Insurers are in the process of filing proposed premiums for ACA-compliant nongroup plans that will be available inside and outside of Marketplaces in 2017.

Recent reports by insurers about their experiences during the first two years under the ACA suggest that some assumed that enrollees would be healthier than they turned out to be and set their premiums too low, leading in some cases to significant financial losses for ACA-compliant plans and an expectation that premiums could rise faster in 2017.  Some insurers took relatively large premium increases for 2016 to better match premium levels with the costs of their enrollees — which would help to offset the need for 2017 premium increases — but it is too soon to know if these efforts were generally successful or whether losses have continued into 2016.  At the same time, some insurers have had better experiences and may be able to sustain current pricing, while new product offerings and new competitors may offer opportunities for consumers who are willing to shop around to find reasonably priced plans in 2017.  This still is a new market, with insurers still finding their way, and as with 2016, it is likely that we will see a wide range of requests for rate changes and new product approvals across insurers and geographic areas.

State and federal regulators will be reviewing the proposed rates over the next few months in advance of the next open enrollment period, which will begin on November 1, and in some cases approved rates will likely end up being lower than proposed rates.

This brief discusses the key factors that will influence the rate changes that insurers are requesting.

Are current premiums adequate?

The first step in looking at how an insurer would want to adjust their premiums for a new year is assessing whether their existing premium levels were reasonable for the people who enrolled in the previous year.  While rate requests are mostly about projecting future costs and enrollment, the first step is to determine the proper starting point.  Insurers whose prior-year’s premiums were too low relative to their claims costs will look for increases to better align premiums with costs; this does not mean that insurers can recoup past losses, but rather that it allows them to go forward with premiums that better match their claims experience. Conversely, insurers that overestimated prior costs may look to start from a lower premium level.

One complicating factor is that insurers must estimate costs after risk adjustment, which protects insurers that enrolled a disproportionate share of higher-risk enrollees and penalizes insurers that enrolled healthier than average people.  This means insurers are essentially attempting to judge the risk level market-wide in areas that they serve, not the risk of their actual enrollees.  However, final payments into and out of the risk adjustment system are unknown at the time insurers must propose their rates, introducing an element of uncertainty (which should dissipate as payments under the program become more stable and predictable).

Adjustments for previous mispricing were an important contributor to premium requests from some companies in 2016 and will be again in 2017.  The ACA transformed the nongroup market, enhancing benefits, limiting cost sharing, improving affordability for low and moderate income families through federal subsidies, while eliminating rating and coverage restrictions based on health.  Insurers are required to establish rates in the nongroup market based on a “single risk pool,” meaning the rates are tied to the health care use of enrollees in ACA compliant plans both inside and outside the marketplaces.

When they set their initial rates for 2014, insurers (and the regulators reviewing rates) were not certain how many people would enroll, how long they would stay enrolled (“churn”), and what their health care needs would be. As a result, in many cases insurers used their small group insurance rates as a starting point, with various adjustments.  As mentioned above, the risk adjustment program, as well as the temporary reinsurance program, were new and a source of some uncertainty.  Insurers also were not aware of the initial problems Healthcare.gov and some of the state exchanges would have, nor of the “grandmothering” policy announced by the Administration, discussed below.  Many of these uncertainties carried over into 2015 rate setting: because rates for 2015 were prepared in the spring of 2014, insurers had a somewhat better sense of the demographic characteristics of who was enrolling, but only a few months of actual claims experience to begin to gauge the health care needs of their enrollees.  It really was not until the third year (2016) that insurers were able to begin to use claims experience in the new market in their rate setting process, and some (but by no means all) had rather large rate increases because they had underestimated the health care costs of their enrollees.  (We note that in some cases premium requests for 2014 and 2015 may have been reduced by State insurance regulators.)

One issue that some insurers have focused on recently is the relatively poorer health status of people who enrolled during special enrollment periods (SEPs).  Under the ACA, people without health insurance are generally expected to enroll during annual open enrollment periods; if they do not, they must wait until the following year to enroll.  This short open enrollment period, along with the individual responsibility penalty, is designed to discourage people from waiting until they have a health problem to seek coverage.  There are occasions, however, when people who do not need to purchase their own coverage during an open enrollment period have changes in their circumstances that mean that they need to seek coverage in the nongroup market.  The most common reason occurs when people lose their coverage, for example if they lose a job or become ineligible for Medicaid.  Other reasons include a change in family status (e.g., birth, adoption, or divorce) or changing where you live.  People in circumstances such as these are given SEPs in between the annual open enrollment periods where they can choose a health plan and apply for premium tax credits and cost sharing assistance.

Insurers have increasingly voiced concerns about how the SEP process is conducted and the poorer health of those who enroll during these periods, in general arguing that there are too many recognized circumstances and that in most cases enrollees in Marketplaces were not required to document their situation in order to enroll.¹  In response, the Centers for Medicare and Medicaid Services (CMS) has eliminated some of the SEPs and announced that it will begin requiring documentation for some of the more common SEPs, although people will be able to enroll before their documentation is submitted.²  While several insurers have stated that these changes are moves in the right direction, it is unclear how the changes will impact premium requests for 2017.

