ACTUARIAL ASPECTS OF MASSACHUSETTS REFORM Ian Duncan FSA FIA FCIA MAAA New England Actuaries Club November 2012
Agenda 1. History and accomplishments of Massachusetts Reform 2. Actuarial Implications of Massachusetts Reform
Introductions Ian Duncan FSA FIA FCIA MAAA. Vice President, Clinical Outcomes & Analytics and Head of Research, Walgreen Co. Chicago. Adjunct Professor at UC Santa Barbara and Adjunct Research Professor, Georgetown Dept. of Health Administration. Board member, Massachusetts Health Insurance Connector Authority. Author of several books and peer-reviewed studies in healthcare management and predictive modeling. 2011 publication has chapter on Massachusetts Reform. Published 2008 May 2011
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Comparison of Massachusetts and US Health Care Reform Laws Massachusetts US Medicaid Expansions Subsidized Coverage Insurance market reforms Health Insurance Exchange Individual Mandate Employer Responsibilities 5
Commonwealth of Massachusetts Population: 6.5 million Second highest average per capita income in the US ($51,500 in 2010). Home to 65 universities and colleges (Harvard; MIT; BU; BC; etc.) Home to many famous medical facilities: Mass General; Brigham & Womens; Dana- Farber Cancer Institute, etc. Prior to passage of reform in 2005, Massachusetts had the lowest rate of uninsured in the US (9%) 6
Massachusetts Facts High income state. Strong base of employer coverage. Relatively low rate of uninsurance. ~20% of state economy is health care. Uninsured (prior to reform) ~9%. Long history of bi-partisan efforts to expand insurance coverage and introduce reforms. Expansive Medicaid program with 1115 waiver. Well-funded safety net. Strong advocacy groups. Earlier reforms of individual and small group insurance market. Medicaid waiver pays for approximately half of the additional cost of coverage (~ $850 million). The Most Democratic Legislature in the United States 7
Major Components of Massachusetts Health Reform Law Subsidize insurance for low and moderate income Medicaid expansions (mostly for children) Commonwealth Care (for adults up to 300% FPL) Flow of funds: Massachusetts Treasury => Connector Authority => insurers Reform the individual health insurance market Merge individual and small group markets Health Insurance Connector /Exchange Commonwealth Choice Products (Gold, Silver, Bronze and Young Adult Plans) Dependent coverage to age 26. Flow of funds: employer (or insured) => insurer. Funds do not flow through the Connector (Connector charges between 2.5% and 4% administrative fee for enrollment/marketing services). Require adults to have insurance if it s affordable Or pay state income tax penalties (between $228 and $1,260 in 2012). 8
Massachusetts Connector The Travelocity of Health Insurance Section 125 plans Small Employers Unsubsidized Unsubsidized CommChoice Individual Market Subsidized CommCare 9
Subsidized Insurance: Commonwealth Care Household income <300% federal poverty level No employer coverage available Sliding scale premium 5 private health insurers Benefits comparable to employer plans Run by the Connector Percent of Federal Poverty Level Individual Premium Per Month Couple with children: Premium Per Month <151% $0 $0 150.1-200% $39 $78 200.1 250% $77 $154 250.1 300% $116 $232 300% FPL ~ $31,000 for individual; $62,000 for family of three 10
One Stop Shopping at www.mahealthconnector.org 11
Mass 2.0: Standardized Products 12
Affordability Schedule for Single Person: Monthly Premium Annual Income Mass 2011 Affordability Scale $0 - $13,538 $0 $13,539 - $16,260 $0 $16,261 - $21,672 $39 $21,673 - $27,096 $77 $27,097 - $32,508 $116 $32,509 - $39,000 $175 $39,001 - $44,200 $235 $44,201 - $54,600 $354 $54,601+ Affordable Same as Commonwealth Care Premium Schedule 13
