A MERICAN ACADEMY of ACTUARIES

Transcription

1 A MERICAN ACADEMY of ACTUARIES Actuarial Issues Related to Pricing Health Plans Under Health Care Reform July 1994 Monograph Number Ten M O N O G R A P H S E R I E S O N H E A L T H C A R E R E F O R M

2 The American Academy of Actuaries is a national organization formed in 1965 to bring together into a single entity actuaries of all specialties within the United States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to act as the profession s public information organization. Academy committees regularly prepare testimony for Congress, provide information to congressional staff and senior federal policy makers, comment on proposed federal regulations, and work closely with state officials on issues related to insurance. The Academy s nine-member Health Plan Pricing Work Group prepared this paper. The Academy s Health Practice Council has charged this work group with identifying and describing the issues, problems, and information needed to adequately price health plan products under President Clinton s proposed Health Security Act. The members of the Health Plan Pricing Work Group are: Paul R. Fleischacker, FSA, MAAA, Chair Judith A. Discenza, FSA, MAAA Martin S. Huey, FSA, MAAA James A. Hughes, MAAA David G. Josephson, FSA, MAAA Philip J. Lehpamer, FSA, MAAA Frank Rubino, FSA, MAAA Mark D. Wernicke, FSA, MAAA Paula S. Wickland, FSA, MAAA

3 A MERICAN ACADEMY OF ACTUARIES TABLE OF CONTENTS EXECUTIVE SUMMARY...1 INTRODUCTION...4 THE CURRENT ENVIRONMENT...5 SETTING HEALTH PLAN PREMIUMS IN A REFORMED SYSTEM...6 Assessing Risk in the Covered Population...6 Community Rating...7 Guaranteed Issue...8 Guaranteed Access...8 NEWLY COVERED BENEFITS...9 Scope of Benefits...9 Lack of Historical Data for Newly Covered Benefits...9 Impact of Limitations and Exclusions...10 ESTIMATING PROVIDER PAYMENTS...11 Retrospective Adjustments...11 Expanded Access to Underserved Areas...11 Freedom of Choice Providers and Health Plans...12 Centers of Excellence...12 OTHER ISSUES SURROUNDING PREMIUM RATE DEVELOPMENT...13 Risk Adjustment Mechanism...13 Non-Termination...13 Geographical Cost Differences...13 Pricing Constraints...14 Corporate Alliances...14 Workers Compensation and Automobile Insurance...14 Administration and Marketing Costs...15 Reinsurance...15

4 A MERICAN ACADEMY OF ACTUARIES CONCLUSIONS...16 APPENDIX...17 Importance of Utilization and Unit Cost Information in Health Plan Pricing...17

5 A MERICAN ACADEMY OF ACTUARIES EXECUTIVE SUMMARY Under President Clinton s Health Security Act 1, managers of health plans 2 will confront diverse issues, problems, and data needs that they will have to respond to if they wish to continue adequately pricing their products. These factors will affect their existing benefit and rating structures. Without significant changes, historical experience, rating assumptions, and pricing methods for existing products may not be appropriate for projecting the future. As a result, pricing uncertainty and financial risk for health plans will be greater under health care reform than in the past, particularly during the first few years of implementation. The Current Environment Traditionally, health plan pricing has involved collecting individuals (and/or groups) together into classes. Premiums have then been determined for each class, targeted to reflect the particular risk presented in a given class. This approach has been used for most types of insurance, as well as by health maintenance organizations (HMOs). In this environment, it is important to match products and prices with the needs, expectations, and values of potential consumers. In the health insurance/hmo arena, there are many ways to segment the market in order to accomplish this. Most health plans divide the general population into three categories of business: individuals, small groups, and large groups. Consumer values and expectations, along with health plans products, underwriting, and pricing, usually differ among these three segments. The segments themselves introduce an element of homogeneity into the determination and pricing of benefits for the classes within them. The reward for using such a complex system is an added level of precision in establishing premium rates that meet company and consumer goals. Setting Health Plan Premiums in a Reformed System Under universal coverage, the health plan pricing environment would change greatly. Health plan managers would need to determine the relative impact that different consumer needs and perceptions would have on product pricing in a universal access environment. For at least the first several years after enactment of health care reform, health plan managers would not be able to rely on historical results within a segment to estimate the impact of future claims. A fundamental factor in determining the cost of a health care plan is the profile of the population selecting the benefits. Under the Act, individual insureds, rather than their employer, would select a health plan. As a result, health plans would have virtually no control over which individuals select their plans, and the demographics and health characteristics of existing health plans may change in unknown ways. Health plans would assume significant pricing risk until their risk pool stabilizes, since their prior experience may no longer be credible. In addition, universal coverage and community rating requires that the broadest of bases (total population) will pay the broadest of premiums (the community rate). Contrary to what intuition might suggest, the risk of error increases when the most general estimate is used over the broadest of bases because of the lack of homogeneous risks. Community rating, guaranteed issue, and guaranteed access increase health plan pricing uncertainty and risk. This would be particularly true for those health plans that have not been required to operate in that type of environment, since prior experience may well be irrelevant for predicting future utilization and costs. 1 Hereafter referred to as the Act. 2 Health plans, as used in this monograph, refer to vendors who will market their products to regional and/or corporate alliances. They include insurance companies, Blue Cross and Blue Shield plans, health maintenance organizations (HMOs), and preferred provider organizations (PPOs). 1

