(Part 6 of ?): Statement at 2017 Rate Request Public Hearing

July 6, 2016. As indicated in Part 5, the Maryland Insurance Administration (MIA) held a public hearing on the 2017 ACA rate requests. That hearing took place on July 6, 2016 and was open to all interested parties. For reasons I cannot comprehend, I was the only individual market consumer to make a statement. Maybe it’s due to a lack of knowledge of the event, other conflicts, or who knows what … or, maybe there just aren’t that many people that are upset about things. All I can say with certainty, is that the MIA was very accommodating. They allowed me to speak freely and without interruption. It is tough to go into a (well attended, just not by individual consumers) forum as the “anti” guy, but I was treated with courtesy and I sincerely thank the MIA for that. It is, quite frankly, the first time in two years that I have felt like someone actually cared enough to listen to anything I had to say with regard to the ACA. What follows is the statement I prepared for the hearing. Unfortunately, I have a tendency to speak from the heart rather than from “the paper” so I certainly did not read the statement verbatim. I did, however, follow the basic structure of the written statement and discuss the included points. In many respects, the statement constitutes a synopsis of the more detailed information included in Part 5.

Hearing Statement as Written. I am here today as a reluctant witness and documentarian. I have no desire to spend time I don’t have to spare monitoring developments, analyzing underlying data, and otherwise addressing various aspects of the Affordable Care Act as its implementation plays out in Maryland. Yet, I want to be sure that no one can claim ignorance of the practical impacts of the ACA. I am stunned at the publicly unrecognized burden this program has loaded onto the backs of responsible hardworking Americans trying to maintain their place in a disappearing middle class. I am stunned to have switched places with the previously uninsured. I am stunned to read of the great strides the ACA has made in reducing the rise in health care costs while witnessing coverage premiums and deductibles skyrocket. And I am most stunned that this is apparently not shocking to those responsible for either developing or implementing this program. Nine out of ten individual market consumers may very well get subsidies to reduce plan costs, but that is of no comfort to the tenth consumer responsible for supporting those subsidies.

In 2014, I paid (for my family of three) $4,889 in premiums for a $5,000 deductible (down from $10,000 due to a decreasing deductible feature) health plan. The premiums for the cheapest individual marketplace plan you approved last year are double that at $9,391, for a $13,100 deductible plan. If you approve the CareFirst rates as requested, the premiums for that plan will increase to $13,912, triple those of my 2014 plan. In three short years, the ACA would require a minimum additional annual expenditure of over $9,000 while increasing maximum annual outlays from $10,000 to $27,000. In effect, the ACA will charge just under $14,000 annually for what is effectively the right to self-insure with a catastrophic backstop. This is what is keeping that tenth of ten consumers, and probably a good fraction of those nine of ten subsidized consumers, awake at night.

I face these numbers and say no, not cost effective. In my case, the ACA has moved three individuals off of the insurance rolls and onto the health care roulette wheel. So why do I care what happens? Quite simply, because I am running a risk that I’d like to eliminate; but not at any cost. There is a cost effectiveness calculation that must be considered. How many $14,000 annual outlays (assuming no further increases) can I avoid before catastrophe strikes. Enough to justify the risk? Who knows? What kind of a health care program puts responsible individuals in the position of making such a decision? Since the ACA does just that, I have been forced to dig into the weeds to find out the how and why, and what I find does not make me believe that ACA designers have thought through even the most basic of program issues. Looking at the 2017 CareFirst request in a bit of detail will reveal a bit about why I come to this conclusion.

The publicized 12 percent rate request increase actually consists of individual plan changes ranging from a 10 percent decrease for the Catastrophic plan to a 41 – yes 41 – percent increase for the Bronze plan. Most perversely, the 41 percent increase is for a plan with a staggeringly healthy payout ratio of 50-59 percent (where the range results from inconsistent data in two of CareFirst’s source documents, the Unified Rate Review Template and the accompanying Actuarial Memorandum). Such a plan should be receiving a significant rate cut (as it also should have received during the last rate review cycle when it had a similarly healthy payout ratio). In contrast, Silver and Gold plans with experience period payout ratios ranging from 90 to 140 percent have requested rate changes ranging from a 0.4 percent decrease for the Gold plan to a 13.5 percent increase for the Silver 1500 plan. The rate increase for the 140 percent payout Silver 2500 plan is a meager 2.5%!

