Continuing with our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series, we weigh in on minimum loss ratio (MLR) requirements.
While the minimum loss ratio requirement—the idea that 80-85 cents of every healthcare dollar should go toward medical care—sounds good, it is out of step with the financial realities many insurers face. Claims do not always move in a predictable way, meaning that medical costs can be volatile. Previously, an insurer’s lower claim cost years could help balance out the higher claim cost years. However, under the MLR rules, insurers need to pay out rebates during lower claim cost years as opposed to building up reserves for higher claim cost years. This dynamic will be amplified if the individual mandate is ineffective and adverse selection ensues.
The MLR rules, as written, also present challenges to high-deductible health plans (HDHPs), because the MLR calculation only includes plan expenses, not patient expenses. These plans give consumers greater skin in the game, thereby encouraging more judicious use of care. Expenses to administer these plans are typically higher as a percentage of premium than they are for richer benefit plans. To the extent that the MLR requirement takes these plans off the table, it could also remove a possible cost-reducing concept from the mix.
The MLR rules challenge smaller insurers, which are more susceptible to the underwriting cycle because they lack the volume to absorb down years or to spread risk across multiple business lines. The MLR rules also do not allow smaller health plans to pool large claims across states, creating a significant issue for small multi-state plans.
Efforts are afoot to tweak the MLR rules and fix these problems, but that doesn’t change the reality that this rule is hard on insurers. The difficulty is exacerbated by new rating rules. Insurers face a low ceiling and a high floor, without much room to stand up.
This Healthcare Reform Briefing Paper discusses how to manage the volatility of the underwriting cycle in light of the MLR rule. Also, we recommend reading Milliman’s Consumer-Driven Impact Study for more on HDHPs.
We continue our blog series, “Ten strategic considerations of the Supreme Court upholding PPACA,” with a look at the potential implications of the Supreme Court health reform ruling on employer-sponsored insurance coverage.
Employers grapple with new options and plan requirements. Employers need to consider how the employer-sponsored insurance (ESI) model fits in their future. Many employers are intent on maintaining such benefits, recognizing a distinct recruiting and retention mechanism. Reports of ESI’s demise are premature as of this date. Employers will continue to review and amend their plans in efforts to control costs, and there are distinct advantages and cost pressures brought on by PPACA. There may also be new incentives for pursuing a self-funded approach, even by certain small employers. And the law does include some disruptive elements for ESI that bear watching. For example, many feel that the summary of benefits and coverage statements that employers must send to employees are burdensome and won’t be sufficiently useful to employees.
The change to Medicaid expansion could also complicate matters for employers. Under PPACA, employers with over 50 employees may be subject to additional plan affordability penalties for employees under 133% FPL—unless these individuals are Medicaid eligible. If a state does not expand Medicaid, employers above 50 lives may be subject to more plan affordability penalties than they would be were their state to pursue Medicaid expansion. In this sense, a state’s decision to expand Medicaid may have cost implications for employers. How will the anticipated healthplan costs for employers change now that low-income employees may not be able to qualify for Medicaid in certain states?
Learn more about employer-sponsored insurance here.
As part of Milliman’s blog series, “Ten strategic considerations of the Supreme Court upholding PPACA,” we consider the Supreme Court’s decision to allow states to opt out of Medicaid expansion and how it creates dynamic changes across the healthcare system.
Medicaid expansion just became a far more complex and variable proposition. The Supreme Court decision gives states the option not to participate in Medicaid expansion. In states that opt not to participate, there are big questions about how their Medicaid programs will function and how all this may affect the population that would have been Medicaid-eligible through the expanded coverage.
If a state does not participate in the Medicaid expansion, to what extent will those below the 133% federal poverty level (FPL) threshold qualify for premium tax credits and cost sharing subsidies?
Is a partial expansion possible? Are states that opt out of Medicaid expansion able to receive any portion of the enhanced federal funding available under PPACA through a partial expansion using waivers or a state plan amendment?
Are provisions of PPACA that are not explicitly tied to Medicaid expansion still in effect for states that opt out of the expansion? For example, will states have to abide by the primary care physician fee schedule increase that is scheduled for 2013 and 2014?
With the court upholding the exchanges and other components of the law, the interaction between Medicaid and these components creates a maze of issues for states, insurers, employers, and the uninsured.
For more comprehensive insight into Medicaid, click here.
In our previous post we announced the release of Milliman’s “Ten strategic considerations of the Supreme Court upholding PPACA.” Moving forward we will highlight each strategic consideration. We start by evaluating how “Adverse selection may still be a challenge”:
Guaranteed issue and community rating make the individual insurance market more accessible to the uninsured, but without an effective individual mandate these reforms create adverse selection. The key word there is effective. If enrolling in a healthcare plan is viewed as optional for U.S. citizens because the penalties have limited teeth, those who consider themselves healthy are less likely to enroll because it may not be in their immediate economic best interest. For pricing to be sustainable, these healthier people must enroll in order to balance out the insurance pool costs and health risk.
Milliman analysis on the effectiveness of the individual mandate indicates that much depends on a person’s household income, age, and family type. As the exchanges come online in 2014, many will be focused on the enrollment to determine how this theoretical underpinning bears out in actuality.
One new wild card: The court’s ruling on Medicaid expansion complicates the adverse selection question, because the decision raises access questions for certain low-income individuals. Which brings us to Consideration #2 [Medicaid expansion just became a far more complex and variable proposition].
For more Milliman perspective on adverse selection and the individual mandate read this Health Reform Briefing Paper and this research report.