Session 74 IF, Hospital Indemnity Growth & Pricing Considerations. Moderator: William S. Bade, FSA, MAAA. Presenters:

Transcription

1 Session 74 IF, Hospital Indemnity Growth & Pricing Considerations Moderator: William S. Bade, FSA, MAAA Presenters: William S. Bade, FSA, MAAA Alex M. Bagby, ASA, MAAA Paul C. Ramirez, FSA, MAAA SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 Bill Bade, FSA, MAAA Milliman Tampa, FL Alex Bagby, ASA, MAAA American Fidelity Oklahoma City, OK Paul Ramirez, FSA, MAAA Allstate Benefits Jacksonville, FL

3 SOCIETY OF ACTUARIES Antitrust Notice for Meetings Active participation in the Society of Actuaries is an important aspect of membership. However, any Society activity that arguably could be perceived as a restraint of trade exposes the SOA and its members to antitrust risk. Accordingly, meeting participants should refrain from any discussion which may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided both at official SOA meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics or other forms of self-regulation, product standardization or certification. The following are guidelines that should be followed at all SOA meetings, informal gatherings and activities: DON T discuss your own, your firm s, or others prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins. DON T stay at a meeting where any such price talk occurs. DON T make public announcements or statements about your own or your firm s prices or fees, or those of competitors, at any SOA meeting or activity. DON T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers. DON T speak or act on behalf of the SOA or any of its committees unless specifically authorized to do so. DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the association on behalf of a committee or section. DO consult with your own legal counsel or the SOA before raising any matter or making any statement that you think may involve competitively sensitive information. DO be alert to improper activities, and don t participate if you think something is improper. If you have specific questions, seek guidance from your own legal counsel or from the SOA s Executive Director or legal counsel. 2

4 Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 3

5 Product Overview & Trends 4

6 Hospital Indemnity Insurance These are insurance plans that pay a specified lump-sum and/or daily amount when an insured person is admitted to a hospital for a covered injury or sickness. Other included benefits can pay lump-sum or daily amounts for stays in Intensive Care Unit, Emergency Room, Rehabilitation Units, etc. Claims are paid directly to the policyholder Can be used to cover deductibles and copays Replace lost wages Help with living expenses 5

7 Source AHIP 2015 Census of Health Savings Account - High Deductible Health Plans As enrollment in high-deductible health plans grow, hospital indemnity insurance plans are a natural fit. These plans can help mitigate the risk from high out-of-pocket medical expenses due to hospitalization. 6

8 Common Benefits in HI Plans Base Hospitalization Benefits Initial Hospitalization Daily Hospitalization Intensive Care Unit Rehabilitation Unit Treatment Benefits Surgery Emergency Room Inpatient Physician s Treatment Others Ambulance Benefit Transportation and Lodging Emergency Accident Health Screening Outpatient Physician s Treatment Wellness Benefit 7

9 HSA-Compliance There has been significant growth in HSA-Compliant Hospital Indemnity products. In order to be compliant with an HSA, only a subset of the benefits discussed previously can be included in coverage. Rather than interpret the tax regulations, below are the benefits that carriers are including on their HSA-compliant HI plans. Frequently Marketed Initial Hospitalization Benefit Daily Hospitalization Benefit Intensive Care Unit Occasionally Marketed Emergency Accident Rehabilitation Unit Health Screenings Transportation and Lodging Benefit 8

10 Product Chassis Individual Guaranteed Renewable Issue Age or Attained Age Premiums Employee Paid Premiums Heaped Commissions Insurance contract belongs to individual policyholder Group Voluntary Guaranteed Renewable Issue Age or Attained Age Premiums Employee Paid Premiums Heaped Commissions Insurance contract belongs to group (employer, union, association, etc) Group Annually Renewable Composite Premiums Employer or Employee Paid Premiums Level Commissions Insurance contract belongs to group (employer, union, association, etc) 9

11 Coverage Plan Options Pre-Ex Clause Most insurance plans include a 12-month/12-month pre-existing conditions clause. Losses due to conditions that were treated within 12 months prior to the effective date are subject to a 12- month waiting period. This provision can be waived for takeovers or for an increase in premium. Pregnancy Waiting Period Nearly every carrier has a pregnancy waiting period in their coverage no benefit is paid for births that occur within a window of the effective date of the coverage often 9 or 10 months. This waiting period can sometimes be waived for an increase in premium. Mental and Emotional Conditions Some carriers have the option to include or exclude hospitalizations due to mental and emotional disorders (e.g. bipolar disorder, schizophrenia, etc). Drug and Alcohol Intoxication Some carriers have the option to include or exclude hospitalizations due to intoxication or being under the influence of a controlled substance. 10

12 Worksite Market Trends 11

13 Trends in the Worksite Market Rapid growth in group chassis products Marketed as supplement to HDHP s Employer sale positioned along with medical plan HSA compliant products Modular based products Unit based indemnity benefits Increased portability on group products Guaranteed issue with low participation requirements 12

