MLR in a Biden and ARP world

Yesterday, I noodled about the risk adjustment implications of both the Biden Administration’s executive actions and passage of the American Rescue Plan’s new short term subsidy table.  Today I want to think through the implications of these changes for the Medical Loss Ratio (MLR).  MLR in the ACA individual market context requires insurers to spend 80% of qualified premiums on either claims or certain quality improvement efforts over a three year rolling average.  If an insurer in a given year comes up short with a 3 year MLR that comes in the 60s or 70s, the insurer then needs to send checks or premium credits to policy holders in proportion to the gross premiums that they paid in the last year of the three year window.  Currently insurers are calculating the 2018-2019-2020 MLR window for final settlement this summer and checks or rebates or premium credits to be distributed late summer or early fall 2021.

Yesterday I made some assumptions about the market:

Actuaries made the assumption that Open Enrollment for Healthcare.gov would freeze on December 15 for the 2021 plan year.  That is effectively not true as a second large enrollment period with plentiful publicity and supportive elite earned messaging as well as paid messaging is ongoing right now.

Actuaries made the assumption that the benchmark premium will cost someone earning 150% FPL (<~$19,000/year) will be about $60 per month.  That is no longer true.  The benchmark premium is now $0 for that individual.

These are major changes….

These assumptions were made by July 2020 to price plans for January 1, 2021. Plans were priced for a risk profile that mostly looked like the 2019 and 2020 covered life pools. Insurers also made a wide variety of COVID specific adjustments. Some insurers reduced premiums. Many insurers made no explicit COVID adjustment. A few insurers increased premiums as they guessed/estimated/projected that they would be paying some fixed fee for some number of vaccines on some number of doses as well as many insurers thought about catch-up care from Spring 2020 care deferrals. Last summer, I thought there would be a lot more variance between expectations and actual experience than normal as insurers were trying to price in a pandemic with a lot of broadly defined unknowns. From that assumption, I also would not be surprised if some insurers had low MLRs this year and some had high as different guesses will hit their bottom lines differently.

However, the Biden Administration policy changes are another curveball. The enrollment pool is changing.

I am assuming that the current wave of marginal enrollees, those people who are enrolling over and above normal “off-season” levels, will look a lot like marginal, price sensitive enrollees who signed up after December 10, 2020 for January 1, 2021 coverage. On average, these enrollees tend to be more price sensitive and healthier than the rest of the cohort…
We should also assume that some people who would have disenrolled for non-payment of non-zero premium will not disenroll or have their coverage terminated due to non-payment of premium as it is now far more difficult to terminate coverage for non-payment when there is no payment that needs to be collected.

I think that the risk pool is going to be a lot healthier (and a bit bigger) on average compared to July 2020 projections. A healthier risk pool will not be using as many services nor generating as many claims. Claims revenue will also increase as marginally attached individuals who were likely to have been terminated for non-payment of premium are still maintaining their now zero premium coverage while generating few if any future claims. I also think that some people will be buying up gross premium as both a 61% AV Bronze and a 64% AV Bronze may be zero net premium to them now but previously only the 61% AV Bronze plan was zero net premium.

There are going to be a lot more member months of people who are likely to be fairly light users even net of risk adjustment buying plans that were priced for a sicker risk pool than the one that they are actually covering. This is going to create, in my opinion, significant downward pressure on MLR again in 2021.