Accounting for previously approved 2016 rate increases that are not yet reflected in CareFirst’s experience period data, rectifies some of the lack of correlation between observed payout ratios and requested 2017 rate changes, but only magnifies the perversity of the Bronze level request. Adjusting CareFirst’s experience period data for the implemented 2016 rate changes, the 2017 rate changes that should be implemented to produce a full slate of 80 percent payout ratio plans are easily calculated as follows:

• A rate decrease of 44 to 73 percent relative to 2016 premiums for the Catastrophic plan (versus a 10 percent requested decrease);
• A rate decrease of 34 to 44 percent relative to 2016 premiums for the Bronze plan (versus a 41 percent requested increase);
• A rate decrease of 7 to 11 percent relative to 2016 premiums for the Silver 3500 plan (versus a 1 percent requested increase);
• A rate increase of 31 to 34 percent relative to 2016 premiums for the Silver 2500 plan (versus a 3 percent requested increase);
• A rate decrease of 9 percent relative to 2016 premiums for the Silver 1500 plan (versus a 14 percent requested increase); and
• A rate change ranging from a decrease of 6 percent to an increase of 8 percent relative to 2016 premiums for the Gold plan (versus a 0.4 percent requested decrease).

The appropriate rate change for all plans combined is an increase ranging from 2 to 7 percent versus a requested increase of 12.0 percent. Hands down winners; Silver 2500 plan holders. Overwhelming losers; Bronze plan holders. Every penny of the Bronze plan rate increase (if approved) flows out of the pocket of a Bronze plan holder and into the pocket of a Silver 2500 plan holder.

How can this happen? It appears to be traceable to an ACA rate review design flaw that calculates a rate index for all plans in the aggregate and then determines individual plan rates from that common index according to their respective actuarial values. Such an approach requires a non-existent set of ideal conditions, namely that historic premiums accurately reflected the economic value of each plan (they did not) and that external influences did not alter the economic values for individual consumers (they did). Premium and other subsidies such as co-pay, deductible, and maximum out-of-pocket cost sharing directly influence the behavior of a portion of the assumed common risk pool. This might be acceptable if rates were set on a plan-specific basis to isolate the effects of influenced behavior, but instead the effects of that behavior flow out of the influenced plans and into the rates of all plans. A full discussion of this effect is included in my longer comment letter, but the key point is that the effect manifests itself in the form of increased treatment and associated claims, thereby increasing required premiums. The effect is clearly evident in the CareFirst experience period data.

The fact that the ACA fails to account for its own external influence on plan-specific treatment behavior is precisely how a plan with a 50 percent payout ratio is slated for a 41 percent premium increase. If one accepts the premise of a common risk pool and premiums are properly set, there is no effective difference in setting premiums on the basis of individual plans or pooled plans. Properly priced plans should result in a random subset of the common risk pool being distributed across individual plans, resulting in a similarly random distribution of the common treatment behavior of that risk pool, so that there is no effective difference between treating properly rated plans individually or in combination. However, only a plan-specific rate review provides critical protection against historic rate errors and ACA-influenced consumer behavior. An aggregate plan rate review allows the effects of such influences to improperly propagate across plans.

Finally, it is appropriate to address the concept of actuarial value and its impacts on the rate setting process. The ACA defines actuarial value in terms of plan benefits with no consideration of plan premiums. This is an absurd construct since the economic value of a plan depends on both its benefits and its costs. A meaningful comparison of plans can only be made on the basis of economic value; actuarial value serves no useful comparative purpose. The ACA rate review process fails to properly account for such limitation. Surely it is easy to see that if I give you product for free and force your neighbor to pay a considerable sum for that same product that you will behave differently with regard to that product than your neighbor. Your neighbor has invested a considerable sum into procuring the product and may have only limited additional means to invest in its use. Conversely, you invested nothing for product procurement and are free to allocate all of your means to its use. I can further compound the effect by telling you that I will also pay a portion of your usage expenses. Obviously your ability to use that product becomes even more divergent from that of your neighbor even if you would have had identical behavior free of my influence. Your economic value for the plan is different from that of your neighbor. In other words, even a single plan with a specific actuarial value has an entirely different economic value to two consumers paying different premiums, and an even more divergent economic value when additional treatment-side cost sharing benefits are offered. When plan rates do not properly reflect economic value, as is the case when rates are determined on the basis of ACA actuarial value, there is no appropriate constraint on plan behavior.

We see similar myopia in some of the comments posted on the MIA website in response to the CareFirst rate request, where commenters compare premiums and wonder why they are not more in line with actuarial values. Why, for example, is the difference between Bronze and Silver plan premiums greater than the difference in their respective actuarial values? This is the nearsighted version of the ACA’s farsightedness. Here we look only at premiums, neglecting to consider that the plans also offer differential treatment-side economics in the form of higher deductible, co-pay, and maximum out-of-pocket costs. For example, Bronze plan deductibles are two to four times higher than Silver plan deductibles and over six times higher than the Gold plan deductible. These treatment-side cost differences function in combination with premium differences to determine the relative economic value of a plan. Expecting plan premiums alone to reflect actuarial value ratios is not realistic. Whereas the ACA assumes actuarial value is a meaningful metric even though it entirely ignores premium costs, the premium side only comparison makes the opposite mistake by ignoring non-premium costs. Only the combination of premium and non-premium costs reflects the true economic value of a plan.

