Connect for Health Sustainability: Premiums

Last week I discussed some of the problems with some of the initial work around Connect for Health’s financial modeling.  The next step is start breaking down the individual lines in the Connect for Health(c4H) . The first step is breaking down the top line revenue. An initial updated model can be found here.

There are two key assumptions in the revenue figures, enrollment and premiums, and a factor that is primarily in C4H control, the administrative fee for policies sold through the c4h. For the moment, we take the baseline enrollment figures as given  and only make adjustments based on other modeling.  That leaves the interaction between the administrative fee and premiums as the only remaining item to model.

The administrative fee is paid from premiums so to understand the relationship we need to build a simple model of premiums from the carrier perspective. The basic formula is
premiums = claims + administrative expenses + C4H fee
For this model, we can replace the 5% premium increase from the initial models to a 5% claim increase. We can also assume that a generic carrier is following the 80% medical loss ratio for administrative expenses. I’ve calibrated the model to reflect the initial c4H worksheet for first year premiums on the premiums worksheet. This simple model doesn’t reflect any adverse selection from the lower enrollments and appears to be inline with the intent of the original modeling while still enabling a response to the higher c4H administrative fees.

The next step is to understand how a change in the C4H administrative fee may impact the premium. We can include the administrative fee as a separate component of the premium. However, it is important to realize that the full cost of the C4H administrative fee is not reflected in the premium. Since the ACA also creates a single risk pool, a carrier that sells policies inside and outside of Connect for Health must charge the same premium for that policy. Since the administrative fee will not be collected on that policy but a portion of it is built into the premium, policies that are sold outside of Connect for Health help to tamper down the effective administrative fee.

The relationship between the amount of the administrative fee and the percent of administrative fee in the premium is not as simple as the proportion of Connect for Health enrollments in the total market. The ACA risk pool regulations only apply to legal entities. Therefore if an insurance carrier creates a new subsidiary to sell only on Connect for Health, for that carrier the percent of the administrative fee included in the premium is 100%. Creating a new subsidiary does involve some upfront and ongoing costs but if the administrative fee is high enough, carriers may seek to create Connect for Health only subsidiaries. Overall these means that paradoxically as the C4H administrative fee increases there is also a higher likelihood for more of the fee to be passed to consumers via the premium!

The final step is to adjust enrollment. Since health insurance is a normal good, as the price rises the amount consumed will decrease. For the completeness of the model, I’ve included this interaction. With the small effects currently seen in the overall premium adjustments this impact isn’t large but it helps an additional bit of fidelity and makes sure that this piece is included as the model gets more complicated.

The spreadsheet model accompanying this discussion can be copied and you can adjust the cells in yellow to see how different values impact the overall health of Connect for Health’s bottom line.

Take-Aways:

  • Connect for Health needs to consider industry and consumer reactions when changing financing assumptions
  • Carriers have methods of minimizing the impact of Exchange business from other lines of business

Caveats:

  • The current model takes claims as a given so this doesn’t include modeling of an adverse selection death spiral

Actuarial Disclaimer

This document should not be taken as statement of actuarial opinion or an actuarial communication under ASOP 41. It is intended to foster discussion without providing a specific finding.

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