US Health Reform - What s happened, and does it matter to Australian health insurers?

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1 US Health Reform - What s happened, and does it matter to Australian health insurers? The Australian media have provided a great deal of coverage of US health reforms without really explaining what is going to change. This article summarises the effect of the reforms on US private health insurers. We consider how the post-reform US will compare to the Australian private health system, and whether any of the US reforms could benefit Australia.

2 Summary of US Reforms This section summarises the US reforms that are most relevant to private health insurance. The health reform legislation runs to over 2,500 pages, so this article can provide only a brief overview. Some changes will be introduced immediately while others will be phased in over up to 10 years. Individuals and small employers buying insurance will enjoy greater protection than large employers. Compulsory Private Health Insurance America has a number of public health programs, including Medicaid for people on very low incomes or with certain disabilities, and Medicare for over 65s. Americans who are not covered by one of the public health programs will either have to take out private health insurance, or face additional taxes (2.5% of their income or a minimum dollar amount, whichever is the larger). Role of Employers Most Americans with private health insurance are members of employer plans. Risks are pooled across the workforce, so employers can often extend cover to workers who would not meet individual underwriting criteria. Employer schemes will continue to be the main method of providing private health insurance. There will be penalties introduced for employers who do not offer schemes to their workers. Some support will be offered to smaller employers to establish new schemes. Support for Individuals without Employer Insurance The US government will subsidise premiums for those on low incomes who are unable to join an employer scheme or one of the public schemes. Each state will have to establish Health Benefit Exchanges through which private health insurers can sell subsidised insurance policies. There will be only four categories of policy available in the exchange, ranging from bronze to platinum. The categories are intended to ensure that all policies provide at least a minimum standard of cover, and to allow price-based competition within each product category. Some level of subsidy will be available to families earning up to around US$80,000 (in current dollars). Rules specify the maximum proportion of income that poorer families will have to spend on private health insurance, with government covering anything above this. For example, premiums for a family earning US$80,000 will be limited to 9.5% of income if they buy a Silver policy, while families earning around US$20,000 (the threshold for Medicaid) will pay no more than 2% of income for the same policy. Government subsidies will also limit out-of-pocket costs (copayments and excesses) for low income families. US Health Insurance Statistics Americans without any health coverage (public or private): 15%. Americans with private health insurance (individual or employer-based): 67%. Proportion of private health insurance provided through employers: 88%. Source: 2008 statistics from US Census Bureau 2

3 New Rules for Private Health Insurers In the language of Australian PHI, US policyholders now have guaranteed acceptance and renewability and premiums will use a partial form of community rating. The profitability of health insurers will be limited by law. Premiums for a particular plan will only be allowed to vary based on the number and ages of people covered by the policy, the area where the policyholders live and any tobacco use. The policy for the most expensive age group can cost no more than 300% that of the cheapest age group, and the loading for tobacco use cannot exceed 50%. State governments will determine whether rates should vary by area within a state and, if so, specify the rating areas. From 2014, insurers will no longer be able to deny coverage or apply premium loadings to people with pre-existing conditions. Waiting periods for new policyholders can be no more than 90 days. Insurance companies will no longer be able to drop coverage when policyholders get sick (except in cases of fraud), and lifetime caps on coverage will be banned. Insurers must allow children to remain on a family insurance policy until they reach 26 years of age. Gross margins for private health insurance companies will be limited to 20% for individual and small group policies, and 15% for the large group market. States are being provided with additional funds to scrutinise premium increases. Insurance companies deemed to have increased premiums excessively will not be allowed to sell policies through health insurance exchanges. Funding The legislation includes new taxes to help pay for the reforms, such as a premium levy on private health insurance companies. The levy rate for not-for-profit insurers will be half that applied to for-profit insurers. There is also a tax on policies that provide very high levels of cover, referred to in the US as Cadillac policies. Risk Equalisation In the absence of risk equalisation arrangements, high risk individuals are currently excluded from the insurance market, although separate high risk pools are available in some states. There will be a three stage process to change risk equalisation arrangements: 1. Beginning immediately, an interim high risk pool will provide government-subsidised coverage to people with pre-existing conditions who are unable to buy commercial insurance. 2. Special risk-equalisation arrangements will apply for the three years after 2014, as insurers will no longer be able to rate on the basis of pre-existing conditions: The legislation suggests a scheme under which insurers are paid specified amounts if they cover people with certain pre-existing conditions. The cost of these payments would be recovered by a levy on all insurers operating in a state. However, state governments can decide what measures are introduced in each state. Government will provide financial support to any private health insurer that makes significant underwriting losses, and collect additional taxes from insurers with very low claim ratios. 3. Each state is required to establish an alternative risk-adjustment mechanism for subsequent years, although details of what this might involve are limited. 3

4 US Health Trivia There are six registered health care lobbyists for every member of the US Congress. Source: Bloomberg Implications for US Insurers There was limited comment from health insurers as the reforms passed into law. In its statement, industry association Americas Health Insurance Plans said this: Ensuring that all Americans have access to coverage is a significant step forward for our country, but these reforms will only be sustainable if they are paired with real efforts to control costs. News releases we have seen from individual insurers echo the sentiment that more might have been done to control medical costs in addition to broadening access to care. In some states, provision of public health care is contracted out to private health insurers. Diversified insurers are set to benefit from the reforms, as the coverage of the public insurance schemes expands. The US will need an effective risk-equalisation mechanism to support greater community rating of insurance premiums. We note that the legislation includes limited details of how risk equalisation will be effected, especially beyond Australian experience shows it is difficult to achieve consensus on risk equalisation systems. As such, we expect this issue to generate significant debate in the US in coming years. The US health system will continue to purchase health care largely through insurance companies, rather than bulk government funding of services. The funding will still be largely provided by employers as part of workers total remuneration, rather than through taxation. We don t know the extent to which the US decisions reflect inertia and vested interests rather than a rational analysis of funding policy. US Health Trivia Medical debt is cited as a factor in over 60% of US bankruptcies. Source: American Journal of Medicine 4