Using CareFirst’s experience period data, we can investigate the economic value of each plan by comparing dollars of incurred claim per dollar of out-of-pocket cost paid (including premiums); in other words, dollars of benefit received per dollar paid into the system. Catastrophic and Bronze plan members receive benefits equal to about one third of their payments ($0.33 in benefits per dollar spent). Silver plan members receive $0.60-$1.10 in benefits per dollar spent, and Gold plan members receive about $0.90 on the dollar. Silver and Gold plans have considerably greater economic value than the lower premium Bronze plan and, due to a combination of subsidy effects and pricing errors, and this economic value differential is far greater than the difference in the design actuarial value of the plans. Whereas the actuarial value differs by roughly 14 percent between Bronze and Silver plans (actuarial values of 60 versus 70 percent respectively) and 25 percent between Bronze and Gold plans (actuarial values of 60 versus 80 percent respectively), we see about a 40 percent value differential between Bronze and Silver level plans and a 55 percent value differential between Bronze and Gold level plans. It is not hard to see who is paying the freight under the existing rate structure. However, if, as previously described, we properly set individual plan rates on the basis of individual plan performance, we can recalculate the per dollar expended benefits by plan. What we find is that the differences in plan-specific returns are almost exactly in line with the differing actuarial values of the plans. Bronze plan members receive a 10-20 percent lower return than the average Silver plan member, and a 25 percent lower return than a Gold plan member. To avoid continuing to penalize those consumers making the fewest treatment demands, it is imperative that rates be established on an independent plan-specific basis, not an interdependent aggregate plan basis.

As I said when I started, I am stunned at the seeming indifference to the various issues that underlie ACA data and that are readily available for all to see. I have a hard time believing that anyone would stand up and say that paying $14,000 in annual premiums for a health plan that is unlikely to pay a single dollar in benefit is something that we should all just take in stride. I have a hard time believing that people would simply absorb a $9,000 tax increase, yet that is the equivalent of what is happening under the ACA. This is serious stuff and someone needs to draw the line. Where are the savings from getting the non-insured out of the emergency rooms? Surely these costs were previously passed along to pre-ACA insureds in the form of increased premiums, yet we still witness a tripling of rates under the ACA? How can this be? Where are the savings from enrolling the healthy young? Is it just the individual market that is taking it on the chin, and therefore of no concern to any but the affected minority?

I urge great caution in your deliberations as you consider rates for the individual market, to consider very carefully the impacts of your decisions on those who do not receive subsidies. The subsidy cutoff is not at a level where the affected individuals are sitting around wondering where to throw their money. If approved, the 2017 ACA premiums alone for the cheapest CareFirst plan would represent 17.3 percent of annual gross income for a family of three making four times the 2016 Federal Poverty Level. Consider also that the self-employed are considered employers, responsible for paying 15.3 percent of their income to cover Social Security and Medicare taxes (but yet are not employers eligible for employer-based insurance under the ACA). Together, these two expenses alone would cover one-third of the annual gross income for that family of three. Did anyone truly envision a health tax that was larger than Social Security and Medicare combined, and that did not provide a single dollar in benefit until an even larger deductible was satisfied? Now add in federal income tax, state income tax, county income tax, sales tax, gasoline tax, property tax, automobile insurance, and home insurance? And if there is a dollar left over after housing, food, transportation and education costs, retirement savings which are paid entirely out-of-pocket by the self-employed. Are we really wondering why there is a disappearing middle class?

In closing, I expect it would be quite revealing to go around this room and have each person reveal the out-of-pocket premiums and deductibles for their health care plan. Keep in mind that the self-employed also have the privilege of paying a portion of any subsidies that are offered in the form of employer cost sharing, either through taxes or increased product prices. Those of us that do not have the luxury of a cost sharing arrangement would appreciate a diligent rate review conducted with full knowledge of the impacts that your decisions carry. Thank you.

What’s Next. While the MIA goes about its business of coming to some conclusion with regard to the 2017 ACA rates, I guess I should probably start tracking down the status of my 2016 exemption hearing (as requested in March). Just another well greased cog in the ACA machine. I will follow-up with another installment of this saga when warranted.

Amazingly enough, that need presented itself less than a month after this post, when CareFirst submitted a revised 2017 individual market rate request. That request is the topic of my Part 7 post …

Posted July 12, 2016Questions or comments can be sent to aca@meszler.com