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From Spencer's Benefits Reports In two separate papers published in September as part of a series examining Critical Issues in Health Reform, the American Academy of Actuaries reviews administrative functions and expenses currently assumed by health insurers and the potential impact of merging the individual and small group insurance markets.
Administrative Functions, Costs
The administrative functions (as identified by Sherlock Company, an insurance industry analyst) and costs, as estimated by the Blue Cross and Blue Shield Association (BCBSA), of current health insurers are categorized as follows:
The total median estimated cost of administrative services now provided by health insurers is $25.36 or 10.4% of premium. However, these costs vary depending on the size of the insured group and the level of service. For example, the BCBSA’s administrative expenses per member per month are estimated at $69 for Medicare Advantage managed care plans, but only $19.07 for administrative services only self-funded plans. Estimated administrative expenses for small groups represent 12% to 13% of premium, plus 2% to 5% for insurance broker commissions. For the Federal Employee Health Benefits Program, for which the federal government administers some of its functions, the BCBSA’s administrative expenses represent only 5.7% of the premium.
Other expenses that insured health care plans face are state premium taxes (typically 2% of premium), assessments, and fees; as well as maintaining adequate financial reserves, which at a minimum requires 25% of premium. To maintain reserves, insurers rely on investors and sponsors who require competitive returns (about 15%), which leads to a premium load of 3.8% and a premium increase of at least 7%. Insurers also must insure against health care inflation, adding another 3.8% to premium costs.
Administrative costs as a percentage of Medicare spending appear to be much lower than those of commercial plans. Furthermore, the reported Medicare administrative costs reflect only the cost for contracted Medicare plan administrators and not the government’s administrative costs for the program. In addition, Medicare enrollment and billing are done by the Social Security Administration; provider payment rates are legislated, not negotiated; Medicare is not required to meet solvency or capital requirements (nor are self-funded plans), and it exercises minimal controls for fraud and abuse.
Merging Individual, Small Group Markets
Merging the individual and small group markets, as has been proposed for health care reform, would result in higher premiums for individuals, the Academy claims. Because the guaranteed issue requirement that currently applies to the small group market would apply equally to individuals, younger, healthier individuals would assume some of the higher risk of a mixed health group. Increased cost likely would cause individuals to drop coverage. The Academy added that, if the tax treatment of health insurance is equalized between individual and group insurance, younger, lower-risk individuals might opt to purchase individual coverage rather than enroll in the group health plan.
Currently, there are major differences between the individual and small group markets, including marketing, underwriting, and rating, depending on different states’ rules.
If HIPAA regulations for the small group market are applied to the merged market, then existing individual policyholders (effectively being rated as a “group of one”) could enter the merged market at a rate for a lower-risk individual and then experience premium increases after claims are paid for that individual. In the current individual market, premiums generally do not increase with individual claims.
The Academy cites the Massachusetts Connector as an example of a health insurance exchange—the Connector budgets 3.5% to 4.5% of premium for administration.
Key issues that might arise out of proposals to grandfather existing small group and individual contracts include “management of existing small groups through careful pricing and transition rules to avoid the immediate movement of groups eligible for lower premiums; leaving those remaining to pay higher premiums and create rate spirals; and maintenance of equity for individual policyholders, especially those previously underwritten at issue if new entrants to the pool are not underwritten. Alternatively, existing small group pools may actually see improved pricing as those otherwise uninsurable join the new pool, leaving the lower-risk individuals to receive prospectively lower rates and putting increased upward rate pressure on the new pool.”
According to the Academy, “Absent an enforceable and effective mandate, guaranteed issue requirements in the individual market, without any financial penalties, encourages individuals to delay the purchase of insurance until they know they have a need for services, resulting in unaffordable premiums for everyone. If such a guaranteed issue individual market is merged with the existing small group market, we would expect to see rates in the combined market to eventually increase overall. The magnitude of the increase would be dependent upon several factors, including the rating factors allowed in the expanded small group market. In fact, rates may increase very rapidly if employers and individuals realize that they can defer the purchase of insurance until there is a need for care.
“If insurers lose the ability to adjust premium rates based upon the emerging claims experience of the group (current small group rate provisions often allow an additional rate adjustment for experience, frequently limited to a certain percentage) they [insurers] may exercise greater diligence in risk selection (e.g., through marketing strategies, nonmedical underwriting practices, etc.).”
For more information, visit http://www.actuary.org/.
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