6 Newly Covered Benefits P RICING HEALTH PLANS UNDER HEALTH CARE REFORM Under the Act, health plans would be required to provide a guaranteed standard benefits package. The difference between the scope and limitations of the proposed benefits, compared with what is included in current products, would add to the uncertainty involved in pricing these health plans. There would be greater uncertainty with projected claims costs during the initial years of reform because the new benefits package detailed under the Act includes some benefits that are not typically covered under current indemnity or prepaid HMO plans, so little, if any, historical data would be available. In the absence of credible experience data, health plans would have to rely on data from existing indemnity benefits or government programs, adjusted by estimates of the value of benefit differences for pricing the new benefits. However, the adjusted data may not accurately reflect expected utilization or costs under coverages not previously available. Also, utilization and/or costs would likely increase once coverage for additional services commences. Finally, limitations and exclusions that are more or less restrictive than similar provisions currently included under typical health plans may also present pricing problems. More restrictive limitations may deter individuals from using services, while the absence of any limitation might encourage unnecessary or increased utilization relative to existing plans. Estimating Provider Payments Another source of pricing uncertainty is estimating provider payments, which are a health plan s primary expense. Uncertainties here may give rise to significant risk. Under the Act, health plans would enter into agreements with providers. Health plan managers would be required to know how health care providers will be paid and how changes in the method of payment will affect total payments. They would also be required to be able to estimate the effect of any differences in providers payment methods and reimbursement amounts. Health plan managers would also need to evaluate the impact on rates of any global budgeting constraints and the imposition of fee schedules. It would be important for them to know if a fee schedule is mandatory or optional and to which plans it applies. In addition, health plan managers would need to know whether health plans will be allowed to negotiate and use lower fees than the schedule. One provision of the Act requires the use of region-wide fee-for-service schedules. Currently, there are big differences in provider fee schedules in most regions, so a new uniform schedule would redistribute revenue among providers with unknown ramifications for existing networks and health plans. On these issues, as well as many others discussed in this monograph, timing and/or data availability problems may have an impact on pricing. For example, budgeting constraints and the imposition of fee schedules may not be known before pricing is completed or, if known, there may not be relevant experience data to estimate their impact. Health plans would need information on any retrospective adjustments that can, or must, be made. These would include arrangements like retroactive recoveries from providers in the event a global budget is exceeded or a health plan s premium exceeds a threshold level. In addition, health plans would need to know the type of recovery, such as a flat percentage recovery from all providers and the timing of any recoveries. Some of these cross-plan subsidies will not be known or may be unknowable at the time prices are determined, resulting in potentially significant risk and uncertainty. Other Issues Surrounding Premium Rate Development Risk Adjustment Mechanism. Two provisions of the Act, community rating and guaranteed issue, make some kind of risk adjustment mechanism a necessity. Without effective risk adjustment, health plans will be motivated to avoid high-risk individuals and groups. An appropriate risk adjustment mechanism may also reduce some of the impact of pricing uncertainty, e.g., the demographic composition of a health plan s population. 2