Individual Mandate: The Tax Penalties Penalty Schedule for Failure to Comply with the Individual Mandate. 2007-2012 2007 2008 2009 2010 2011 2012 per year* per year** per year** per year** per year** per year** 150.1-200% FPL 200.1-250% FPL 250.1-300% FPL Above 300% FPL. Age 18-26 Above 300% FPL. Age 27+ $219 $210 $204 $228 $228 $228 $219 $420 $420 $456 $456 $456 $219 $630 $624 $696 $696 $696 $219 $672 $624 $792 $864 $996 $219 $912 $1,068 $1,116 $1,212 $1,260 * For Tax Year 2007, the penalty for not having insurance as of December 31, 2007 was $219. ** If the individual is without insurance for all twelve months of the year. 14
Result After 4 Years: Lowest Rate of Uninsurance in the Country Massachusetts: Uninsured as % of Population 11.30% 10.4% 10.20% 9.2% 5.4% 2003 2004 2005 2006 2007 1.9% 2010 Source: Current Population Survey, 2003-2008, US Census Bureau Source: Massachusetts Division of Health Care Finance and Policy, 2010 Household Insurance survey 15
As of December 2010: 412,000 More People Have Health Insurance Than in June 2006 Bridge Program +21,000 Medical Security +32,000 Private Coverage +7000 (Individual +34,000 and Employer -27,000) Commonwealth Care (+159,000 ) Medicaid +193,000 Source: Division of Health Care Finance and Policy 16
Change in Number of Newly Insured Since Health Reform: December 2008 vs. December 2010 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 +421,000 +412,000 246000 404000 175000 7000 December 2008 December 40513 Private Public March 2010 December 2008: Private =42% of increased coverage December 2010: Private =2% of increased coverage 17
Support for Health Reform Among Massachusetts Physicians Support Continuation of MA Reform 75% Believe MA Reform Helped Previously Uninsured 79% Believe MA Reform Improved / Did Not Impact Care Quality 88% Source: Physician Views of the Massachusetts Health Care Reform Law NEJM Oct 2009 18
Crowd-Out Has Not Occurred: No Evidence of Decline in Proportion of Employers Offering Health Insurance 90% 80% 70% 60% 50% 40% 30% 70% 72% 76% 77% 68% 60% 60% 69% 2005 2007 2009 2010 20% 10% 0% MA Sources: DHCFP and KFF annual survey US 19
Most of the Remaining Uninsured Have Very Low Incomes Details of Uninsured from Mass Tax Filings: 2008 Uninsured part of year (n=156,000) Uninsured Full Year (n=140,000) Paid penalty 17% 17% Nothing affordable 16% 15% Lapse<3 mo 32% -- Income <150% FPL: exempt 31% 63% Appealed penalty 3% 2% Religious/other exemption 1% 3% 20
Remaining Uninsured are Disproportionately Young Men 21
On Coverage, Massachusetts is Already Far Ahead of Where the US Will Be in Nine Years After National Health Reform Uninsured Rate Pre- and Post-Reform (Among people <65 years old) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 19% US 8% 3% Mass 2009 2019 22
Actuarial Implications of Reform: the 3 Rs Many of the early and continuing actuarial issues in Massachusetts are focused on attempts to address the unpredictable risk that plans faced in assuming nearly 200,000 previously-uninsured lives. As experience has emerged on these lives, risk management centered around more traditional risk-transfer mechanisms. The initial risk imposed by members without prior experience has been managed by a gainsharing mechanism. Ongoing risk has been managed with Risk Adjusted revenue transfers between plans. Ongoing losses are managed with stop-loss pool. => The 3 Rs: Risk-adjustment, Risk-Transfer and Reinsurance. 23
Gainsharing (Risk Corridors) The Connector has operated different corridors/gainsharing arrangements in different years. Recognize that the newly-insured lives represented an unknown risk; Risk Adjustment, while useful for addressing selection between MCOs, did not provide additional revenue to offset a revenue shortfall if claims should exceed the actuarial rate estimates. The Connector also implemented a stop-loss pool to which all participating plans contributed. It is essentially a self-insured arrangement (no new revenue is involved). Claims on (and contributions to) the pool are applied before gainsharing. Only the gain-sharing mechanism involves additional revue; Reinsurance and Risk-adjustment move existing revenue between health plans. 24