14 Product Positioning Product packages typically chosen by the employer or broker Can be customized to fit the employers needs Offered to employees on a voluntary basis Employer paid business appears to be on the rise Employees choose between pre-defined plans that best fit with their medical plan Marketed three ways Traditional stand-alone plan direct individual market Deductible protection with HDHP s Traditional supplemental product voluntary sale Designed specifically as a supplement around the medical plan Packaged with self-funded Minimum Essential Coverage (MEC) plans Seasonal employees; high turnover groups 13

15 Product Underwriting and Renewability Group products are usually guaranteed issue with pre-ex Pre-ex can be waived in certain circumstances Medical brokers are finding GI group chassis products attractive Platform friendly Individual products usually employ simplified underwriting particularly in direct markets Renewability Group guaranteed renewable or optionally renewable Individual guaranteed renewable or non-cancellable 14

16 Marketing/Distribution Trends 15

17 16

18 Supplemental Product Markets Primary Distribution Channels Is HSA Compatibility Critical? Typical Commission Structure Worksite Consumer Retiree Agent, Broker, Exchange, Enrollment Firm, 3 rd Party Tech Vendor Large Employer: Yes Small Employer: No Agent, Direct No Agent, Direct No Heaped or Level Heaped Heaped Carrier Profitability Favorable Favorable Favorable Typical Underwriting GI or SI SI SI Funding Method Insured or Employer Insured Insured Wellness Benefits Common Not Common Not Common Value Added Services Common Not Common Not Common Product Chassis Group or Individual Individual Individual 17

19 Worksite Market Timeline 1990s A few carriers dominate the market with individual Accident, Cancer, and Disability products Unum merges with Colonial (1993) and Provident (1999) Influx of new market participants in response to the ACA AFLAC completes acquisition of Continental American Liazon begins enrolling clients Towers Watson acquires Liazon; Aetna acquires bswift Mercer Marketplace Exchange adds voluntary products, AON launches its Corporate Health Exchange, and Buck introduces the RightOpt exchange Several carriers begin emphasizing group Accident and Critical Illness marketing efforts Carriers begin placing products on Third Party Platforms Accident and Critical Illness products dominate product development due to simplicity and perceived staying power with ACA rules Willis and Towers Watson merge to form Willis Towers Watson Mercer purchases 9.9% stake in Benefitfocus Carrier expansion of product portfolio with ACA certainty 18

20 Future Market Trends As carriers and distribution partners mature, their products, services, and decision making will evolve These key players will invest in new technologies and administration platforms that improve the customer experience, streamline internal operations, and expand product offerings Established carriers with best in class technology will begin to increase the complexity of product offerings while maintaining a superior customer experience 19

21 Competitive Landscape 20

22 Supplemental Market Convergence Traditional Supplemental Carriers Medical Carriers Group Life and Disability Carriers 21

23 2016 Milliman HI Survey Results Over 80% of carriers developed a new HI product in the last three years Over 80% of carriers plan to develop a new HI product in the next two years Of the carriers that currently offer a hospital indemnity product and plan to develop a new hospital indemnity product in the next two years, approximately 35% will enter a new market and 65% will introduce a new product to an existing market 22

24 2016 Milliman HI Survey Results Nearly 40% of carriers sell both group and individual hospital indemnity products Carriers perceive regulatory climate and competition as the two greatest risks to the hospital indemnity market On average, carriers believe that the risk of a declining market is low 23

25 2016 Milliman HI Survey Results Carriers are reinventing billing, administration, underwriting, etc. practices Many companies offer two, three, and four tier pricing Some carriers offer self administered billing Minimum participation levels in worksite group business are waived under certain scenarios 24

26 Pricing & Valuation Considerations 25

27 Valuation Methodology Like most supplemental health insurance plans, Hospital Indemnity plans are reserved on a GAAP basis using FAS60 for long-duration contracts On a statutory basis, individual hospital indemnity plans are reserved on a 2-year FPT method For individual contracts issued after January 1, 1982, the specified morbidity assumption is the SOA 1974 Medical Expense Table For group contracts, the morbidity assumption used are best-estimate assumptions of anticipated future experience, not incorporating any expectation of future morbidity improvement. Contract reserves are not required on group hospital indemnity, as these are composite-rated and yearly renewable. Key pricing/valuation assumptions include: Claim Costs Lapse Rates Premium/Commission Rates Expenses Interest Rate Age/Gender Mix 26

28 Claim Costs Claim costs for HI products have an unusual shape peaking in the late 20s to early 30s due to pregnancy benefits paid This shows the difficulty in pricing this product. Adverse selection is a key risk and must be accounted for. Pricing a HI plan using experience from medical plan can be difficult. 27

29 Lapse Rates Higher lapse rates in this product when compared to other supplemental health plans. Not unusual to see 40% to 60% of policies lapse within 2 years. The shape above peaking in duration 2 lapses is common in supplemental health business. 28

