Wall Street Analysts Predict Rate Shock in Exchanges and Ripple Effects on Hospitals

CQ HEALTHBEAT NEWS
Dec. 19, 2012 – 4:57 p.m.

Wall Street Analysts Predict Rate Shock in Exchanges and Ripple Effects on Hospitals

By John Reichard, CQ HealthBeat Editor

Centers for Medicare and Medicaid Services officials will have a busy 2013 figuring out how to creatively use their regulatory powers to lessen rate shock in the new health insurance exchanges set to begin enrolling people next fall, Wall Street analysts predicted Wednesday.

Ways to forestall such increases include postponing the movement of enrollees in the state Preexisting Condition Insurance Plan into the exchanges and slowing the implementation of a “rating band” requirement that will sharply increase prices for the young, suggested Wall Street analysts who follow the private health insurance industry.

The forum was the annual Wall Street Comes to Washington Conference sponsored by the nonpartisan Center for Studying Health System Change.

Carl McDonald of Citi Investment Research and Analysis said he agreed with the recent Aetna executive’s prediction that consumers in the individual and small-group market will see hefty premium increases because of the requirements in the health care overhaul law (PL 111-148, PL 111-152).

“I think he’s right. I think if you’re looking at the individual market, somewhere between 20 and 30 percent average increases in 2014.”

McDonald and other analysts said those relatively high prices mean insurers are unlikely to pay hospitals the relatively attractive payment rates that commercial insurers pay.

McDonald broke down the 20 percent to 30 percent increase in premiums in 2014 because of the health care law. He said that even without the law, there would be a 5 percent base premium increase. Add to that a 3.5 percent per-member fee that insurers will have to pay to fund exchange operations. Then include an additional 2.5 percent for fees that insurers must pay to help fund the health care law and another 2.5 percent charge for a reinsurance pool the law creates to cushion insurers financially if they have unusually costly enrollees. That’s 13 percent.

But that’s not all. On average, individual insurance plans now have leaner benefits than they’ll be required to offer in the exchanges. That could push the increase “into the mid-20s,” McDonald said.

“You’re going to have situations where some people are faced with 100 percent plus rate increases in ‘14 … and you’re going to have some people who actually see rate decreases” such as “people who are 64 and sick.”

McDonald said that range of effects stems from the rating band requirement that says premiums can vary based on age by no more than a factor of 3-to-1. Now in many markets older people pay an average of six times more than younger people.

“The practical implications of 3 to 1 are that you’ve got to raise your prices on the young and healthy people very significantly so you can charge your oldest and sickest people enough.” McDonald added that “I think the result of that is that over the course of ’13 there’s going to be a long discussion among regulators about ‘how do we prevent this from happening.’

“CMS has suggested one solution, which is keep the high-risk pools intact in 2014,’’ he said. That means the high-cost people now in the high-risk pools wouldn’t get coverage through the exchanges in 2014, he explained. “If that happens, plans don’t have to price for it.”

How quickly the age bands are implemented could also be reconsidered. “Do we have to go to 3-to-1 in 2014?” McDonald said. “Or can we phase it in – 5-to-1 in 2014 and 3-to-1 by 2017?”

Size of Penalties Pressure Premiums

Deutsche Bank analyst Scott Fidel added that the age rating requirement intersects with the relatively weak financial penalties for not buying coverage in a way that puts upward pressure on premiums.

Faced with relatively high premiums, the young will pay a relatively modest penalty if they don’t buy coverage. “One month’s premium increase for them will be more than what the penalty would cost for the entire year,” he said. As a result, they could drop out, leaving plans with sicker and older enrollees and higher premiums as a result.

The structural elements of the health care law designed to bring down premiums for the older and sick “is one of the most challenging elements of the ACA,” Fidel added.

Urban Institute analyst Robert Berenson, a top Medicare official in the Clinton administration, agreed with the analysts. He noted that problems with higher premiums could be particularly great in states that are cool to the health care law and don’t actively try to get the young to buy coverage in exchanges.

“The people who we know will get in are those with high health care needs. This is a very good deal for a 64-year-old with health care problems,” Berenson said.

“States that sort of don’t want to do this and don’t want to actively implement the ACA are probably the states that are going to suffer the worst from the rate shock and need to sort of understand that and try to really be actively bringing in the relatively healthy subsidized population,” he said.

The analysts predicted many insurers will be drawn to the exchange market because their customer base isn’t growing and the health care law creates about 30 million potential new customers.

Big national companies and regional Blues plans will be among the companies offering coverage in the market, they predicted. But they expressed doubt that any insurer is going to come in and try to grab market share right away. That suggests no one is going to come in with aggressively lower rates to win more customers and help exchanges with their sticker shock problem.

The exchange market is a new one for insurers, and they won’t want to dive in and get socked with high costs and then raise prices and lose customers, analysts said. Compared to plans coming into the market for Medicare Part D prescription drug coverage in 2006, insurers are “going to be a lot more conservative and a lot more measured,” CRT Capital Group analyst Sheryl Skolnick said.

A major topic at the forum was how hospitals would be affected by the competitive pressures on health plans in the exchanges. Would plans competing in exchanges pay hospitals low Medicaid rates, higher Medicare rates, or, highest of all, commercial insurer rates? Skolnick observed that if plans paid close to commercial insurer rates, a significant cloud hanging over the future of the hospital industry would be lifted. But the analysts doubted that would happen because plans already face upward pressure on premiums they will charge in exchanges.

Fidel said he doesn’t see how health plans in exchanges could be affordable if they pay close to commercial rates. Lisa Goldstein, managing director of Moody’s Investors Service, said her company does not expect insurers in exchanges to pay close to the rates that commercial insurers pay.

Source: CQ Online News

Same-day coverage of the people and events shaping health care policy from Washington.

© 2012 CQ Roll Call All Rights Reserved.

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