Almost every morning, we hear about another problem with the Healthcare.gov website. The Obama administration has committed to fixing the problems by Dec. 1, but the delays will still cause problems that we should be considering.
Each carrier or health plan that developed rates for the exchanges developed rates that would apply for 2014. Although the initial enrollment period could extend past Jan. 1, most carriers assumed that a significant portion of the enrollment would begin no later than then. Rates for 2014 are based on projected claims for the full year. This projection reflects health-care inflation, in addition to many other key assumptions. A complete 2014 claim period would be centered on July 1. Any delays in enrollment would push back the center date. For example, a 10-month period ending Dec. 31 would be centered on Aug. 1. Because health-care costs rise as the year progresses, a delay in enrollment would increase the cost of the average claim, even though the monthly rate paid by the person buying the insurance would remain the same. Assuming an illustrative annual rate of 8% increases in health-care costs, there would be about a 0.64% per month understatement in projected claims being paid by carriers. Because anticipated margins in exchange rates likely fall in the 2% - 4% range, delays in enrollment can significantly lower projected margins.
Beyond the inflationary impact of enrollment delays, there is a strong likelihood that the delay may lead to a bias in the average morbidity or health status of the enrolled population. Individuals with the best health have the least need to enroll in the exchanges. Therefore, one might expect healthier individuals to be the slowest to enroll. The individual mandate penalty may appear small compared with the premium for even the least expensive bronze coverage. Delays in enrollment would likely have an adverse impact on the health plan’s assumption for average morbidity under the program, because a disproportionate share of the less healthy individuals will be enrolled into the exchanges. In other words, the pool of people being covered through the exchanges will be less healthy than insurers expected when they set rates. With margins at just 2% - 4%, a small swing in morbidity would eliminate a carrier’s margin independent of the inflationary impact.
Issues related to the demographic mix of the population that insurers assume will enroll add to the potential problems. Since health-care reform has limited the rate variation by age to a 3:1 maximum, rates for older individuals have been reduced while younger individuals pay a subsidy. In reality, the actual costs by age exhibit a higher ratio, probably closer to 4:1 or 5:1. If younger individuals delay enrolling or don’t enroll at all, rather than pay to subsidize older individuals, carrier margins are expected to deteriorate even more. For each 10% proportionate reduction in enrollment by those under age 45 compared to that assumed in rate development, margins are reduced by about 1.1 percentage points. A proportionate reduction of 20% could eliminate most, if not all, of a carrier’s margin.
A less obvious concern to some, yet perhaps even a more important issue, is the impact of the delays on the 2015 rates on the exchanges. Without delays, the rates for 2015 will be based on a very limited experience base, probably just the first quarter of 2014. With delays, the rates will be based on even less. In light of the delays, the 2015 rates will be based upon projections of 2014 rates, continued uncertainty, and confusion about actual financial results in 2014. Unexpected losses will force carriers to increase future rates to make up deficits.
Bottom line: The delays matter and, if not carefully managed, will create serious financial implications in 2014 and subsequent years.