7 A MERICAN ACADEMY OF ACTUARIES Once a risk adjustment system is in place, a health plan s manager will be required to determine how to price products based on system guidelines and rules. These may include both prospective and retrospective payments to, or receipts from, a risk pool and corresponding adjustments in premium rates. Given all the unknowns, the timing and coordination of risk adjustment data and payments among all the various players will be a major challenge, and adds to the uncertainty in the pricing process. Risk adjustment mechanisms, by themselves, cannot be expected to resolve every difference between health plans. The level of sophistication contemplated for these factors, at least initially, will make that impossible. Even with risk adjustments, some health plans will keep trying to attract enrollees who will use fewer services than the average participant. If financial incentives toward favorable risk selection continue, health plans that attract worse than average risks would face pricing or financial difficulties. The ultimate impact on premium levels could very well be the same kinds of pricing spirals observed in a non-mandated market. Non-Termination. Under the Act, health plans are legally obligated to provide medical care even when premium s have not been paid. Consequently, premium rates would most likely have to be increased to reflect uncollectible premiums. Geographical Cost Differences. Cost differences among various areas of the country (and even among regions within states) are commonplace and are routinely managed under the current system. In the local environment contemplated in regional health alliances, coupled with community rates, this challenge may be more difficult to manage if the alliance covers a broad geographical area with widely varying provider costs. Pricing Constraints. Health plans would also need to consider government constraints on pricing. Overall, under the Act, the NHB is given very broad powers to set premium and expense caps. Health plan managers would be required to stay informed about the NHB s regulations and to modify their premium rates accordingly. However, whether the premium cap will be high enough to allow health plans to charge the premiums required to cover their anticipated medical and administration expenses is an open question. The NHB will also determine regional target premiums and promulgate inflation factors for each regional alliance. The information required for determining regional adjustment factors does not currently exist. Thus, regional targets will involve tremendous uncertainty; they may reflect overestimates for some regions and underestimates for others, with some health plans bearing the financial consequences. In addition, timing differences between the establishment of regional inflation factors and health plan bids will also add pricing uncertainty as health plans attempt to set prospective premiums. Conclusions There is always some degree of uncertainty in developing any health plan premium. The wholesale restructuring of the U.S. health care financing system that would ensue after enactment of the Health Security Act would add enormously to the pricing uncertainty for a health plan trying to establish an adequate premium. This discussion has identified four major issues and conclusions. The demographics and health characteristics of existing health plans may change in unknown ways, since individuals would directly select their plan, and new populations (e.g., the uninsured) would enter the system. The financial consequences to many health plans would be unpredictable, and their prior experience may no longer be credible. Newly covered services (e.g., investigational treatments) would be difficult to price accurately at first because there are no historical data for basing reasonable estimates. After-the-fact cross-plan subsidies and the unknown impact of government subsidization would make initial pricing very risky. Pricing constraints imposed on health plans through global budgets and premium and expense caps may constrain premiums to levels that may prevent some plans from collecting enough money to stay in business. 3

8 P RICING HEALTH PLANS UNDER HEALTH CARE REFORM INTRODUCTION Under President Clinton s Health Security Act, managers of health plans will confront diverse issues, problems, and data needs that they will have to respond to if they wish to continue adequately pricing their products. These factors will affect their existing benefit and rating structures. Without significant changes, historical experience, rating assumptions, and pricing methods for existing products may not be appropriate for projecting the future. As a result, pricing uncertainty and financial risk for health plans will be greater under health care reform than in the past, particularly during the first few years of implementation. 4

9 A MERICAN ACADEMY OF ACTUARIES THE CURRENT ENVIRONMENT Traditionally, the pricing of health plans has followed the approach used for pricing other types of insurance. Individuals (and/or groups) have been collected together into classes, and premiums have been determined for each class. Like other types of insurance, premiums have been targeted to reflect the particular risk presented in a given class. A class can be defined according to factors like age, gender, health history, geographic location, etc. The goal of this procedure has been to match the premium charged for benefits with the best estimate of the value of benefits expected to be delivered to all the people within each class. This traditional insurance approach has been used for most types of insurance, as well as by health maintenance organizations (HMOs), in a free market environment. In such an environment, it is important to match products and prices with the needs, expectations, and values of potential consumers. Consumers can choose to purchase a competing carrier s product or make no purchase at all if premium levels do not match the values they attach to the product. The actuary s challenge has been to meet price competition and consumer demands by assessing risk and matching prices with those risks. Actuaries have also proposed various methods for determining classes for grouping insureds, which help companies achieve the goals of growth, profitability, and equity. In the health insurance/hmo arena, there are many ways to segment the market. However, most health plans divide the general population into three categories of business: individuals, small groups, and large groups. Consumer values and expectations, along with health plans products, underwriting, and pricing, usually differ among these three segments; many health plans focus their marketing efforts on only one or two of them. The segments themselves introduce an element of homogeneity into the determination and pricing of benefits for the classes within them. Similarly, each segment presents different types of challenges. The reward for using such a complex system is an added level of precision in establishing premium rates that meet company and consumer goals. 5

