CALPERS projects a minor rate increase due to COVID

CALPERS which runs California’s public employee pension and retirement benefit system released their health insurance projections for 2021 recently:

The overall impact of COVID-19 on CalPERS’ 2021 rates will be a modest 0.57%. Factors included in projecting COVID-19’s impact included the savings due to delayed and deferred care this year, which CalPERS was able to use to reduce rate increases for next year.

This is well within the boundaries of what ACA individual market insurers are projecting. Most insurers, in their late spring and early summer initial rate filings, project no impact on rates.  A few project 7-10% rate impact.  The big questions that influence pricing is the interaction of effective treatments and prevention which will increase short run costs and the long and unknown story of averted care and how much and how quickly some of that care is done in the last quarter of 2020 and most of 2021.

Current rate filings and rate announcements last looked at claims experience in late June.  Late June claims have idiosyncratic and non-random submission for the month of June.  Late June data runs means May is mostly fuzzy but somewhat reliable data.  Late June data runs can use April with high confidence that they are seeing most of the action that actually happened.  Normally this is fine.  Insurers have ways to estimating what is likely to still be sitting on an accountant’s desk somewhere or what is slowly meandering its way through the payment and adjudication systems.  These Incurred But Not Reported (IBNR) methods rely on the assumption that this year fundamentally looks similar to last year with slightly different levels and day of the week and week of the year adjustments.  However COVID is a massive discontinuity that could plausibly blow up IBNR assumptions.

More importantly than IBNR is that we have had a significant change in the shape of the assumed future between late May and today.  In late May and most of June, there was a broad if not universal assumption that we could see a summer lull with a fall second wave.  The summer lull would allow for the catch-up care deficit to be reduced which would lower 2021 claims costs that could be attributed to catch-up care.  In mid-July, we realize that we are still in the first wave in most of the country.  Insurers with overwhelming exposure in only New England are unlikely to see a big dissonance between their May assumptions and July assumptions about the future reality.  However insurers in California, Arizona, Florida and elsewhere could be seeing a big discrepancy between assumptions and reality.

Now does this matter?

It might!

If we think that there is a lot more care getting deferred and pushed back into 2021 as hospitals are restricting elective and deferable procedures, then 2021 premiums could be too low and 2020 premiums could be too high.  The ACA Medical Loss Ratio (MLR) regulations are likely to send significant and unanticiapted rebates back to enrollees in the Fall of 2021 if this comes to pass.  Insurers will also be able to use this year to build reserves if they don’t redistribute windfall profits out as hookers and blow to key stakeholders.