Healthcare Underwriting Under the Affordable Care Act

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August 5, 2011

Healthcare Underwriting And Rating Under the Affordable Care Act

Summary:

The Patient Protection and Affordable Care Act has significantly changed the way health plans do business and will do business. This creates considerable uncertainty and risk for the health plans. Since health plan costs have increased far more rapidly than anyone wishes, any further influence to increase health care costs is unwanted by most. Very recent reports suggest that US health care will exceed 20% of GDP in the very near future. How much more can we absorb? No one really knows, but we are so close to that point that other changes are needed to help stop the rise.

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The health care reform act, known as the Patient Protection and Affordable Care Act (PPACA), was quickly passed and unfortunately includes many inconsistent and incomplete provisions. Major fix-ups are being incorporated to make it possible to actually enforce (e.g., loss ratio definitions, loss ratio oversight, integration with insurance departments, etc.). Some new provisions are being included, for example, the August 2011 addition of copay free contraceptives. Although the country is politically polarized regarding the Patient Protection and Affordable Care Act, it actually does include some significant improvements and benefits over what we have today.

The Patient Protection and Affordable Care Act introduced several benefit changes including:

  • No copays, deductibles or limits on preventive services
  • Basic definitions of benefit levels (i.e., bronze, silver, gold, platinum)
  • New benefit requirements (i.e., maximum child age, contraceptives, etc.)

The Patient Protection and Affordable Care Act also formally introduced comparative effectiveness and value based benefits to improve the cost of care. As time passes, we anticipate other additions. Most of the changes increased near term costs.

The Patient Protection and Affordable Care Act introduced restrictions on several aspects of underwriting and rating:

  • Medical underwriting for the purpose of setting rates (i.e., no more medical questionnaires)
  • Use of ancillary information to set rates (i.e., prior pharmacy use)
  • Rejecting coverage for prior medical reasons
  • Gender-specific premium rates or premium rating factors, even though females generally have greater costs than males.
  • Breadth of rate differences (i.e., ratio between high and low)

For at least the near term, the Patient Protection and Affordable Care Act permits other rating practices that are in place:

  • Age rating (i.e., use of age based rate differences)
  • Group experience rating (i.e., use of prior creditable experience to set rates as long as they aren’t based upon specific experience of individuals)
  • Standardized rate tables for use in exchanges
  • Use of 2-tier rating structure (i.e., single vs Family coverage). The regulation appears to outlaw the very typical 3-tier rates (i.e., single, 2Party, Family).

On the horizon we expect additional market movement to Value Based Benefit design. These have been used to somewhat of a limited extent to date, but the Patient Protection and Affordable Care Act encourages the use of these as an attempt to reduce health care costs and to “bend the trend downward. There is limited evidence these programs accomplish this, but there is great hope that it will. Groups continue to explore whether or not there are advantages by
paying the penalty and terminating their benefit programs. Many have concluded that in this economy they have no choice. Exchanges are increasing in popularity and the use of private exchanges to compete with the public ones is emerging in more markets. Many experts believe that the individual mandate to purchase health insurance will be tossed out, although this is still up in the air.

One of the big items impacting the health care system for the older and less fortunate individuals in the country is the Medicare professional payment levels. Medicare regulations provide the government with an opportunity to reduce payments (i.e., currently estimated at more than 30%). This adjustment has been deferred for several years, primarily from political fallout reasons and a desire to not disrupt the system. The fiscal challenges facing the government right now likely increase the probability that some adjustment such as this will occur. This will have a significant impact on the health care system with the likely result of increasing charge levels for everyone else. In addition to the financial impact of raised fees, it will likely impact the ability to access providers.

The Patient Protection and Affordable Care Act has significantly changed the way health plans do business and will do business. This creates considerable uncertainty and risk for the health plans. Since health plan costs have increased far more rapidly than anyone wishes, any further influence to increase health care costs is unwanted by most. Very recent reports suggest that US health care will exceed 20% of GDP in the very near future. How much more
can we absorb? No one really knows, but we are so close to that point that other changes are needed to help stop the rise.

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About the Author

David Axene started Axene Health Partners in 2003 after a successful career at Ernst & Young and Milliman & Robertson. He is an internationally recognized health consultant and is recognized as a strategist and thought leader in the insurance industry.

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