Consumer Watchdog's Public Comment On Health Net's CA "Exchange" Rates
The main provisions of the Affordable Care Act take effect in just six months. Any Californian who cannot afford health insurance, or is paying too much now, or has watched her benefits whither away, will look to California’s new insurance exchange, Covered California, for alternatives. New subsidies will increase access to health coverage by providing premium assistance to millions of working families. But what of those consumers who do not qualify for subsidies? Will new market reforms increase their access to health coverage? The answer lies in the cost of coverage. If the exchange can make health insurance more affordable for working Californians who are shut out or squeezed by the current system, it can succeed.
Executive Summary
Health Net was one of 13 participating insurers to submit rate plans to Covered California last month. Consumer Watchdog reviewed the rates proposed by Health Net for the PPO plans it intends to sell in the insurance exchange.
The rate filings submitted last month to Covered California by Health Net and other participating insurers are for new individual-market plans that have never before been sold. These public comments therefore focus not on a proposed rate increase, but whether the proposed rates for these new plans are reasonable or unreasonable.
With the assistance of an actuarial analysis by AIS Risk Consultants, Inc., Consumer Watchdog has determined that Health Net’s May 23, 2013 individual PPO rates for Covered California are unreasonable.
An estimated 68,411 individual consumers will pay these rates for plans that will be newly available for enrollment on October 1 of this year, and will go into effect on January 1, 2014. The total annual premium revenue resulting from the proposed rate is $276.6 million.
The average monthly cost of coverage will be $337.09. This results in an annual average premium of $4,045. For adults (over 21), Health Net proposes rates, which will vary based on age and location, from a low of $128.07 a month, to a high of $1192.50 a month.
As the attached actuarial memo prepared by AIS Risk Consultants, Inc. explains in more detail, Health Net’s rate plan relies on unreasonable assumptions about how sick the individual purchasers of these new health plans will be. By projecting new enrollees will use dramatically more health care services in the future compared to its current policyholders, Health Net claims that a higher rate is necessary. If the company used more reasonable projections, rates would likely be at least 20% lower than Health Net proposes, or an average $67 a month, for the thousands of Californians who will soon purchase Health Net PPO coverage in the exchange.
SUMMARY OF ANALYSIS
Health Net’s premise that new enrollees in its individual health plans will be much sicker than its current individual policyholders are today is flawed on three counts:
- Health Net’s adjustments to its 2012 “claims experience” to account for new, sicker enrollees expected to enter the exchange market is more than two times higher than the best estimates projected by Covered California’s analysis.
Health Net predicts that its new policyholders will be 71.4% sicker next year than its current enrollees were in 2012. In other words, the new group of consumers in the individual market will use more medical services than the current individual market, causing a 71.4% increase in medical costs. According to Health Net, most of that increase will come from a 61.5% jump in claims over last year’s rates. In contrast, Covered California commissioned a report from the Milliman[1] firm that projected the most likely scenario was just a 26.5% increase in claims next year.
Health Net’s projection of the amount by which claims will increase in the new exchange market is more than two times Milliman’s most likely scenario. As a result Health Net’s projected medical costs are 28% higher even than Milliman’s best estimate, indicating that Health Net’s rate assumptions are unreasonable.
- Health Net projects a starting point for rates that is 25.4% higher for its PPO plans than it does for its HMO plans.
Health Net sets an “index” rate – the starting point for health insurance companies to calculate rates – of $425.33 a month for its PPO plans, 25.4% higher than the $339.12 a month index rate Health Net proposes for its HMO plans. The index rate represents the average allowed claims per member per month for Essential Health Benefits.
Because the index rate reflects average allowed claims – and PPO and HMO plans both cover the same Essential Health Benefits – the disparity cannot be explained by differences in benefits available under PPO plans compared to HMO plans. Health Net has not accounted for this pricing disparity, which leads to higher rates for PPO customers.
The difference could also be due, at least in part, to differences in provider networks – a smaller network in the HMO plans, or lower payments negotiated with providers in either network. However, Health Net itself stated that no savings were attributable to provider networks or contracting differences. Milliman projected only a small difference, between -9% and 1%, due to changes in provider contracts. So, although differences in provider networks could theoretically account for some difference in the starting point for rate setting, they do not appear to do so here. 25% is clearly well above what impact could reasonably be expected.
We conclude that the PPO “index” rate is too high, and is the second basis for concluding Health Net’s proposed rates are unreasonable.
- Health Net’s PPO rates are higher than the average rates for all other companies as submitted to Covered California.
Health Net’s PPO rates are an outlier when compared to other health insurers in the exchange marketplace. Based on Covered California figures, Health Net’s rates are higher than average, and in some cases, much higher than average.
It’s no secret that federal health reform is reshaping the insurance marketplace, and that in this changing marketplace health insurers and regulators must rely upon more assumptions than usual to predict the makeup and experience they should expect from customers in the future. Still, Health Net’s predictions for its PPO plans stand out as significantly more pessimistic than its competitors. Unreasonable expectations about the medical need of future customers results in unreasonable rates. The distance between Health Net and its competitors’ predictions is a third reason we come to the conclusion that the proposed rate is unreasonable.
Finally, we note that one of the primary consumer protection goals of the Affordable Care Act is to provide greater access to health care by prohibiting insurers from charging consumers more based on their health status. This goal is achieved, in part, by requiring all enrollees in the individual market to be merged into the same risk pool. However, Health Net has split its individual market enrollees into two risk pools, one for its PPO and another for its HMO plans. We have not fully analyzed the potential rate impact of Health Net’s splitting of the market, however the question merits future investigation.
Analysis by Allan Schwartz, AIS Risk Consultants, Inc.: http://www.consumerwatchdog.org/resources/healthnet_ais.pdf
[1] We have our own reservations about the Milliman study. Founded by “renowned actuary and insurance industry veteran Wendell Milliman,” according to Milliman’s website, “our consultants have been helping insurers succeed for decades, from solving their biggest strategic challenges to addressing small issues one detail at a time—and everything in between.” Yet even the worst-case scenario by a firm with deep ties to the insurance industry did not predict that new enrollees will be as sick as Health Net would have us assume.