10 P RICING HEALTH PLANS UNDER HEALTH CARE REFORM SETTING HEALTH PLAN PREMIUMS IN A REFORMED SYSTEM Under universal coverage, the old rules would disappear. There would no longer be a set of common problems to be solved. In fact, the challenge would be to determine the relative impact that different consumer needs and perceptions would have on product pricing in a universal access environment. To take one admittedly extreme example, historical experience in large employer/union-negotiated programs, which typically have a rich package of benefits, has been much different from the experience in the individual purchaser market, which reflects a more costconscious, carefully limited product design. For at least the first several years after enactment of health care reform, actuaries will not be able to rely on historical results within a segment to estimate the impact of future claims. For example, actuaries will be required to consider how an individual purchaser will respond to the significantly increased benefit levels provided under the Act, particularly if some treatments were not previously covered. Assessing Risk in the Covered Population A fundamental factor in determining the cost of a health care plan is the profile of the population selecting the benefits. With universal coverage and community rating, the broadest of bases (total population) will pay the broadest of premiums (the community rate). Contrary to what intuition might suggest, the risk of error increases when the most general estimate is used over the broadest of bases because of the lack of homogeneous risks. The new insureds will come from two sources in the current population: people who have been insured, including those covered by Medicaid and possibly Medicare, and the uninsured. Under the Act, individual insureds, rather than their employer, would be able to select their health plans. The net result may be substantial switching back and forth among health plans and (at least initially) significantly greater pricing uncertainty and risk. The Currently Insured. To measure the impact current insureds would have on the cost of coverage in a universal coverage environment, it is helpful to divide them into subgroups and attribute rating characteristics (demographics, health status, and other characteristics affecting utilization) to each. In addition, there are some factors that influence which kind of coverage or plan a person will choose. To the extent that the rating characteristics of those selecting one health plan differ from those who select another, the expected costs of the plans will vary by more than the value of their coverage alone. The subgroups are based on individuals previous source of coverage: Individual coverage; Employer-sponsored coverage, both small and large groups; Medicaid; and Medicare. Except for those covered under Medicaid and Medicare, individuals in these subgroups are generally employed and are assumed to be in better health than the general population. No doubt, there are some unhealthy people in the insured population, including those who get coverage when they are healthy and then get sick. There are, in addition, former employees who, if they can t get standard coverage, take advantage of extensions of coverage through the group conversion and Consolidated Omnibus Budget Reconciliation Act (COBRA) provisions. Unhealthy dependents are also included among the insured population. Right now, the people who are covered by Medicaid qualify for it because of low income and/or resources. To the extent that low income is associated with, or due to, poor physical or mental conditions, these people may generate higher claim costs. Offsetting the higher costs from poor physical condition, however, may be lower costs from this group s lower average age and lower propensity to seek treatment. 6

11 A MERICAN ACADEMY OF ACTUARIES It should also be assumed that, under any managed care plan or health care reform plan, insureds will be urged to use preventive care and to seek early intervention before a condition worsens. They will be encouraged to obtain needed care rationally, seeking treatment in physician offices instead of hospital emergency rooms, for example. Most Medicare enrollees are over age 65 and have higher than average claim costs just because they are older and generally less healthy. Many disabled and/or dialysis-dependent individuals at any age are covered by Medicare, and they, too, typically have higher claim costs. The insured population represents a broad cross-section of health risks. Because Medicare or group insurance covers virtually everyone age 65 and older, the insured population is older, on average, than the general population. Since morbidity increases with age, the average cost of a plan with a disproportionate number of older individuals can be higher, and therefore unattractive, to younger individuals. The Currently Uninsured. For the uninsured, major subgroups are not so easy to identify. Some of the reasons why people are not insured overlap. Furthermore, except for the older and disabled populations, many people in this population lack coverage because they are between jobs; so their rating characteristics are actually a lot like segments of the insured population. For convenience, the following subgroups can be considered: Healthy individuals; Uninsurable individuals (defined below) at all ages; and Individuals (whether healthy or not) who cannot afford insurance. Many healthy individuals, typically younger people, are uninsured because they have decided they do not need coverage or they are not able (or willing) to pay for it. Including this group in any health insurance plan may serve to reduce the average cost of the plan. Uninsurables are people whose health status precludes them from obtaining coverage through individual or small group health plans that are underwritten. In general, they have higher than average claim costs; they may be under treatment for acute and/or chronic conditions. As a result, any bias on their part in selecting a health care plan can have an enormous impact on the cost of the plan. Such bias might develop if a health plan gains a reputation for treating certain expensive conditions effectively or if the benefits under a given plan seem more advantageous to unhealthy risks. Of the individuals who cannot afford insurance, young people with low earnings ability will likely have low average claim costs and therefore decrease the average cost of a plan. Older people, people whose lifestyles don t promote good health, or people who have poor health histories will likely increase the average cost of a plan. Since health plans would have virtually no control over which individuals select their plans, the plans will be assuming significant pricing risk until their risk pool stabilizes and experience develops over a period of time. Community Rating Community rating under the Act would require that each health plan have a single set of rates for each plan design in a given regional alliance (geographical) area. Rates would vary by family type (single, couple, one-parent family, or two-parent family). All individuals who apply for coverage from the health plan and pay contributions will have coverage and be charged the same rate, regardless of health status, age, or gender. Health plans that currently insure an older and/or sicker population relative to those that cover younger and/or healthier individuals (assuming no changes in covered populations) would have higher average coverage costs and, therefore, higher community rates (unless legal constraints are placed on them). Since individuals, not employers, would be choosing their own health plans, a given plan could attract a relatively different population than its current group of enrollees. Furthermore, within a regional alliance, if the area to be covered by the alliance is too large, health plans located in high-cost areas would be at a disadvantage relative to those in lower-cost areas. (See the Academy s Monograph, Actuarial Perspectives on Regional Health Alliances.) 7

