Welcome to the Let's Talk Health Care Blog
Positive. That’s how we are feeling. Change in health care is quickening, and we are a vital force in that current.
Opening the Black Box (Part 2)
Posted by Eric Schultz on December 12, 2010 7 commentsIn my last blog, I explained how insurance premiums are calculated for employers having less than 51 employees and for individuals and how state regulations affect those rates. In this blog post I will provide examples that drive a:
- Premium decrease of 37%
- Premium increase of 16%
- Premium increase of 52%
…even when the medical cost trend is increasing at 10% in all three examples.
To keep the math simple, each example is based on an employer with two employees, but the same concepts are applicable to employers that have up to 50 employee lives.I also assume the customer will keep their benefits exactly the same.
For a quick review from the last post, the premium is determined by two components: the Base Rate – or the average rate for all small employers and individuals covered by an insurer – and the Rating Factors.
The Rating Factors allowed by state law are: Customer’s Industry, Customer’s Geographic Location, Size of the Customer and Percentage of its employees choosing to purchase insurance, Wellness and Tobacco Use and, most importantly, the age of the employees.
Changes in the average age of an employer’s employees can dramatically affect year over year premium changes. The age factor may increase or decrease significantly if the mix of employee ages changes. So here are three examples that are calculated using state regulated formulas that produce some surprising results:
37% Decrease: One group with 2 employees. A 60 year old and a 20 year old. If the 60 year old leaves the group, the premium renewal will be a 37% decrease.
16% Increase: Same group in the first example, but the 20 year old leaves. The group receives a premium renewal increase of 16%.
52% Increase: One group, 2 employees. A 45 year old and a 20 year old. If the 20 year old leaves the group, the premium renewal will be a 52% increase.
Intuitively, I get the first example. When an older person leaves the group, then insurance rates would go down. But the 2nd and 3rd example don’t make sense at first glance. Why would a two person group retaining the 60 year old produce an increase which is lower than when a group retains a 45 year old?
The detailed calculations are at the end of this blog, but the short answer is that state regulations require groups with younger employees to subsidize groups with older employees. In Massachusetts, the group with the oldest employees can’t be charged more than two times what the group with the youngest employees is charged, even though the true spread in medical costs is much greater.
To match the actuarial reality with the state regulations, Harvard Pilgrim first establishes rate factors for each age category. These factors range from about 0.4 to 2.4. We assign the appropriate age factor to each employee within a group and then calculate the average to determine the age factor that will be used to calculate the group’s rates. Under the regulations, the group’s factor must fall between 0.66 and 1.32. If the actual factor falls above 1.32, we assign it a factor of 1.32, resulting in a subsidy to that group. If the actual factor falls below 0.66, we assign it a 0.66, requiring that group to subsidize the pool. In our example, these rules work to limit the size of the increase for the group with the 60 year old employee (who receives a subsidy), but not for the group with the 45 year old employee (who does not).
The wide swings in premium rates that can occur have become a concern for policymakers. The Massachusetts Legislature recently enacted a new law directing the Division of Insurance to establish a so-called “bumper” or “cap” on how much any employer’s rates can increase because of changes in the average age of its employees. The good news is that this will limit the rate shock that some employers have experienced. It will, however, come at a cost. All small employers will need to pay a little bit more in order to fund the bumper. It may also have an unintended consequence of limiting choice, as an employer must stay with their existing employer to receive the benefit of the bumper. Harvard Pilgrim will continue to work with policymakers to strike the right balance when setting the bumper.
Now, for those who want to see the math on the three examples:
37% Decrease: Employer group is 20 and 60 year old. 20 year old age factor = 0.480 and 60 year old age factor = 2.016. The average age factor of this group is (0.480 + 2.016)/2 =1.248.
In year two, if the 60 year old leaves and the 20 year old remains, the employer group’s age factor would be 0.480. Since this is less than the minimum age factor of 0.66 (set by regulation), the age factor is increased to 0.66.
This produces a year over year decrease of 47% for the age factor of this employer group of (1.248 – 0.66)/1.248.
Combined with the 10% increase in the base rate produces a 37% decrease for this customer.
16% Increase: Employer group is a 20 and 60 year old. 20 year old age factor = 0.480 and 60 year old age factor = 2.016. The average age factor of this group is (0.480 + 2.016)/2 =1.248. If the 20 year old leaves and the 60 year old remains, the employer group’s age factor would be 2.016. Since this is greater than the maximum age factor of 1.32 (set by regulation), the age factor is decreased to 1.32.
This produces a year over year increase of the employer group’s age factor of 6% = (1.32 – 1.248)/1.248.
Combined with the 10% increase in the base rate produces a 16% increase for this customer.
52% Increase: Employer group is 20 and 45 year old. 20 year old age factor = 0.480 and 45 year old age factor = 1.177. The average age factor of this group is (0.480 + 1.117)/2 =0.829.
If the 20 year old leaves and the 45 year old remains, the employer group’s age factor would be 1.177. This factor is within the regulated range of 0.66 to 1.32.
This produces a year over year increase in the group’s age factor of 42% = (1.177 – 0.829)/0.829.
Combined with the 10% increase in the base rate produces a 52% increase for this customer.