5 Comparison with Australia The table below draws some comparisons between the post-reform US private health insurance environment and the current regulations in Australia. Policy Area Penalty for not joining Community Rating Insurer rules Premium Subsidies Rate Increases Policy range Distribution Taxation Australia Medicare levy surcharge (MLS) of 1% only applies to incomes above $70,000 (single) or $140,000 (family). MLS of 1.5% is proposed for high income families. Full community rating (except for loadings under Lifetime Health Cover). Rates vary by number of people covered (broadly) and state. Guaranteed acceptance and renewal for all Australians. Waiting periods up to 12 months. Currently available to all, but to be withdrawn for high income families. Additional subsidies for older Australians. Rate increases need government approval. Regulation effectively limits gross margins to around 15%. Wide range of policies available, including some that provide low levels of cover. Most insurance purchased by individuals rather than employers. For-profit insurers pay standard corporate taxes. Not for-profit insurers are tax exempt. US (post-reform) 2.5% income penalty if not covered by public insurance. Partial community rating. In addition to number of people covered and state, rates can vary based on the ages of the people covered and tobacco use. The premium variations permitted only partially allow for risk differences. Guaranteed acceptance and renewal if not covered by public insurance (regardless of pre-existing conditions). Waiting periods not more than 90 days. Targeted to low income groups. Over 65s covered by Medicare rather than insurance. Taxes on Cadillac policies for wealthy individuals. States may deny insurers access to the exchange if rate increases are excessive. Gross margin limited to 20% for individual / small group policies, and 15% for large group market. Only four categories of policy can be sold in the exchange. Employers to continue providing most private health insurance coverage. Insurers will pay amounts in addition to standard corporate taxes. 5

6 Would Similar Reforms Benefit Australia? US healthcare is generally cited as an example to avoid rather than emulate. However the core issue the reforms seek to address is relevant to all countries: the role of government in helping people to access healthcare they would otherwise not be able to afford. It is therefore worth considering whether any of the reforms might be appropriate in Australia. Community rating will make US private health insurance a little more like Australian private health insurance. However, significant differences in health systems mean many of the US changes would not be relevant to Australia. In particular, very high subsidies for low income earners and the requirement to provide comprehensive coverage in part reflect the absence of a universal public health system in the US. Australia has a mixed health system, with funding from government, private insurance and outof-pocket costs. All commentators predict that Australian health spending will grow faster than overall GDP. Planning for the future should include conscious decisions as to whether government is best placed to fund this growth, or whether there should be a larger role for private health insurance. Areas of particular concern are in providing care for the poor and for old people. The US solution provides public sector support for older people, and focuses insurance subsidies on younger people with low incomes. In Australia, the highest premium subsidies are for older people, with only those on very high incomes set to lose rebates under proposals now before parliament. Providing additional subsidies to help working Australians on low incomes get private health insurance could lower the average age of insured people and thus lower premiums for all Australians. Given the importance of smoking as a public health issue, if Australian community rules were to be rewritten today we would expect broad agreement that tobacco users pay more for private health insurance. The key elements of an effective community rating system are guaranteed acceptance and renewal and affordable premiums; there is no requirement for every policyholder to pay the same rate. Australian family policies cover dependants under 21. According to PHIAC statistics, PHI participation is lowest among year olds. Children remaining on family policies until the age of 26 would be more likely, and better able, to continue private health insurance than people aged 21. Keeping younger people insured would reduce the average cost of insurance. Conclusion There is substance behind the spin the US reforms will allow people on low incomes or with pre-existing conditions to access private health insurance. Many of the US changes were implemented in Australia long ago, and remaining differences in approach largely reflect differences between the US and Australian health systems. However, Australia is considering how to fund growing health costs, and the US experience always provides an interesting reference point. 6

7 About Finity Finity is the largest independent general insurance actuarial and consulting firm in Australia, with around 80 staff in Sydney and Melbourne. Finity has a dedicated practice providing actuarial and management consulting to PHI companies. Our core areas of expertise include: Strategy: Finity assists insurers with a range of strategic issues. A key area of our work is helping clients consider responses to current industry change. Appointed actuary role: Our consultants are experienced in preparing liability valuations and Financial Condition Reports, and can provide the necessary opinions on pricing and product design. Our reputation is built on providing clear, accessible advice of outstanding technical quality. Demutualisation, merger and acquisition: Finity has been actively involved in recent industry consolidation, and was engaged by insurers on both the buy and sell sides in recent transactions. We also have expertise to assist health insurers in other areas, including: Actuarial Outsourcing: Whether you want help with a single project or are looking for a complete outsourcing solution, Finity can help. Peer Review: We are happy to provide managements and their boards with a concise second opinion on any matter, drawing out key issues and making broad market comparisons. Contacts Jamie Reid Jamie.Reid@finity.com.au Ashish Ahluwalia Ashish.Ahluwalia@finity.com.au Geoff Atkins Geoff.Atkins@finity.com.au Ian Burningham Ian.Burningham@finity.com.au Copyright 2010 Finity Consulting Pty Limited Sydney ph: fax: Level 7, 155 George Street THE ROCKS NSW 2000 Melbourne ph: fax: Level 6, 30 Collins Street MELBOURNE VIC 3000 Auckland ph: fax: Level 27, 188 Quay Street AUCKLAND 1010 Finity Consulting Pty Limited ABN: