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Patient Protection And Affordable Care Act (PPACA) Deep Dive Part II: Will It Be Affordable?

My last post explored some of the variables that may impact PPACA’s ability to reduce the number of uninsured. Regarding the concept of affordability, though not the first to raise concerns over “rate shock,” I did share some thoughts in a recent article published in the Hartford Courant. In this follow up, we will explore further the concept of affordability.

On March 23, 2010, the Patient Protection and Affordable Care Act was passed with two primary intentions –

  1. Reduce the number of uninsured – estimated to be 47 million people (or 15% of the population)
  2. Slow the rate of health care costs

Will PPACA slow the rate of health care costs?

In the short term, the short answer appears to be no. In the first public acknowledgement by the administration that costs may actually go up, Health and Human Services Secretary, Kathleen Sebelius commented on Tuesday March 27, “there may be a higher cost associated with getting into that market.”

On the same day, the Society of Actuaries released their study, which found "that the cost of medical claims, one of the key factors driving insurance premiums, will rise an average of 32% nationwide by 2017 as a result of an expected change in the individual market composition.”

Why will costs go up?

While the federal government, States and professional insurance service providers attempt to forecast and reforecast what costs will be, the bottom line is that no one will truly know until the carriers provide pricing. At this point, we are not expecting to see actual pricing at the earliest until May. That being said, we see the following as contributing factors to a rise in premiums:

Rate Compression:  Historically, insurance carriers have had a wide range of latitude in charging younger members less and older members much more for premium. The new regulations will now limit the carrier’s ability to establish premium differentials to a 3:1 ratio. Though this change is more a re-distribution of total costs, it should significantly increase premium levels for the younger population.

Guaranteed Issue:  The guaranteed issue requirement now eliminates an insurer’s ability to decline any member access to coverage regardless of their health status. Some States had previously moved in this direction prior to PPACA, but for others this cost variable will be enormous.

Selection:  One of the areas that insurance actuaries will try to forecast and hedge against is the element of selection. If they are now limited in their ability to rate based upon age or medical status, they need to make some assumptions regarding the risk profile of individuals and groups. On the individual front, they will try to account for “healthy” members opting out of or not taking coverage and “less healthy” members enrolling in greater numbers. This will contribute to overall cost going up.

Plan Designs:  Whether the Federal or State government is providing coverage through an Exchange, the plan designs that are selected will have a significant impact on price. It is estimated by some carriers that more than 50% of their individual policyholders purchase a benefit level that does not satisfy the new 60% minimum essential coverage level and in many cases provides much less coverage. Many individual policyholders currently purchase “catastrophic” insurance (high deductibles, annual maximum limitations, excluded coverages etc...) in the event they incur significant medical expenses. Many of these policies will no longer satisfy the coverage requirements and force individuals to purchase more coverage which in turn will be more expensive.

Fees:  There are three new fees applied to employer sponsored plans as a result of the new regulations. These include the Patient Centered Outcomes Fee, the Health Insurer Fee and the Transitional Reinsurance Fee. Early indications are that all combined these will add approximately 5% onto premiums that are already inflating at a 10 to 12% rate.

Claims Cost:  As noted earlier, the Society of Actuaries study is forecasting a 32% increase in claims cost by 2017. The theory is that as more people who are currently uninsured avail themselves of subsidized coverage, previously postponed or neglected medical issues will now increase overall utilization. Though some of this will be offset by a reduction in emergency room care that is currently spread through the system, there will be an anticipated spike in elective care services which has been previously unaddressed (e.g. invitro fertilization, bariatric surgery, specialty drugs etc.)

How much will costs go up?

The short answer is nobody knows until the pricing is released. We do know that the impact by State may vary widely. In States that have been highly regulated with significant mandated benefits (e.g. Connecticut and Massachusetts), the impact won’t be as severe as those with little mandated benefits (Indiana, Wisconsin, Ohio). We have seen predictions range from 20% to 100% and more depending upon individual or group forecasts.

HC-Reform1-460x172As consumers and employers begin to better understand the operational elements of PPACA,   it appears that there will be challenges in meeting the Act’s two primary objectives– that of reducing the number of uninsured and reducing costs. Though reducing the uninsured may be the easier of the two metrics, it is clear that reducing overall costs may only be achievable for isolated constituents. In addition, there are a variety of bipartisan discussions focused on the cost drivers (fees, penalties etc...) that will receive wide attention as we approach the fall which may still impact these early forecasts. Stay tuned.