cover pediatric dental and vision to the level required under ACA. AVs for the current plans range from minimal coverage of 37% to as much as 92%, after accounting for the addition of essential benefits that must be covered under the ACA. 2. Broker/Sales Commissions Overall, all of the insurers included in our review are reflecting 2011 commissions on their individual book of business that are 2-6% of premium. 3. Loss Ratios 2011 actual loss ratios (paid claims over premium) for the individual market were fairly similar for five of the seven insurers. Five insurers had a loss ratio of around 68 74%, one insurer s individual book of business had a loss ratio that is already around the ACA minimum Medical Loss Ratio (MLR) of 80% and one insurer had a loss ratio greater than 80%. After adjusting for taxes and the OMIP assessment, the loss ratio range for the five insurers increased to 72 79%. Note that none of the insurers is fully credible under the ACA rules and thus, only a portion of any calculated rebate would need to be refunded. Regulations Oregon currently only allows rate variation based on age, family size and region. In general, there are no rate variations on individual premium for gender and health status. The following highlights current regulations in the Oregon market. July 31, 2012 Page 15

19 1. Underwriting medical underwriting is used in the Oregon individual market, with a denial rate of approximately 25% in the fourth quarter of This relatively high rejection rate indicates that the members accepted into the current individual market are likely to be significantly healthier than the average individual. As mentioned above, Oregon does offer a high risk pool via the OMIP/FMIP program. 2. Mandatory Benefits Oregon requires coverage for many benefits including, but not limited to, the following: clinical trials, contraceptives, hearing aids for children and dependents, HPV vaccine, mastectomy-related services, oral anticancer medications (if cancer chemotherapy is covered), services to treat pervasive developmental disorder in children, pregnancy and childbirth, non-fda approved drugs (if prescription drug coverage), medically necessary prosthetic and orthotic devices, and tobacco cessation programs. A more comprehensive list can be found on the state s website Rate Filings Rating actions are required to be filed and approved by the state prior to implementation. 4. Rating Variables two rating variables are used in the Oregon individual market (discussed below). Other rating variables are not allowed in the individual market, including, but not limited to: preexisting condition exclusions, rate-ups for substandard health and smoking status, and durational variations. a. Demographic Rating the individual rating variables are gender-neutral in Oregon. The insurers rate based on age. The current age ratio of rates varies significantly by insurer. In the individual market, the oldest to youngest adult insured ratio is between 3.3:1.0 and 5.2:1.0. b. Geographic Rating Two insurers use geography factors to rate individual premiums. The ratio of most to least costly region varies between 1.09:1.0 and 1.2:1.0. All rating variables noted above that are currently used will be allowed under ACA but these variables will have limits around the factors that may be utilized. While smoking factors are not currently utilized in the Oregon individual market, they will be allowed under ACA. Because of challenges associated with self-reported data and the cost of testing for smoking, it is not clear if issuers will employ a smoking adjustment. 3 Oregon Department of Consumer & Business Services: Health Insurance Quarterly Enrollment Reports. 4 July 31, 2012 Page 16

20 2.3 Data Received The analysis in this report is primarily based on data provided by the insurers and the state. This information includes but is not limited to: 1. Detailed benefit plan information for plans representing at least 80% of the individual, portability and Healthy KidsConnect books of business, as well as 100% of the OMIP/FMIP program. The detailed information includes: a earned premiums, allowed and paid claims, and member months by benefit plan. The same data elements were also provided in aggregate for the balance of the remaining plans in the insurer s small group book of business. b. High level cost sharing and covered services information for each benefit plan. 2. Summary of member months, premium, claims and allowed cost experience by line of business (small group, individual, portability, Healthy KidsConnect, OMIP/FMIP, size groups) and product type. 3. Rating factors by age band, gender, family size/status and line of business. 4. Member months by gender and age band. 5. Administrative loads, by admin component, as a percent of premiums. While most of the data received were for plans that are open, (currently accepting new enrollment) approximately 22% of the individual market is in a grandfathered plan. Only three insurers have grandfathered individual plans with over 70% of each insurer s members currently in grandfathered plans. For the insurers with grandfathered plans, two of the three have higher loss ratios in their grandfathered plans while the other has lower. The actuarial values are similar within the insurers, with one insurer s grandfathered plans having slightly less rich cost sharing than its non-grandfathered counterparts. Combining the data for the three insurers, loss ratios and actuarial values are both lower in the grandfathered plans than non-grandfathered plans. For the purpose of this report we have assumed all grandfathered plans will be impacted by the ACA. That is, it is assumed these plans will make all necessary changes to be ACA compliant, whether or not they are grandfathered. This assumption is conservative and any variance from this assumption will lessen the number of individuals who are impacted by the ACA requirements. To the extent insurers offer and sell new plans in that incorporate some or all aspects of ACA, this would also lessen the number of members impacted as well as the magnitude of the impact. July 31, 2012 Page 17

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