Rate setting, optimistic actuaries and pandemics

Overly-optimistic actuaries are a good way for an ACA individual market insurer to lose money.

Actuaries and benefit managers are trying to price out their ACA plan offerings for 2021 right now.  CMS requires initial rate filings to be made by the start of June with final rate submissions at the end of July.  Some states have earlier deadlines.  Pennsylvania wants initial filings in mid-May. After insurers file an initial rate, they engage in a back and forth with their state regulators, whose primary concern is solvency, to get to a final rate. The final rate will often incorporate new information and claims experience that has emerged in the several months between initial filing and final approval.

Actuaries have a process to generate a rate filing.  They use the most recent year of complete data, in this case 2019, and then apply a model that accounts for changes in the population, changes in network and technology, changes in payment levels and changes in underlying health status to come up with a rate that is not inherently banana-pants.  This process works reasonably well when the recent past can reasonably be assumed to be a decent approximation of the near future.

The ACA had an optimistic actuary problem in 2014.

No actuary in 2013 really had a good idea what the 2014 guaranteed issued, community rated, subsidized individual health insurance market would look like.  The price linked subsidy system of the ACA where the benchmark premium is locally determined by the premium of the second cheapest silver plan means that every insurer was competing to be the cheapest silver plan as the insurer with the cheapest silver plan determines what the second cheapest plan is.

Actuaries were pricing off of consultant reports and guesses at the underlying health status and premium sensitivities of the covered population.  Some insurers thought that the market would look like COBRA.  Others thought it would look like Medicaid, and more thought it would look like large group, commercially insured.  Since the actuaries had no clue what the 2014 population would look like, they took educated guesses. And if we assume that most insurers have fundamentally similar enough cost structures with the exclusion of the Medicaid Managed Care insurers like Molina and Centene/Ambetter, the insurer with the most optimistic guess as to the relative health of the population would price lowest and “win” the price war.  That “win” led to a low price level in 2014 and 2015 that was significantly below claims costs.  It was a failure of a first price auction where the most optimistic predictors won marketshare by pricing too low to cover claims costs.

The ACA may have an optimistic actuary problem in 2021.

Right now, there is massive uncertainty as to what utilization and health profiles will look like in 2021.  We can assume that individuals who have been on ventilators in 2020 will need continued, elevated levels of care in 2021.  We can assume that significant number of procedures that either have already been cancelled or will be cancelled as hospitals make space for COVID-19 treatment will eventually be performed in 2021 or 2022.  We can assume that some of the regulatory steps that are greatly expanding the licensed clinical workforce such as full scope of practice laws for master-level clinicians and far more telemedicine/distance medicine, will both continue.

• How many people will have COVID-19 and be ventilated in 2020 and need extended follow-up care in 2021?
• How many people will have COVID-19 in 2021 and be hospitalized?
• What does a provider network look like in 2021 after all of the clinicians have been infected with COVID-19 in 2020?
• How many procedures that were deferred in 2020 will be people try to schedule for 2021?
• How does telemedicine and master level clinicians bill in 2021?

All of those are among the dozens of known uncertainties.  Experts can reasonably choose different points on all of these questions as to what the plausible future of 2021 looks like.  Some experts will have an almost random distribution of what they think 2021 will look like on these questions.  Some experts will be uniformly more pessimistic or optimistic than average on each question.

The optimistic actuary who thinks that there won’t be a ton of COVID-19 2020 cases that need follow-on care in 2021 and that the provider networks will be as broad or broader with more low cost master level clinicians who can perform most services on an outpatient, non-facility fee basis while most deferrable procedures won’t be rescheduled will produce a very different premium than an actuary who thinks that there are a ton of people leaving the ICU who will have long lasting and costly health shadows of the future while also expecting hot spots to break out in 2021 even as most of the deferred care comes rushing back to mostly inpatient settings in 2021.

Right now as actuaries are preparing their initial rate filings, good faith error bands are going to be huge.  I expect rate filings in May to have huge variation in initial rate increases between insurers with similar 2019 and 2020 rate structures just because Company A will be more optimistic than Company B on some measures as we won’t have any clue what is happening with COVID19.  However, I also expect rate requests to converge significantly on final approval as the extra few months of information about the peak and scale of the COVID19 experience will dramatically reduce the variance in optimistic and pessimistic actuaries.

So as rates are filed in the next six to eight weeks, expect to see some eye-popping requests and some numbers that just seem a bit low.  Those will change as we know more.