I hope you see the point. Even if factors that affect a whole book lead to an average increase of 10%, specific employer groups may see very different results. When the mix of ages of its employees changes significantly, all bets are off. If young people leave the group, annual rates for the customer may increase dramatically.
| Categories: | Health Care System, Premiums, Working with Everyone |
comments
Leave a Reply
About The Author
Eric Schultz
President and CEO
Harvard Pilgrim Health Care, Inc.
Full bio
related posts
related content
categories
archives
blogroll
Come join an inspiring community
There are so many ways to be well. Pick up ideas from our community and share your own way to be well!
Hi Eric -
Based upon your final statement, “If young people leave the group, annual rates for the customer may increase dramatically”, do you and your Actuaries expect to see any additional rate pressure stemming from the relatively new rule that allows dependent children to remain on their parent’s plan until age 26?
Looking at it from just a numbers standpoint it seems likely that the pool of younger Subscribers would shrink (maybe slightly; perhaps significantly) since they are no longer necessarily enrolling as Subs at the age of 21, 22, etc.
Eric –
The CFO of a Mid-Atlantic hospital system in PA told a small group recently that his system’s cost per adjusted hospital admission rose 2.0% in 2010, down from 3.5% last year. I suspect the results are similar in most places. A CEO of a hospital system in NJ commented that his system’s inpatient admissions were down over 5% this year. For insurers’ medical trend to be 10%, the cost shifting to make up for inadequate Medicare and Medicaid payments must be significant. Yet, Medicare and Medicaid aren’t controlling their costs very well either, I suspect, because they don’t try to manage care and fraud is probably an issue as well.
John:
Overall, we expect the Affordable Care Act provision that extends coverage for Young Adults up to age 26 will have a relatively small impact on our rates. We are planning to see only slight increases in family size because the three states we serve (Maine, New Hampshire and Massachusetts) already have similar state mandates for young adult coverage. We expect little change in subscribers average age.
The Young Adult Plan through the Massachusetts’ Connector may see a slight decrease in growth rate due to decreased demand. The same may hold true for Student Insurance.
The overall impact on our rates in this area is well below 1%.
Barry:
You raise many excellent points and the drivers are going to differ from state to state.
Without a doubt, the private employer and consumer sector is paying more for health insurance because of cost shifting due to inadequate government payments made to providers. This cost shifting has been occurring for years and is largely built into the base rates.
Other drivers of trend are:
1. High cost hospitals, typically those with very strong brands and geographic market power, are expanding into new communities and also establishing new relationships with some community hospitals that have difficulty competing. These acquisitions, joint ventures and other arrangements also bring with them much higher fee for service rates that drive up total costs. We have seen this especially in the area of outpatient diagnostics, outpatient cancer treatments, and new forms of specialist services that are distributed to community hospitals.
2. The Federal Health Care Reform passed this spring is causing rates to increase for a change in covered services – no lifetime maximums, first dollar coverage for preventive services, coverage up to age 26, and others.
3. State Mandates – some states are shifting previous costs funded from their tax revenues to health insurers…which then get passed on to private employers and consumers. In Massachusetts, for example, costs associate with portions of childhood immunizations ($40 million +) were shifted to healthplans. Also, effective January 1, 2100, certain intensive and early intervention services must now be covered under health insurance.
Moving away from fee for service medicine will help to deal with some of these trends, but continuing state and federal mandates, government cost shifting and excessive market powers have to be addressed.
Eric, in addition to the cost drivers mentioned in your reply to Barry, and as a possible “remedy” to the ongoing issue of costly unnecessary care, it is your opinion that moving away from a fee for service payment model might impact the expensive areas of inpatient admissions and ER/ED visits?
I imagine that it is still way too early to tell if an ACO approach (or some other payment model) will have any impact, but given the dramatic numbers in Massachusetts (the numbers I’ve heard are that approximately 13% of all inpatient hospitalizations in MA are deemed unnecessary, and as much as 50% of all ER/ED visits are unnecessary) are you of the thought that reforming the way providers are paid will have any significant impact? Or is it more a matter of financially motivating the consumer away from these seemingly easily accessed service points by making it maybe not prohibitively expensive, but costly enough to make someone think twice, or three times, before they visit an ER or agree to an I/P stay?
Thanks.
I’m trying very hard to wrap my head around all this. One question keeps haunting me….might an unexpected consequence of opening this black box lead to potential layoff of older workers to adjust the bottom line for employers. I’m not sure I understand how the number figuring protects older workers…and let’s face it…older workers need to keep working… If only to pay for healthcare going forward….Can you explain this to me?
Thanks for your response Dianne. I think there are a couple of points worth emphasizing to respond to your concerns about “older” workers:
1. Massachusetts law requires that the cost for the oldest person cannot be more than two times that of the youngest employee. By way of comparison, the new federal health care law allows a 3 to 1 ratio which would mean that older persons would pay more and younger persons pay less.
2. Last summer, a new law was passed as part of Chapter 288 which directs the Division of Insurance to implement a new pricing requirement that sets a “ceiling” on the premium renewal increase that an employer would receive. Details are yet to be defined. This new requirement will help to buffer higher increases due to shifts in age. Of course this will also mean that the actual cost above the “ceiling” will be passed along to all of the customers…thereby spreading out the costs to a much larger population.
“Age” has long been a major variable driving insurance premiums and is well understood by brokers and employers. So I don’t expect this blog will drive changes in human resource retention strategies based on age (not to mention age discrimination).
In the spirit of improving our health care system, we will continue to work on keeping details driving the cost of care and the cost of insurance transparent.