12 P RICING HEALTH PLANS UNDER HEALTH CARE REFORM As a result, prior health plan experience may not reflect either the demographic composition or health status of the new covered population. This would introduce a high degree of uncertainty into pricing. In addition, the health status of the 39 million uninsured, and which plans they will choose, is an unknown at this point. Also, workers over age 55 would be eligible for subsidized early retirement health benefits. The federal funding for these people would probably be worked into the community rates offered through the health alliances. Thus, it would be very important for all health plans to reevaluate their current rating methodology and assumptions. A goal of each health plan would be to set rates to ensure that its total premium covers the medical care costs of all enrollees, plus expenses and profit. Under the Act, within a given rate tier (single, couple, one-parent family, and two-parent family), competing health plans premiums will be averaged; the employer would pay 80% of the average, and the employee would pay the balance. Thus, health plans with premiums that fall below the average would have lower employee contributions, while health plans above the average would require higher employee contributions. Individuals would select health plans based, in part, on how much they will have to contribute. Health plan managers will have to make decisions on the relationship of the rate tiers to each other, in light of where their rates will fall relative to the average. Health plans that have insured employees for whom the employer previously paid more than 80% of the premium cost, for relatively rich plan designs, would need to consider the potential impact on their covered population and costs if the employer decides to reduce contributions. Individuals may opt for a lower-contribution plan so they do not have to pay more for coverage than before; this will alter the health plan s demographic composition. When pricing any plan design, the employee cost of paying for deductibles, coinsurance, and copays should be considered as well. The complexities involved in setting and collecting premiums in the instance of two-worker families should also be evaluated. Guaranteed Issue The Act calls for guaranteed issue coverage. Implementation of this would have an effect on price determination, particularly in the early years of the program. This factor is particularly important for health plans that currently are not required to provide coverage to all who apply and that deny coverage to individuals if there is no reasonable rate sufficient to cover their expected claim costs. For such health plans, it probably would not be appropriate to use historical experience in pricing, since it cannot reveal much about expected future experience, which would unfold under a whole new set of rules. Guaranteed Access Traditional indemnity plans are designed to provide access to any provider. A patient s unrestricted choice of providers can widen the price gap between benefit plans with and without this feature, that is, between traditional indemnity and managed care plans. This may result in selection against certain health plans, because individuals select plans that best meet their needs. Health plans must account for this gap, as well as for adverse selection, in their pricing. Adverse selection by providers can also occur. Some believe that traditional indemnity plans will provide far better monetary rewards than managed care plans so they elect to stay out of network (managed care) plans. The shift from a group choice system to an individual choice system may encourage this type of adverse selection among providers, and thus put more pricing pressure and uncertainty on the indemnity plans. In conclusion, the issues relating to potentially different insured populations, community rating, guaranteed issue, and guaranteed access would increase both the uncertainty and risk in health plan pricing, since prior experience may well be irrelevant for predicting future utilization and costs. 8

13 A MERICAN ACADEMY OF ACTUARIES NEWLY COVERED BENEFITS Under the Act, health plans would be required to provide a guaranteed standard benefits package. The difference between the scope and limitations of the proposed benefits, compared with what is included in current products, would add to the uncertainty involved in pricing these health plans. There would be greater uncertainty with projected claims costs during the initial years of reform because of the new benefit package. (See the Academy s Monograph Number Five, Actuarial Issues Involved in Evaluating a Guaranteed Standard Benefit Package under Health Care Reform.) Scope of Benefits The Act stipulates that three plans, with different cost sharing levels, must be offered: (1) a high cost sharing indemnity fee-for-service plan; (2) a low cost sharing HMO plan; and (3) a combination cost sharing point-of-service (POS) plan that combines in-network HMO coverage and out-of-network fee for service coverage. All three plans would cover the same services, as outlined in 1101 of the Act. The guaranteed standard benefits package stipulates the extent and scope of benefits that must be provided by all health plans. Beyond that, certain benefits may be added at the plan s discretion. For example, coverage of investigational treatments, health education classes, mental health/substance abuse intensive non-residential treatment, and case management are not required. But in reality, competitive pressures on price, as well as the need to comply with global budget limitations, may preclude many health plans from offering discretionary benefits. Lack of Historical Data for Newly Covered Benefits The proposed guaranteed standard benefits package includes some benefits that are not typically covered under current indemnity or prepaid HMO plans, so few, or no, historical data are available. These include: Service (Reference Act ) Indemnity Products HMO Health professional consultants for well individuals ( 1112) No Yes* Clinical preventive services ( 1114) No Yes Family planning services ( 1116) No No Vision care to age 18 ( 1125) No** No** Dental care to age 18 ( 1126) No** No** Health education classes ( 1127) No Yes Investigational treatments ( 1128) No No *Limited coverage may be provided. **Services may be covered as an optional benefit. In the absence of credible experience data, health plans would have to rely on data from existing indemnity benefits or government programs, adjusted by estimates of the value of benefit differences for pricing the new benefits. However, the adjusted data may not accurately reflect expected utilization or costs under coverages not previously 9

