What to Expect for 2015 ACA Premiums: An Actuary Opens the Black Box
The Affordable Care Act (ACA) greatly changed how health insurers set premiums in the individual market starting in 2014. In spite of the uncertainty introduced by these changes, premiums for this year generally emerged better than expected, and CBO and JCT have lowered their estimate of average 2014 premiums in the exchanges by about 15 percent.1 Time will tell whether these premiums end up being too low, too high, or right on the mark for the population enrolled. While early enrollment snags in many exchanges fueled concerns about adverse selection and a possible spike in premiums for 2015, the late enrollment surge seems to have mitigated some of this concern.2
Well before the full 2014 experience is known, however, insurers must set their prices for 2015. Initial rate filings are already underway, and negotiations with regulators and exchange managers over the summer will determine final rates. In this essay, I describe the myriad factors that will be on the minds of health plan actuaries as they develop premiums, highlighting factors that will be more – or less – predictable and assessing their likely influence on future rates. This assessment is from a national perspective; individual state experiences will differ significantly based on whether they allowed insurers to extend non-ACA compliant policies beyond 2013 and their overall success in enrolling a large and balanced risk pool in exchange plans. Pricing updates also will vary across markets within a state and even within markets, depending on the characteristics of the local market and the insurers offering products.
Remember the Single Risk Pool
Under ACA rules an insurer must price for the individual market using a single risk pool that includes all of its enrollees in ACA-compliant policies, whether purchased on or off the exchange. Enrollees in catastrophic plans are excluded, as are those remaining in pre-2014 non-compliant products via grandfathering, early renewal or the extension of these products first permitted in November 2013. It is the exclusion of this latter group, largely expected to be better risks, that leads to concerns about worsening risk pools in states allowing such transitions. However, many off-exchange enrollees will be healthier people who were previously underwritten and “retained” by their insurer, offsetting some of the pressure for higher premiums based on exchange enrollment alone.
Some factors affecting insurers’ 2015 premiums can be projected with a fair amount of certainty. As always, actuaries will begin by using prior-period adjudicated claims to compute “trend” – that is, the rates at which cost per service, service use per enrollee, and intensity of service use have been changing for all of their privately insured enrollees. This factor will point to increasing premiums. They must then project this trend forward to the 2015 rating period by assessing whether utilization patterns of the 2014 enrollees differ from those underlying the trend (such as due to the new, very expensive drug for Hepatitis C) and developing expectations about whether the 2015 enrollees will look like the 2014 pool.
Insurers now assessing their 2014 enrollees will face data shortcomings but will not be completely in the dark. Many carriers will have claims for their pre-ACA enrollees who stayed with them in 2014 by moving into ACA-compliant products on or off the exchange. Actuaries at several insurers have told me they expect these enrollees to comprise up to three-quarters of their single risk pool – providing very significant insights for future pricing as well as a large share of enrollees expected to be healthier, on average. Similarly, insurers will know the risk profile of any enrollees continuing in their non-compliant plans and can estimate the impact of excluding them from the pricing pool.