Gainsharing (Risk Corridors) Gainsharing limits and terms have changed since 2006, but the principles remain fundamentally the same. The most recent gainsharing arrangement works as follows: Aggregate risk sharing corridors apply to all Commonwealth Care Health Plans: Aggregate risk sharing corridors of 4% apply above and below the target medical capitation rate ( Health Plan Full Risk Corridor ); The Connector Authority shares 50% above and below the Health Plan Full Risk Corridor; and The Health Plans return to 100% full risk at 50% above and below the medical capitation revenue (closed-end risk sharing). 25
Gainsharing (Risk Corridors) (contd.) Health Plan Liability $638.50 Health Plan Payments $540.60 Health Plan Full Risk Corridor $442.70 $425.67 $408.64 $212.84 $212.84 $408.64 $425.67 $442.70 $638.50 2011 Target Capitation Rate 26
Stop-loss (Reinsurance) The Connector operates a stop-loss pool to which all Commonwealth Care Health Plans must contribute. No state money is included (i.e. the pool is entirely self-insured). Health Plans fund the pool at 1.25% of the capitation rate and the pool pays 75% of incurred claims above a $150,000 attachment point. Experience-rating also occurs if the pool runs a surplus or deficit. 27
Risk Adjustment Risk Adjustment is just one of the techniques used by The Connector to manage the selection risk of the Commonwealth Care program. The Connector does not fund the Commonwealth Choice program. The number of Connector Commercial members is small and so direct risk mitigation is not an issue; nor is the Connector able to influence pricing or underwriting of Commercial individual and small-group insurance. Initially, lacking claims data, risk adjustment was applied based on age and sex of enrolling members. The relative age-sex factor adjusted the base (Connector established) premium rate. As experience developed claims-based risk factors (using DxCG Medicaid Model) were developed and apply in the most recent year to members with more than 6 months of experience. New entrants continue to be age-sex adjusted. Adjustment calculations are performed by the Connector Authority staff using data provided by MassHealth (Medicaid), the enrollment and billing administrator. 28
Risk Adjustment The PMPM capitation rate to be paid to the Health Plan is equal to: Target PMPM x RF HP + Admin. Where: Target = Statewide Medical only Target for the Commonwealth Care Program = $394.00 PMPM [1] (before any adjustment for hospital tax, but includes pharmacy costs) Total Members RF j HP = Σ (Geo i x Plan i x Disc i x Risk i ) / (Total Members) i = 1 Where: Geo i,j = Geographic (region) factor for Health Plan j Member i. [2] Plan i,j = Plan Type factor for Member i in Health Plan j. Risk i,j = Risk factor for Member i in Health Plan j. Disc i is a factor that represents a discount offered by the Health Plan. It does not apply in FY 2012. [1] This capitation amount includes prescription drugs, but does not include any adjustment for Health Safety Net (Uncompensated Care) hospital assessment. [2] Note that in Massachusetts, health plans serve multiple geographic regions and offer different plan types. This calculation develops a plan-wide adjustment factor. 29
Risk Adjustment Example of calculation of overall adjustment factor Rating Factors Member Plan Type Region Age Gender Plan Type Geographic Risk Total 001 I North 27 F 1.0619 0.9468 0.8694 0.8741 002 * I North 22 F 1.0619 0.9468 0.9970 1.0024 003 II North 35 M 0.9461 0.9468 0.9108 0.8159 004 * II Central 44 F 0.9461 1.1589 1.0350 1.1348 005 III Central 54 M 0.8909 1.1589 1.2533 1.2941 Avg 1.0242 * Members 002 and 004 had seven or more months of experience during the historic experience period. Therefore, they receive a DxCG risk factor rather than an age/gender risk factor. Example (Member #2): RF i,2 = (1.0619)(0.9468)(0.9970) = 1.0024 Although the payment to this Health Plan in the first quarter of Fiscal Year 2011 was initially $431.58, the payment is retroactively adjusted for the increased Total Average Rating Factor and becomes: $393.67 x 1.0242 + $32.00 = $435.20 30