14 P RICING HEALTH PLANS UNDER HEALTH CARE REFORM available. (See Appendix, page 17.) services commences. Utilization and/or costs would likely increase once coverage for additional Health plans would need to make assumptions about changes in utilization and costs in developing projections for prices. Section 6002(b)(2)(C) of the Act recognizes the need for such adjustment in connection with the National Health Board s (NHB) development of the national per capita baseline premium target. Nevertheless, there would be greater uncertainty with regard to both premium targets established by the NHB and premium rates developed by health plans. (See the Academy s Monograph Number Six, Actuarial Issues Related to Budget Development and Enforcement Under Health Care Reform.) In any health plan, increases in the level or scope of benefits without increased employee cost sharing generally result in increases in the utilization of services and, sometimes, the average charge for such services. For example, it is hoped that providing more benefits for preventive services will yield long-term favorable changes in people s underlying health status, thereby lowering the incidence of acute and chronic medical conditions. However, the shortterm consequence of these new benefits may, instead, lead to increased (induced) demand for services, which would directly affect the cost of the benefit. Impact of Limitations and Exclusions Limitations and exclusions that are more or less restrictive than similar provisions currently included under typical health plans may also present pricing problems. More restrictive limitations may deter individuals from using services, while the absence of any limitation might encourage unnecessary or increased utilization relative to existing plans. In summary, these differences in benefits, limitations, and exclusions would result in greater uncertainty in health plan pricing, since prior experience may not be representative of what happens with future utilization and costs. 10

15 A MERICAN ACADEMY OF ACTUARIES ESTIMATING PROVIDER PAYMENTS Provider payments are a health plan s primary and biggest expense; uncertainties here may give rise to significant risk. To price a health plan properly, it is necessary to know how health care providers will be paid and what the effect of changes in the method of payment will have on total payments. Currently, most indemnity plans pay institutional providers on a charge or a per diem discounted-charge basis, and physicians on a fee-for-service basis. HMOs, on the other hand, may pay institutional providers on a per diem or discounted-charge basis, but may also pay them on a diagnostic-related group (DRG) or similar basis. Physicians within HMO practices may be paid on a salary, capitation, or discounted fee-for-service basis. Further, a portion of the payments to HMO providers may be withheld through risk sharing and/or incentive payment arrangements and paid out only if preset cost and/or utilization goals are achieved. Under the Act, health plans would enter into agreements with providers. The health plans may form restricted networks of physicians and institutional providers, who may agree to any of the reimbursement methods described above. To the extent there are differences in the methods and the amount of reimbursement, or in which providers will receive payments, health plan managers must be able to estimate the effect of these differences. Further, in properly pricing the combination cost sharing or POS plan, managers would have to make an accurate estimate of the amount of out-of-network utilization that will take place and its impact on the cost of the plan. The amount would vary by plan and geographic area. Some examples of reasons for going out of network include guaranteed access to academic health centers, students at a school outside of the network area, and people who simply choose to use a provider who is not part of the network (self-referral). Health plans will also need to evaluate the impact on rates of any global budgeting constraints and the imposition of fee schedules. It is important to know if a fee schedule is mandatory or optional and to which plans it applies. It must also be determined whether health plans will be allowed to negotiate fees lower than the schedule or use lower fees or charges if their provider charges are already less than the schedule. One provision of the Act requires the use of region-wide fee-for-service schedules. Currently, there are big differences in provider fee schedules in most regions, so a new uniform schedule would redistribute revenue among providers with unknown ramifications for existing networks and health plans. On these issues, as well as many others discussed in this monograph, timing and/or data availability problems may have an impact on pricing. For example, budgeting constraints and the imposition of fee schedules may not be known before pricing is completed or, if known, there may not be relevant experience data to estimate their impact. Retrospective Adjustments Health plans will also need information on any retrospective adjustments that can, or must, be made, including arrangements like retroactive recoveries from providers in the event a global budget is exceeded or a health plan s premium exceeds a threshold level. In addition, health plans would need to know the type of recovery, such as a flat percentage recovery from all providers, and the timing of any recoveries. Some of these cross-plan subsidies will not be known or may be unknowable at the time prices are determined, resulting in potentially significant risk and uncertainty. Expanded Access to Underserved Areas Two interim challenges arise when access is expanded into previously underserved areas. First, current medical practice patterns are unknown and will likely change with expanded access. The financial impact of this would be difficult to estimate, adding to pricing uncertainty. Prices can only be stabilized after local patterns are established. Second, high initial utilization could result when previously unavailable services are covered by a plan. 11