Adjustments to correct prior mispricing related to the health of nongroup enrollees likely will continue for 2017 rates as insurers gain more actual experience (they had only a limited amount of 2015 claims experience when 2016 rates were filed) and as the market settles in.  Given the apparently large losses that some insurers had in 2014 and 2015, an important question for 2017 is whether rate adjustments that insurers made in 2016 were largely sufficient or whether some will still need significant increases to reflect the actual health costs of their enrollees.  There is a mix of experience.  Some insurers, for example UnitedHealthCare and Blue Cross and Blue Shield Plans in North Carolina and Pennsylvania, reported significant losses in their nongroup business in 2015, while others, such as Centene, Aetna and Anthem, had more favorable reports.

How will enrollment change in 2017?

In setting rates, insurers try to anticipate how their mix of enrollees will change for the coming year — both what types of new enrollees they may attract and which enrollees they are most likely to lose.  This involves examining factors such as the age, gender and location of projected enrollees, as well as their health care needs and what type of policies (level of coverage and networks) they will enroll in.

This task has been complicated for insurers during the implementation of the ACA because, as noted above, the market structure and rules are entirely new and it is uncertain how quickly enrollment will grow and how large it will be when the market matures.  It was clear at the onset that the introduction of premium tax credits and the individual responsibility penalty would significantly expand the number of nongroup enrollees, and the elimination of health status as a rating and coverage factor would permit more people with health problems to enroll in the market.  From the perspective of setting rates, the intent was that these two factors would to some extent balance each other out: the tax credits and individual responsibility requirement attract healthy people who otherwise might decide not to purchase insurance, and their lower costs help offset the higher costs of enrollees with preexisting health needs.  It also was generally anticipated that the higher-risk people would enroll at a somewhat higher rate during the first year, because they have the highest demand for coverage, and that over time the average health of nongroup enrollees would improve as more of the healthier uninsured sought coverage.  However, the magnitudes of these enrollment dynamics and how quickly they would play out were highly uncertain.³

How insurers view this process in the market areas where they operate will have an impact on their rate requests for 2017.  While situations vary across different areas, overall, participation in the new Marketplaces grew fairly rapidly in the first two years of the program, but slowed in 2016: 8 million people had made a plan selection by the end of the 2014 open enrollment period, 11.7 million by the end of the 2015 period, and 12.7 million by the end of the 2016 period.⁴

A substantial number of uninsured people remain in many markets, and on average they likely are healthier than current nongroup enrollees, so enrolling a large number of them would improve the average health of people in nongroup policies and help moderate premiums.  People in so-called grandmothered plans (nongroup plans sold after the ACA passed and before 2014 were allowed to continue at state discretion until 2018) are another relatively healthy group who will be transitioning into ACA compliant plans over the next couple years.  There are not good estimates of the number of people in these plans, but they should be another, though smaller, source of new enrollment.  The questions for insurers will include how easy it will be to reach these groups and whether they will view the premiums as affordable (even with premium tax credits).  If insurers are optimistic about reaching these groups, their premium requests will factor in some improvement in health for incoming enrollees.

For insurers requesting large premium increases, an additional consideration is that a large increase will cause some current enrollees to leave, and that those who leave are likely to be healthier than those who choose to stay and pay the increase (as with all insurance, people who are willing to pay more typically have greater needs than those who will not).  People with premium tax credits are protected from premium increases so long as they stay enrolled in one of the lower-cost plans in their area, though that could involve switching insurers, which some enrollees may not want to do.  People without premium tax credits may leave because they do not view their plan as worth the higher premium.  This means that insurers requesting larger increases will assume that the health mix of their enrollees will likely become worse due to the increase.

Increases in prices and use of services (“trend”)

A significant part of any premium rate request is the insurer’s estimate of how health care costs are going to change in the coming year, often called trend.  Insurers use prior claims to calculate how the use of services and the prices paid for them have been changing, and use the results – in conjunction with other factors that could affect health care spending growth, such as new drugs coming on the market or price increases built into contracts with providers – to project future claims costs.  These calculations are done separately for different types of services (e.g., inpatient hospital, outpatient, physician, prescription drugs) and may reflect the insurer’s overall business, with adjustments made to reflect differences in service mix or other attributes for a particular policy or market.  Trend is meant to estimate the future cost for existing coverage, before changes in policy attributes (such as network) or enrollment mix.

Health care trend has been relatively low in recent years (with the exception of prescription drug prices), although insurers have been warning that cost pressures are increasing and there  has been some suggestion that trend may be a little higher in 2017 than last year.  From looking at a handful of early rate filings, low end projections are in the 3 to 5 percent range while some insurers are projecting trend of 7 to over 9 percent.  Note that trend may appear somewhat higher than other measures of health care costs.  For example, growth in total national health spending includes other programs that are increasing more slowly (for example Medicare), and growth in the average premium in employer-sponsored plans reflects changes in benefits or cost sharing that tend to depress premium increases.

