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Strategic implications: Rate review scrutiny and no risk selection: Something’s got to give

Next in our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series we discuss the challenges insurers face as they balance the removal of traditional cost-control mechanisms and increased rate review scrutiny.

PPACA has brought about increased scrutiny of rate increases, and it seems likely this will continue. But with a 10% increase now deemed potentially “unreasonable” by federal regulators, and with traditional underwriting/risk selection taken out of the system, there are all the signs of an inevitable collision. An influx of less-healthy people could make it very difficult for many plans to stay below the 10% ceiling without losing money and risking financial instability. If the individual mandate works as hoped, this may be mitigated. Risk adjustment, reinsurance, and risk corridors are also supposed to help with this issue, but will they be enough? This is one to watch.

Want more information? Here are good resources about risk adjustment and reinsurance.

Ten strategic considerations of the Supreme Court upholding PPACA

Milliman today released analysis of the Supreme Court’s 5-4 decision upholding the Patient Protection and Affordable Care Act (PPACA). With the court effectively ruling the individual mandate and other elements of the law constitutional—with the notable and complex exception of certain aspects of Medicaid expansion—healthcare stakeholders can turn their attention to implementing healthcare reform.

“Since 2009, Milliman has been working with its clients to prepare for and implement the healthcare reform law,” said Clark Slipher, Milliman Health Practice Director. “With the law’s constitutionality bound up in court, it’s been an uncertain time for our clients, which include insurers, employers, providers, and state and federal governments. This ruling clarifies the road ahead for American healthcare, and while it is reassuring to know where we are going, healthcare stakeholders face many strategic challenges that will require innovation and sound financial planning in the years ahead.”

Strategic considerations facing healthcare stakeholders include:

  1. Adverse selection may still be a challenge. Even with the individual mandate in place, the success of many insurers under PPACA will depend on their ability to minimize adverse selection.
  2. Medicaid expansion just became a far more complex and variable proposition. The court’s decision to allow states to opt out of Medicaid expansion creates dynamic changes across the healthcare system.
  3. Employers grapple with new options and plan requirements. While reports of the demise of employer-sponsored insurance coverage are premature, these plans still face many potential changes.
  4. What is the effect on early retirees? The role of the employer in covering those between 55 and 65 may change under PPACA.
  5. Rate review scrutiny and no risk selection: Something’s got to give. Keeping rate increases under 10% may become more challenging with many of the traditional cost-control mechanisms no longer available to insurers.
  6. Which states will get on the exchange bandwagon? With the Court decision minimizing uncertainty, there may be increased incentive for states to fast-track exchange planning.
  7. Minimum loss ratios (MLR) pose an ongoing challenge for insurers. Insurers have struggled to comply with the MLR requirements, and increased volatility in medical costs potentially brought on by adverse selection may compound the difficulty for insurers.
  8. Risk adjustment is essential. A new reform calculus is required with traditional risk selection techniques such as medical underwriting no longer allowed.
  9. Will cost shifting hold steady, increase, or decrease? Subsidies, rating restrictions, and an effort to achieve universal coverage all introduce new cost dynamics for insurers, providers, and policyholders.
  10. The cost problem persists. What can be done about it? Certain aspects of PPACA have the potential to affect costs, but this potential needs to be actualized in order to moderate annual cost increases that regularly exceed other consumer spending.

For more detail on each of these strategic considerations, see the full article. To receive regular updates on Milliman’s healthcare perspective, visit our healthcare reform library or follow us on Twitter.

HCR strategic consideration #2: Rate regulation

Continuing our discussion of key healthcare reform (HCR) implications facing health insurers this year, we turn to the topic of new rate review regulations.

Another challenging provision in the PPACA legislation requires the federal Department of Health and Human Services (HHS) to work with state insurance commissioners to conduct an annual review of “unreasonable increases in premiums.” The law does not clearly define what constitutes an “unreasonable” increase and what the states and/or HHS will do with this information, though recent proposed regulations have begun to clarify the intent. It may be that this provision is primarily meant to ensure transparency in the rate-setting process; whether it will lead to tighter rate regulation in all states is not yet clear. HHS has emphasized that this is not a “one-size-fits-all” regulation and that authority still resides with the states, where current practice varies substantially. Some state insurance departments conduct thorough actuarial reviews of rate-increase requests, whereas some exercise only minimal regulatory action.

Some states have already begun to take a tougher stance against insurers’ requests for rate increases; others that have not done so to date may be compelled to increase scrutiny under the new regulations. HHS itself has no statutory authority to regulate premium rates. In states where the insurance department has little or no authority to regulate rates, HHS grant funds can be used to lobby the legislature to expand the insurance department’s statutory authority. Additional uses of the grant money include improving or enhancing the existing rate regulation and approval process.

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