30 Pricing and Implementation Considerations For composite-rated pricing on group hospital indemnity, there can be some operational challenges for new entrants Census needs to be received from the employer in order to calculate the group s composite rate using claim costs by age and gender. When a census is received and the composite rate is calculated, the straightforward approach is to apply the expected claim cost to each cell to arrive at the group s composite claim cost but, this assumes an equal probability of purchase from each person in the group. This is a poor assumption in voluntary insurance, and exposes the insurance carrier to adverse selection risk. Implementation of hospital indemnity on the policy administration system can be complicated for the more complex products The maximum payments per year on some of the benefits can vary once per year, twice per year, unlimited. The coverage options discussed previously need to tracked as well (pre-ex, pregnancy, etc). 29

31 Regulatory Environment 30

32 Tri-Agency Proposed Rule Department of Health and Human Services (HHS), Department of Labor(DOL) and the Internal Revenue Service (IRS) Proposed rule published to the Federal Register on June 10, 2016 Comment period closed on August 9, 2016 Addresses expatriate health plans and other issues Amends the non-coordinated excepted benefits category in the group market Includes Hospital Indemnity and Other Fixed Indemnity (HI/FI) products Also includes Specified Disease products Focus for this session will be on the potential impact to HI/Fi products 31

33 Amended Criteria for Excepted Benefit Status To be hospital indemnity or other fixed indemnity insurance, the insurance must pay a fixed dollar amount per day (or other time period, such as per week) of hospitalization or illness (for example, $100/day) without regard to the amount of expenses incurred or the type of item or service received, and The plan or issuer must provide, in any application or enrollment materials provided to participants, at or before the participants are given the opportunity to enroll in the coverage, a disclosure notice in 14 point type with Federally mandated language that states that this is not major medical coverage or minimum essential coverage. 32

34 Tri-Agency Concerns Some group health plans representing HI/FI products as Minimum Essential Coverage (MEC) Individuals may incorrectly believe these policies provide MEC Products with indemnity benefits paid per visit or per script Products with indemnity benefits for certain services that may vary by the type of service Desire to incorporate into regulation the guidance issued in FAQ11 Desire to align conditions to be considered excepted benefits between group and individual 33

35 Tri-Agency Concerns Three Examples Cited Benefit for hospital stay is a fixed percentage up to a per day maximum Not an excepted benefit product because benefits are not based on a fixed dollar per day or other time period Benefit for doctors visit is $50/day; hospitalization at $100/day; various surgical procedures with different indemnities per procedure; Rx at $15/script Not an excepted benefit product because several benefits do not pay fixed amount per day or other time period but are rather paid based on whether a procedure or item is provided. Benefits are provided at a fixed dollar per day but the dollar amount varies by the type of service. Not an excepted benefit product because benefits are not paid on a fixed dollar amount per day regardless of the type of service 34

36 Industry Ramifications Proposed effective date of January 1, 2017! Millions of existing inforce products that were regulated by the NAIC (and also HHS!) as Excepted Benefit product would no longer comply Essentially eliminates any potential for market innovation HI/FI products that remain will likely be commoditized Having the same per day benefit that does not vary by the type of item or service rendered will create actuarial rating and utilization concerns Low cost services and high cost services having the same per day benefit Could eliminate HI/FI products as valuable insurance options for consumers 35

37 Industry Responses Via Comments Departments lack the authority to narrow the definition of Excepted Benefits found in the Public Health Services Act (PHSA) and subsequent ACA (which did not amend PHSA) PHSA 42 U.S.C. 300gg 21(c)(2)(A)-(C) Consistent with the DC Circuit judges opinion in a similar argument found in Central United vs. Burwell that was subsequently upheld by the US Court of Appeals, DC Circuit States are the primary regulators of health insurance coverage PHSA 42 U.S.C. 300gg 61(a) Strong majority of comment letters recommended removing the proposed amended criteria for excepted benefit status that excludes event based benefits 36

38 Industry Responses - Continued Disclosure requirement Also a proposed criteria for excepted benefit status Many comment letters supported appropriate disclosure Most recommended leaving the regulation of disclosures with the states (NAIC) as is the current practice Some were in favor of Federally mandated disclosure language Consistency between group vs individual Most comments stated the current regulations have that consistency Removing the proposed criteria for excepted benefits would preserve that If the Proposed Rule is enacted, the effective date of 1/1/2017 would essentially be impossible for carriers to comply with Most, if not all, products on the market would need to be redesigned and refiled Inforce products with GR provision cannot be canceled which is problematic in the absence of a grandfathering provision 37

39 Industry Responses - Continued Education Efforts Many carriers and advocacy groups have prepared educational pieces to help the agencies understand HI/FI products better and it s value to the consumer Millions of existing policies today Valuable product to help with rising out-of-pocket medical costs that consumers face today Product growth is a strong indication of its value 38

40 Next Steps Continue educational and advocacy efforts Business as usual until agencies release their response to the comments Likely to be a big battle that could potentially end up in litigation depending on the agencies response Stay tuned! 39