16 P RICING HEALTH PLANS UNDER HEALTH CARE REFORM Freedom of Choice Providers and Health Plans In a mandated but free market, the right to switch health plans without penalty creates pricing uncertainties for all health plans. In the pre-reform market, patients (especially those in traditional programs) can change providers at will to find what they believe is the best treatment for their conditions. Even after reform, pricing uncertainties may persist within traditional plans. With annual open enrollment, the same situation could evolve at the level of the health plan. A patient could decide to stay with or find a new provider who s well suited to his or her needs, even if access to that provider meant changing health plans. Without an extremely refined risk adjustment system, this weakness in control may create price discrepancies. Centers of Excellence To the extent that a certain facility has a superior reputation for particular courses of treatment, its cost, relative to those of other providers, may be significantly different. There may be an impact on prices charged to the local population, depending on payment protocols. In addition, to the extent that certain health plans attract local patients with conditions treated at these centers, their prices will be affected accordingly. Also, some managed care plans that contract with centers of excellence located outside of the plan s service/geographical area would also be affected. 12

17 A MERICAN ACADEMY OF ACTUARIES OTHER ISSUES SURROUNDING PREMIUM RATE DEVELOPMENT Risk Adjustment Mechanism Two provisions of the Act, community rating and guaranteed issue, make some kind of risk adjustment mechanism a necessity. Without effective risk adjustment, health plans will be motivated to avoid high-risk individuals and groups. An appropriate risk adjustment mechanism may also reduce some of the impact of pricing uncertainty, e.g., the demographic composition of a health plan s population. (See the Academy s Monograph Number One, Health Risk Assessment and Health Risk Adjustment: Crucial Elements in Effective Health Care Reform.) Once a risk adjustment system is in place, a health plan s manager will have to figure out how to price its products based on the system s guidelines and rules. These may include both prospective and retrospective payments to, or receipts from, a risk pool and corresponding adjustments in premium rates. For health plans that have to pay into the pool, the risk adjustment mechanism would likely require higher premiums. On the other hand, some health plans would receive risk adjustment refunds. Barring any regulatory requirements, these health plans would have to decide whether to lower premiums to reflect the refund or to add the refund to their surplus. Given all the unknowns, the timing and coordination of risk adjustment data and payments among all the various players will be a major challenge, and adds to the uncertainty in the pricing process. Risk adjustment mechanisms, by themselves, cannot be expected to resolve every difference between health plans. The level of sophistication contemplated for these factors, at least initially, will make that impossible. Even with risk adjustments, some health plans will keep trying to attract enrollees who will use fewer services than the average participant. If financial incentives toward favorable risk selection continue, health plans that attract worse than average risks would be faced with pricing or financial difficulties. The ultimate impact on premium levels could very well be the same kinds of pricing spirals observed in a non-mandated market. Non-Termination Under the Act, health plans are legally obligated to provide medical care even when premium s have not been paid. So premium rates would have to be increased to reflect uncollectible premiums. The effect on different health plans would vary, and price differences may be caused by the timing and level of revenues ultimately received. Geographical Cost Differences Cost differences among various areas of the country (and even among regions within states) are commonplace and routinely managed under the current system. In the local environment contemplated in regional alliances, coupled with community rates, this challenge may be more difficult to manage if the alliance covers a broad geographical area with widely varying provider costs. (See the Academy s Monograph, Actuarial Perspectives on Regional Health Alliances.) One potential problem for pricing involves travel outside a participant s home area. The reason for the travel could have a significant effect on the extent of pricing complexity that results. Travel may range from the two home situation to the incidental circumstance of vacation or, more importantly, to travel for treatment of specific illness. The impact of each of these must be examined when premium levels are set. Emergencies can occur when people are (temporarily) outside their local service areas. The definition of payment protocol for these situations must be very clear. Health plan pricing must recognize these costs, as well as the rules for determining payment. 13