Minimum Pricing Medicaid rules require that the Connector RFP provide bidders with an actuariallysound rate range within which they must bid. This rule has the effect of building-in trend because the actuarially-sound rate range is determined based on prior year s cost + trend. For Fiscal Year 2012, this approach would have resulted in increased cost for the Connector and the state. The Connector adopted a novel sound rate range approach that leveraged a development that had occurred 2 years earlier as a consequence of the termination of the Commonwealth Care Program for Aliens with Special Status. Aliens with Special Status are aliens legally admitted to reside in the US who are not eligible for benefits under 1996 Medicare reform legislation. They must achieve a minimum of 5 years of residence in addition to regular rules to be eligible for benefits. This population (numbering about 30,000 at its peak) is a unique subset of the Commonwealth Care program because, unlike the other 150,000 members for whom a 50% federal match is obtained, the 1996 legislation prohibits use of federal funds. 31
Minimum Pricing When Massachusetts encountered budget difficulties this population was removed from Commonwealth Care and put into a slimmed-down, lowercost program (The Bridge Program) underwritten by Celticare. Subsequent experience of the AWSS population was significantly lower than that of similarly-situated members in other MCOs. The Connector concluded that one MCO had demonstrated that a lower minimum rate was achievable and this became the minimum in the actuarially-sound range for the 2012 FY bids. Several MCOs bid around the minimum rate (some with more limited networks). Overall result was a flat budget from FY 2011 to FY 2012. This steerage of the market continued to FY 2013, where competition between plans resulted in reduction of about 5% in underlying capitation rates. 32
3 Rs: Results (contd.) Risk-adjustment (Q1 2012): Plan 1 2 3 4 5 Rel. Risk Score +5.9% (8.8%) 15.3% 16.1% (2.1%) Net risk adjustment in Q3 2012 is 3.9%, amounting to a net transfer to the participating plans of $6.8 million. The method of risk-adjustment chosen by the Connector does not result in budget neutrality; in 2012, there has been an influx of older and more risky members which has resulted in an increasing trend in the average risk factor (e.g. the + 3.9% in Q3 2012). The concurrent, budget-neutral approach of the ACA does not allow for this change in the underlying risk profile of the covered population. 33
3 Rs: Results Reinsurance (Stop-loss) experience: FY 2007 2008 2009 2010 2011 Cum. Loss-ratio 80.7% 137.4% 54.7% 67.1% 101.4% 81.8% Cumulatively the pool has generated a surplus which has been experiencerated back to the plans. Risk Corridor: Gainsharing has operated according to different parameters in different years. Aggregate net payments/(receipts) over the last few years have been in the range 1%-2% of premiums. Gainsharing results for individual plans have been larger, with several plans being reimbursed by the state between 3% and 5%, and on occasion plans reimbursing the state double-digit percentages. 34
Closing Thoughts Massachusetts reform was passed in 2006 after many years of negotiation, trial-and-error, with bi-partisan (political) support and support of employers, advocates, providers and payers. Cost control continues to be a challenge, 7 years into reform. Massachusetts reform has been affordable (financially) to the state because of significant subsidies from the US Treasury and from diversion of uncompensated care funds from (direct) payment to hospitals to payment to insurers. After 7 years (and considerable success) we are still discovering ways to improve it. Massachusetts reform was less administratively complicated than ACA, but still requires a $50 million administrative budget. 35
Ian Duncan FSA FIA FCIA MAAA Adj. Assoc. Professor Dept. of Statistics and Applied Probability University of California, Santa Barbara 93105 860-614-3295 duncan@pstat.ucsb.edu 36