Insurers raised their rates too high in 2017

The Kaiser Family Foundation just issued a new data brief on the claims and premiums of the individual market in 2017.

I want to highlight one graphic that tells me that insurers raised their rates too high in 2017.

Insurers needed to raise their rates in 2017. They can’t run at an Medical Loss Ratio above 100% where they pay out more in claims than they take in premiums.  They need to be able to pay their claims plumbers (like me) and their medical directors and their customer service reps.  Medicare runs at about a 96% MLR so the $348 Per Member Per Month (PMPM) claims expense  in 2016 backs into a $363 premium at Medicare efficiencies.  No private insurer will have an admin percentage as low as Medicare.  Very well run private insurers break even at roughly 90% MLR.  That would have implied a 2016 average premium of about $386 PMPM while typical insurers break even around with an 85% MLR which implies a 2016 average premium of $409 PMPM.

2017  claims PMPM increased by just under 5%.  That is going to be some combination of an increase in the number of services used per person and the price per service.  5% claim trend is not bad at all.  But premiums increased by 22%.

Insurers overshot their 2017 premium estimates significantly compared to their claims expense.  Best in class insurers which break even at 90% MLR would have suggested an average premium PMPM of $403 while typical insurers at an 855 MLR would have suggested an average $427 PMPM premium.  This would have been an 11% to 17%  increase in average premiums being announced in a few weeks before the 2016 election instead of the much higher rates announced.

And we need to caveat further.  This graphic does not make any adjustments for the termination of Cost Sharing Reduction (CSR) subsidies.  If CSR was paid normally through the end of the year, MLR would have been lower than the actual 82%

In 2017, following relatively large premium increases, individual market insurers saw significant improvement in loss ratios, averaging 82%. Though 2017 annual loss ratios are impacted by the loss of cost-sharing subsidy payments during the last three months of the year, this is nevertheless a sign that individual market insurers on average were beginning to stabilize in 2017, better matching premium revenues to claims costs.

2017 rates were too high if we were to assume no major morbidity shocks to the risk pool.

As a side note, we should expect to see some more MLR rebate checks being cut this fall for 2018 as well as a lot of MLR checks getting cut in the fall of 2019 as the CSR compensation rate hikes were being added onto a base that was too high already for the underlying claims experience.