The Special Session: Re-considering state-based reinsurance across lines of business
This is part of our series “The Special Session” on health policy ideas for states as they respond to COVID-19.
One of the characteristics of the coronavirus’s impact on the American health care system is the introduction of new extreme volatility medical events.
These COVID-related events, like being on a ventilator for over four weeks as is the case with my uncle, are often medically intense. They require 24-hour, one on one nursing care. They require a team-based care model of physicians, including at a minimum a pulmonologist and a palliative care physician. In the case of my uncle, the team has included a nephrologist, a cardiologist, a primary care physician, an emergency room physician, and a neurologist.
You get the idea.
Not only is this much care intense and a strain on the hospital system, it’s a strain on costs, too.
Josh Axene is an actuary and partner at Axene Health Partners. He works on risk and pricing for health plans. In a piece he wrote recently, he projects the range of costs for plan year 2020 to increase up to 7.9% in a “Moderately Adverse” model. The “Expected” rise is a more modest 2.7%.
These are cost spikes in the current year, cost hits that weren’t otherwise projected when products were priced last year at this time for plan year 2020.
That “Expected” rise includes a significant drop in outpatient and elective services. Cost for professional services drops 12% in 2020 as a result of COVID, for example.
Meanwhile, “Medical Treatment Inpatient” costs rise a whopping 85.9%. While this is offset by a 6% drop in “Surgical Procedures,” Inpatient costs overall are expected to rise 37% in 2020 as a result of the COVID experience.
Axene says that “Those delayed services will likely result in some pent-up demand in the future, potentially increasing future health costs and/or raising future trend rates.”
In other words, it’s possible non-COVID-related costs will be strikingly higher in 2021 as utlization climbs.
If we see a resurgence of the disease in the winter, as many epidemiological models suggest, 2021 will likely have a spike in COVID-related costs, too.
Health plans are currently building their models for 2021 as we speak. They are working on pricing their insurance plans based on a projection of costs, to include at least some guess as to whether COVID re-emerges or not. That means they are building in costs for increases in utilization from delayed services, from a likely resurgence of COVID in 2021, and to re-stock reserves hit in 2020 from the onset of the pandemic.
All this means we may be looking at signifiant price shocks to the insurance marketplace, creating a new cost drag on employer-based and individual market health care right when the economy will be trying to get back on its feet.
So, here is what policy makers can do about this.
Reinsurance tools have long existed in the private market.They generally work in two ways.
A reinsurance product typically caps the total cost a risk-bearing entity might pay for any one individual’s care, as well as limits the total amount a risk-bearing entity might pay over a period of time.
In recent years, some states have instituted a reinsurance model as a policy tool to limit the risk exposure of plans in the individual market. Alaska was the first state to introduce such a model, earning a federal waiver. The savings from the reinsurance model in Alaska created such a savings to the feds, as a result of lower premium supports in the individual market, that the federal government now contributes enough money that the model is almost entirely paid for by the federal government via a waiver award.
Other states have earned similar waivers since Alaska broke this ground.
This is a tool that will immediately help reduce the spike in costs that COVID will cause in plan year 2021. If a policy goal is to reduce price spikes in plan year 2021, employing this tool for the individual market is a no-brainer.
But, COVID isn’t limited to the individual market. Why should the benefit of policy only apply to individual market customers?
Offering a re-insurance tool to the small group market would allow premiums to fall in that line of business, too. The differentiation of the individual market from the small or large group market is a legacy of the post-World War II strategy of employers to work around wage freezes. The creation of medical insurance as a benefit for employees, or what we now call the group market, comes from this work around from 1945.
So, why are we still creating policy that reinforces the accidental creation of this market segregation?
Likewise, since the ACA has filled in the coverage gaps for those not working America’s working poor up to the group insurance line of business, the reason to differentiate between the Medicaid line of business and the commercial (both group and individual) market has also eroded.
I’m not arguing that they aren’t implemented differently. I’m arguing that the reason to have someone making 138% of the federal poverty level enjoy one set of benefits but someone at 139% of federal poverty enjoy another just doesn’t make as much sense today as it did before the ACA.
To be sure, both the group and Medicaid markets are different than the individual market where the individual market has been employed successfully.
But, tell me a good reason that we should continue to differentiate between the commercial and Medicaid markets? I know they are different because of regulatory reasons. Yet, those regulatory reasons can be changed by the regulator.
I know they are different because of demographic profile reasons. But, a smart group of folks once said that creating separate services based on demographic profile was unconstitutional. What they said was “separate is not equal.”
In Alaska, the price reduction was about 26% over two years as a result of the reinsurance tool.
If that benefit were extended to employers purchasing group insurance, the result would be signficant cost savings to group market. Those savings would provide businesses with a meaningful cost savings as the economy tries to recover.
Medicaid plans could use this tool, too. As Medicaid rolls increase due to economic contraction, volatility will increase, too. A limit to the cost spikes of any given patient would help Medicaid contain costs among plans.
This reinsurance benefit would apply to all benefits, including COVID. It would help provide increased predictability, through a narrower cost corridor, for health plans, purchasers like Medicaid, and ultimately employers.
There are two additional policy benefits to limiting the risk to health palns that the legislature should also consider.
First, the reduced volatility for health plans should reduce the need for as much reserves. This could reduce the premium to reserve ratios from about 8-10 to 1 to much higher. That range could get from 12-20 to 1, depending on other factors.
But, even at the low end, that means regulators can allow health plans to ease reserves back to their members through reduced premiums, further helping the economy.
Second, because the risk is lower, it’s arguable that the MLR could be higher too. Instead of actuarial benefits of 85%, states could increase that number a point or two. If the reinsurance model is going to create lower overall costs and a reduction in cost volatility, less administrative overhead will be needed. A slightly higher MLR of one or two points, required as a result of the reinsurance product, can get funneled into primary care reimbursement, provider rates or lower costs to the consumer. Or, it could simply result in lower premiums.
Providing a reinsurance benefit will have an immediate benefit to lower costs for consumers – whether those consumers are individuals, employers, or state governments.
Moreover, as you’ll see in additional colums in this series, it supports a fundamental re-alignment of our post-COVID health care system.