18 P RICING HEALTH PLANS UNDER HEALTH CARE REFORM The causes or results of these types of travel will have different effects by region of the country. For example, vacation areas will have seasonal influxes of population; college towns will have lower than average use of services. In addition, the adequacy of risk adjustment compensation for such factors must be considered. Health plans that cover different geographic areas will have to adjust their different data sets to reflect such variations by area. Pricing Constraints Health plans will also need to consider government constraints on pricing. Overall, under the Act, the NHB will have very broad powers to set premium and expense caps. Health plan managers would be required to stay informed about the NHB s regulations and to modify their premium rates accordingly. However, whether the premium cap will be high enough to allow health plans to charge the premiums required to cover their anticipated medical and administration expenses is an open question. For example, under the Act, premium caps are to include an allowance for administration equal to no more than 15% of the projected per capita health care expenditure, or 15% / (100% + 15%) = 13% of the total target premium. Of that 13%, health plans must, or may be required to, pay the federal government to support academic health centers and graduate medical education, regional alliance administration, state premium taxes, and contributions for a state guaranty fund. Collectively, these payments alone might take as much as 8% of premium, leaving only 5% of premium for the health plan s own administration. Many health plans may find this amount inadequate. (See the Academy s Monograph Number Nine, Administrative Costs for Regional Alliances and Health Plans Under the Health Security Act.) The NHB will also determine regional target premiums and promulgate inflation factors for each regional alliance. The information required for determining regional adjustment factors does not currently exist (although some national data exist). Thus, regional targets will involve tremendous uncertainty; they may reflect overestimates for some regions and underestimates for others, with some health plans bearing the financial consequences. In addition, timing differences between the establishment of regional inflation factors and health plan bids will also add pricing uncertainty as health plans attempt to set prospective premiums. (See the Academy s Monographs Number Seven, A Review of Premium Estimates in the Health Security Act and Number Six, Actuarial Issues Related to Budget Development and Enforcement Under Health Care Reform.) Corporate Alliances An employer with more than 5,000 employees could choose to opt out of the regional alliance system and instead retain its own health plan(s) by forming a corporate alliance. Health plans offered by corporate alliances would be subject to the same requirements as those offered by regional alliances. Thus, most, if not all, of the issues, problems, and data needs discussed in this paper would apply and need to be evaluated. In addition, employers would need to evaluate the impact on their costs of the 1% payroll tax and other potential assessments resulting from health care reform, including changes to ERISA. (See the Academy s Monograph, ERISA Changes under Health Reform.) Large employers with health programs whose cost exceeds the average of that assumed for the regional health alliances will likely opt for the regional alliance system. This would add yet another element of adverse selection and uncertainty in health plan pricing for the regional alliance. Workers Compensation and Automobile Insurance Under the Act, health plans must provide for medical benefits under workers compensation insurance and automobile insurance. Reimbursement for these benefits would be obtained from workers compensation carriers and automobile insurance carriers. Health plans administrative systems may have to be modified to handle claims adjudication for these programs and to obtain reimbursement for the claims from the other carriers. Also, managed care plans may need to expand their 14

19 A MERICAN ACADEMY OF ACTUARIES provider networks to include providers who specialize in the treatment of occupational illnesses and injuries and automobile injuries. These new costs may not be completely reimbursed by the workers compensation and automobile insurance carriers. Administration and Marketing Costs Under any reform proposal, changes in commissions, taxes, types of administrative expense, and/or service provision will inevitably occur. Careful analysis will be required to establish the appropriate expense loading (or target claim/loss ratios). Health plans will also need to consider the impact on expenses of meeting additional government reporting requirements, including extra reporting of health care data required by regulation and cost/treatment data and protocols. (See the Academy s Monograph Number Nine, Administrative Costs for Regional Alliances and Health Plans Under the Health Security Act.) Despite the need for careful review of processes and costs in the reform environment, recognizing these items in establishing premium rates should not pose any particular problem. As mentioned before, a problem occurs if a global budget sets an artificially low expense cap. Reinsurance Health insurers and HMOs seek the protection of reinsurance in the face of uncertainty and to protect their financial interests from the costs generated by individual, very expensive claims or an unexpectedly high number of claims. The risk adjustment mechanism, within and across regional alliances, may provide some portion of the protection from pricing uncertainty that will be required under a new system. This mandatory mechanism would only compensate for differences in perceived risk not accounted for in community rating. Retroactive protection from the effects of individual large claims and/or the cumulative effect of an unexpected number of claims may still be desired. Reinsurance coverage may include: Aggregate coverage to protect the health plan from overutilization of services, particularly those outside its service area; Carve-out coverage to handle the costs of certain risks, such as high-risk maternity/premature infants, organ transplants, or mental and nervous/substance abuse; and Stop-loss coverage to pay for all or a percentage of any individual s costs over a specified threshold, such as $100,000. While the Act does not prohibit reinsurance, it does not indicate how the cost of reinsurance and/or claim recoveries would affect a health plan s premium pricing or the reporting and budgeting of a health plan or an alliance. In any event, a health plan would need to incorporate the net cost of reinsurance in its pricing. 15