Unpacking a 23.3% health premium increase; when premiums become unaffordable is the Individual Mandate relevant?

As a consumer I am frustrated and disappointed to see a 23.3% trend increase for an off-exchange silver plan.  The 23.3% rate increase notification came out in October 2017, effective January 1, 2018.  The uncertainty of the individual mandate impacts the rate, however the overall trend increase, and how it impacts affordability, is the bigger story.  First let’s unpack the 23.3% trend increase.  My health plan shared that:

  • 3% was because of a federal tax on health insurers that will be reinstated in 2018,
  • 3% because of uncertainty about the mandate for individuals to buy health insurance, and
  • 2% based on changes to the federal risk adjustment program

On the California Department of Managed Health Care site, I found my health plan’s rate increase filings. In those filings there was a section called “Other Significant Factors Used in Rate Development, Regulatory Changes and Uncertainty”.  That section included the same three items that made up the 8% above, and an additional item:

  • 4.6% to cover the costs of the cost-share reduction (CSR) subsidies

For perspective, there were only a few plans in California who priced and offered health plans for 2018, with many other health plans dropping out of the market when the Federal Government took action to stop CSR payments.

California Department of Managed Health Care shows that my Health Plan’s Non-Grandfathered Individual Plans (on-exchange and off-exchange) being pooled together for the health plan’s rate increase justification.  Pooling allows the risk and costs within the pool to be spread across all in the pool.  This pool contains government paid for (subsidized) and individual paid for (non-subsidized) members.  Covered California reports on enrollees by plan and by subsidized, and non-subsidized enrollees for plans acquired through Covered California.  Comparing the subsidized Covered California enrollees to my health plans filings to the CA Department of Managed care reveals that 50.5% of my Health Plan’s Non-Grandfathered Individual Plan’s pool are non-subsidized, and 49.5% are subsidized.

Who pays for the cost-share-reduction benefit?

When the Federal Government took action to stop CSR payments the health plans were put in a tough position.  By regulation they need to provide a cost share reduction benefit for a subset of the subsidized population, yet the government said it will no longer make those payments.  My health plan responded to that action by increasing rates across the pool by 4.6%, to cover the costs of cost-share-reduction subsidies.

  • The non-subsidized Individuals (50.5% of the pool), will be picking up 50.5% the government’s CSR tab
  • The subsidized Individuals (49.5% of the pool), retain the CSR benefits and premium subsidies to cover the premium increase
  • The 50.5% of the non-subsidized Individuals in the pool also pay for other “Regulatory Changes and Uncertainty” increases

The American Academy of Actuaries July 2017 publication on “Cost-Sharing Reductions: What Are They and Why Do Then Need to Be Funded?” provides additional perspective on CSR’s.  In their analysis they point out that 7 million enrollees-or 58% of individual marketplace enrollees-qualified for cost-sharing reductions.  Individual “marketplace” enrollees, excludes the 43.1% of the pool that acquires individual coverage directly through insurance companies or other distribution channels.

  • Individual “market” enrollees = 100% of the enrollees in my health plan
  • Individual “marketplace” enrollees = 56.9% of the enrollees in my health plan
    • The subsidized Individuals (49.5% of the pool)
    • The non-subsidized Individuals who acquired coverage through the marketplace (7.4% of the pool)

An example of how subsidy eligibility relates to affordability?

To make the importance of subsidized versus non-subsidized vivid for you, let’s look at 2 couples in the 45-64 age bracket in Contra Costa County, CA.  One couple is just below the subsidy line and one just over.  The premium for the second-lowest cost silver plan is $ 2,259 per month.

  • Couple 1 earns $64,500 and is subsidy eligible. The estimated financial help is $ 1,745 per month ($20,941 per year).  The family share of premium is $514 per month, which is 9.56% of their income.
  • Couple 2 earns $65,000 and is not subsidy eligible. The family share of premium is $ 2,259, which is 41.7% of their income.

The premium is unaffordable for the not subsidy eligible plan participant.  Out of curiosity I went to a site to test what the penalty would be if the couple opted to not buy a regulated health insurance product.  The reply was that “you are likely exempt from the penalty because the lowest cost plan in your area is unaffordable.”  I got the same answer for income levels from $65,000 to $180,000.  Keep in mind that as premiums increase so does the upper end of the range.   For perspective the Median Income for a 45-64 couple in Contra Costa County is $101,444.  Also note that if the couples in the example were 34 the premiums would be 50% lower, and correspondingly the top line for affordability would move down.

When premiums become unaffordable, is the individual mandate relevant?

As premiums have increased across age bands the relevance of the Individual Mandate has gone down.  The need to report on a tax return that you have health insurance, and knowing that there is an Individual Mandate has motivated many to acquire Health Benefits, and correspondingly has reduced the number of uninsured.  As premiums increase rapidly and consume more of a family’s budget more individuals will need to size the penalty (if applicable) and assess other ways to mitigate health and financial risks.

The concept of pooling and the value of the mandate (when originally proposed) came with a vision to impact health affordability.  With a 23.3% health premium increase, 14.6% associated with “Regulatory Changes and Uncertainty” and 9.7% associated with Medical and Pharmacy costs, the Individual Market is on a troubling trajectory.  Whether the Individual Mandate is repealed, or not, the Individual Health Insurance Market and alternative approaches for covering health (and associated financial) risk will get attention in 2018.

Author: lewaltman
Lew Altman is managing partner of Lew Altman Consulting, where he works on product market fit, and business development strategy. He led sales and marketing teams for 15 years, and has been a strategy consultant for 10 years.

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