Diving Deep on Two New Rate Studies

By Christine Monahan and Katie Keith

With many of the Affordable Care Act’s (ACA) most significant reforms expected to go into effect in 2014, policymakers and the media have increasingly turned their attention to the law’s price tag for consumers. Republican lawmakers, for example, sounded the alarm about costs in a recent congressional committee report while an Urban Institute analysis sought to counter concerns about rate shock as a result of the ACA’s age rating requirements.

Following last week’s release of not one but two analyses on projected health insurance premiums in 2014, the issue is receiving headlines once again. Most recently, Milliman, Inc. (on behalf of the California exchange, Cover California) and actuaries from The Lewin Group and Optum (on behalf of the Society of Actuaries) entered the fray, each with their own report concluding that premiums will increase for some—but not all—under the ACA. (For a better understanding of why this might be true, check out this Policy Insights note from the Kaiser Family Foundation.) Yet, while headlines have focused on the projected costs of coverage, both reports contain additional findings that are informative for policymakers. Here, we highlight the major findings from the two reports and identify some of the most significant distinctions between them. (For even more coverage, check out this analysis by the Center on Budget and Policy Priorities.)

Milliman Analysis

In its analysis, Milliman evaluated how changes under the ACA would impact individual market premiums in 2014 in California. Overall, the authors estimated that those who are currently insured and earning more than 400 percent of the federal poverty level (FPL) can expect an approximately 30 percent increase in their premiums in 2014.  However, those who are currently insured but earn less than 400 percent FPL will see a significant reduction in premiums because of the impact of federal premium tax credits available through the exchange. Because premium tax credits vary based on income, those earning less than 250 percent FPL would see average reductions of 83.8 percent, while those earning between 250 and 400 percent FPL would see average reductions of 46.6 percent. Milliman also found that individuals who are currently uninsured will pay less in premiums on average in 2014 than they would for coverage today.

Milliman also analyzed how the ACA would impact consumer cost-sharing in the individual market, reflecting underlying trends in health care costs as well as the impact of people buying more comprehensive coverage and, for individuals earning up to 250 percent  FPL, cost-sharing subsidies.  For currently insured individuals earning less than 250 percent FPL, Milliman predicted an average decrease in cost-sharing of over 60 percent.  Even without cost-sharing subsidies, currently insured individuals earning between 250-400 percent FPL would, on average, also see a reduction in cost sharing of over 25 percent.  Currently insured individuals earning over 400 percent FPL would see a slight increase – 1.2 percent – in cost-sharing. Similar estimates were predicted for people who are currently uninsured compared to what they could purchase in the individual market today.

Some factors that went into Milliman’s calculations were as follows:

  • The authors assume that, regardless of the ACA, premiums would go up, on average, by 9 percent from 2013 to 2014.
  • The authors estimate that premium rates will increase by approximately 14 percent due to changes in the market attributable to the ACA\. Within this analysis, Milliman estimated that changes in the individual market demographics (most importantly, the health status of people purchasing coverage) under the ACA would increase premiums by 26.5 percent.  Other factors, such as changes in provider contracting, protection from the temporary reinsurance program, and changes in insurer administrative expenses, would have a downward effect on rates, however, and contribute to the finding of a composite change of 14 percent.
  • The authors assume that buying more coverage – in other words, more comprehensive policies in terms of benefits and actuarial value – will increase premiums but decrease consumer cost-sharing.

Milliman also looked at changes in premiums as well as cost-sharing together to assess changes in the total cost of health care for people purchasing coverage in the individual market. The authors found that currently insured individuals earning greater than 400 percent FPL would, on average, see increases of roughly 20 percent in their total cost of health care while those earning less than 400 percent FPL could expect to see reductions in total costs of health care between approximately 40 percent and 76 percent. For currently uninsured individuals earning less than 400 percent FPL, the reduction in the total cost of care is predicted to be even greater – up to 90.5 percent, while currently uninsured individuals earning more than 400 percent FPL are not expected to see a change in their total cost of care.

Lewin/Optum Analysis

In their analysis, researchers from The Lewin Group and Optum Inc. analyzed six questions related to projected enrollment of the currently uninsured, including the costs of covering this population, the effect on the health care and insurance industries, and cost variation by state. Among its major findings, the report projected a decline in the national uninsured rate from 16.6 percent to between 6.8 and 6.6 percent in 2017 compared to pre-ACA projections. The individual market is also expected to grow from 11.9 million lives to 25.6 million lives under the ACA, with about 80 percent of enrollment through the exchanges. Finally, as has been much discussed in the media, the report projected that monthly costs in the individual market would increase nationally by 31.5 percent under the ACA. For all three of these findings, the authors note that there will be significant variation across states and that the states most likely to see decreases in premiums are those that are currently community rated.

In addition to these national estimates, the authors used data from Wisconsin to make projections about the effect of the ACA on coverage options in the state. According to their analysis, about 31 percent of individuals currently covered through their small employer are projected to enroll through the exchange as individuals. Under a fully implemented ACA, the authors estimate that 4.8 percent of the Wisconsin population would remain uninsured in 2014 (assuming Wisconsin expands its Medicaid program) with 26 percent of the previously uninsured enrolled in Medicaid, 19 percent enrolled in the exchange, and 14 percent receiving employer coverage. The authors also estimate that the ACA will result in a 2 percent increase in system-wide spending in Wisconsin based on an increase in the utilization of services by newly insured people.

The researchers included the caveat that their projections may not account for all of the aspects of the ACA that will affect premiums, including premium subsidies, new benefit designs, taxes and assessments, federal risk mitigation programs, medical loss ratio requirements, and rate review rules. In particular, the analysis assumes that states will not undertake certain “mitigating strategies” in 2014 and 2015, such as transitioning the populations in their state and/or federal high risk pools to the exchange gradually. The populations in these pools are typically much sicker and, thus, more costly than the general population so the costs associated with their care likely increased the estimates. Because some states are planning to transition their high risk pool enrollees into the exchange over time, these estimates are likely overstated in some instances.

Milliman vs. Lewin/Optum?

The key corresponding finding between the two studies is Milliman’s estimate of a 26 percent increase in premiums due to changes in the health status of the individual market in California with Lewin/Optum’s finding of a 31.5 percent estimated increase nationally due to morbidity (and a 61.6 percent estimated increase due to morbidity for California specifically). Because both analyses depend heavily on the assumptions made by researchers in coming to their conclusions, it is important to understand the differences in these assumptions. Here are a few of the distinctions highlighted in the Milliman analysis. First, while both include projections for 2014, the Lewin/Optum authors used expectations for actual enrollment and percentage increases in 2016 or 2017 while Milliman focused its analysis on 2014. Second, the Lewin/Optum authors predicted that a number of large employers would drop coverage by 2017. Milliman, in contrast, did not find evidence that large employers dropping coverage will be a material issue in 2014. Third, the two analyses made different assumptions about the health status of the population of California and the current individual market, both of which affect the price of coverage and projected increases.

For continued updates on implementation of the ACA, be sure to stay tuned to CHIRblog!