Trend is often a factor in rate increases that insurance regulators scrutinize carefully.

Changes in Policy Design or Network

The ACA prescribes the basic benefits that each nongroup health plan must cover and establishes value tiers (i.e., bronze, silver, gold, and platinum), so there is not too much that insurers can do to the benefits or even the overall patient cost sharing to change the cost structure of a particular health plan.  Insurers can reduce the cost of a health plan, however, by limiting the provider network to lower-cost providers; by revising the drug formulary to reduce the number of options (or increase cost sharing) for higher-cost medicines; or by increasing management over service use, such as increasing the use of prior authorization or requiring the use of a specialty pharmacy provider for certain higher-cost medicines.  Moving to a narrower network can have a large impact on premiums (savings can be as much as 20 percent or more for insurers using broad networks).  These changes can help reduce the premium increase request that an insurer might make, or the insurer may offer the revised plan as a new product option.

Changes in Law or Regulation

Changes in the regulatory framework also affect the premium changes that insurers request.  There are several for 2017.  Firstly, the health insurance tax included in the ACA was waived for 2017, which should lead to a reduction in costs and premiums of about 3 percent.  Moving in the other direction, the ACA reinsurance program ends in 2016.  The reinsurance program worked by making an assessment on all health insurance payers and distributing the proceeds to insurers with nongroup enrollees who had enrollees with high medical expenses.  For 2016, these reinsurance payments reduced nongroup premiums by approximately 4 to 6 percent.⁵  Without the reinsurance program, insurers will need to raise their premiums in 2017 by a comparable percentage to make up for the loss of the reinsurance funds.  Finally, as discussed above, CMS made changes to the SEP rules, which should moderate some of the concerns that insurers have about adverse selection from SEP enrollees.

Competition

Analyses have shown that premiums are lower in competitive markets, and with premium tax credits tied to the second-lowest-cost plan in a rating area, it is difficult for insurers to get customers if their premiums rise too far above their competitors.^6,7  One of the issues affecting Marketplaces in some states has been a lack of competitors in some of their rating areas (often rural): in 2016, there are 1,121 counties (36%) with two or fewer insurers offering Marketplace coverage.  The exit of UnitedHealthCare will meaningfully expand the number of counties with limited competition unless new competitors enter.⁸  Insurers who have had losses and who have few or no likely competitors may feel free to take significant rate increases.  And because enrollees who are eligible for premium tax credits contribute based on a share of their income rather than the actual premium, most of the enrollees of these insurers will be shielded from the high increases.  Unless regulators limit increases, we may see significant increases in some of these areas.

One protection from big premium increases in uncompetitive markets is the ACA requirement that insurers who fail to spend at least 80% of premium revenues on health care expenses in the nongroup market as a whole in a state must return the excess to consumers as rebate.  However, this medical loss ratio calculation is now based on a three-year moving average so the effect is muted and lagged.

Discussion

Insurers are gaining experience under the ACA and are in a better position than in previous years to project the health and claims of their enrollees.  Some have realized that their enrollees are less healthy on average than they had anticipated, and for these insurers, relatively large premium increases are likely.  Others, whose current premiums are more in line with their costs, will generally request smaller changes.  Other factors influencing premium changes for all insurers for 2017 include increasing prices and service use, the end of the federal reinsurance program (which reduced premiums in previous years), and the one-year waiver of the federal health insurance tax.

How enrollees experience premium changes will depend on whether they receive premium tax credits and on the competitive position of the plan they are in.  A large share of Marketplace enrollees receive premium tax credits, which means that they pay a set percentage of their income toward the cost of the second-lowest-cost premium in their rating area, plus all of the additional cost for a plan with a higher premium.⁹  As long as these enrollees stay in one of the low-cost plans, any increase they face would be modest.  If they are enrolled in a higher-cost plan, or if their current plan becomes a higher-cost plan, they would pay all of the premium increase unless they changed to a lower-cost plan.  A recent HHS report showed that shopping for new plans is quite common and can lead to substantial savings for enrollees: for 2016, 43 percent of Marketplace enrollees switched plans during open enrollment, saving on average $43 per month.¹⁰

Given the highly competitive nature of the Marketplaces in much of the county, as well as the uncertainty insurance companies faced in the early years of ACA implementation, it’s not surprising that premium increases may be higher in 2017 as the market matures and more data become available to insurers.  This can be seen as something akin to a one-time market correction.  However, bigger premium increases do not necessarily mean that that the Marketplaces are unsustainable.  Some markets are functioning effectively, demonstrating that the approach can work.  And, most Marketplace enrollees are receiving premium tax credits that cushion the effects of premium increases.  If insurers now losing money are able to adjust premiums to become profitable, the market could begin to stabilize.