Recent headlines have raised alarms about hefty premium rate increases facing Affordable Care Act (ACA) consumers in 2019. Yet health insurers just had their most profitable year in the Affordable Care Act’s (ACA) health insurance marketplaces. Why the big price hikes from insurers? The answer may be found in the rate justifications that insurers are required to submit to state departments of insurance.

Although most states do not require insurers to submit 2019 proposed premium rates and their justifications until June, some set their deadlines in May, including Virginia, Maryland, Vermont and Oregon. In these states, proposed rate changes vary from a 9.58 percent decrease (PacificSource in Oregon) to a 91.4 percent increase (CareFirst of Maryland’s Blue Preferred product). We dug into the actuarial memos submitted in these states to find out what’s behind the premium changes.

In general, a common set of factors are driving premium rate changes this year. They include:

• Insurers’ data on members’ use of health care services over the past year, and how it differs from their projections;
• Medical inflation (changes in the price of services) and increased utilization;
• The increase in the overall sickness of the risk pool due to ACA-related policy changes that lead to the loss of young and healthy enrollees;
• Whether the insurer expects to be a payor or a payee under the ACA’s risk adjustment program;
• Changes in benefit plan designs;
• Changes in service areas;
• Changes in the impact of de-funding the ACA’s cost-sharing reduction subsidy;
• Changes to administrative expenses, including taxes and fees;
• The profit margin sought by the insurer; and
• State level policies such as reinsurance programs or limits on short-term health plans.

The impact of the above factors differs among insurers. For example, among our sample of filings from the above four states, projections of medical inflation ranged from 4 percent (Kaiser Health Plan in Oregon) to 9.5 percent (CareFirst in Maryland). Also, insurers’ profit expectations ranged from a high of 8 percent (Optima in Virginia) to a low of 1.5 percent (Blue Cross Blue Shield of Vermont). However, there were common themes.

Repeal of the Individual Mandate Penalty is Increasing Premiums

According to the rate filings, the number one factor pushing premiums up in 2019 is Congress’ repeal of the individual mandate penalty in the Tax Cuts and Jobs Act of 2017. This is not unexpected. The non-partisan Congressional Budget Office projected that repealing the mandate penalty would increase premiums by about 10 percent each year.

Therefore, it was not surprising that the insurers in our sample expect that the mandate repeal will reduce the size and increase the morbidity of their membership. In Virginia, for example, Kaiser Foundation Health Plan’s requested rise of 32.1 percent is driven by an increase in the morbidity of their membership. “The primary cause,” the company says, is “related to nonenforcement of the Individual Mandate.” Similarly, BridgeSpan in Oregon estimates that the individual mandate repeal will fuel a 7.2 percent increase in morbidity.

Notably, although both of Vermont’s insurers predicted that repeal of the individual mandate penalty would cause them to lose healthy enrollees, the projected premium impact was relatively modest, at 2.2 percent for Blue Cross Blue Shield and 2 percent for MVP. A key reason for this is that Vermont is one of only two states that have merged their individual and small-group risk pools. The small-group market in Vermont is over half of the enrolled population, which materially reduces the impact of the mandate penalty repeal.

The Expansion of Short-term and Association Health Plans is Increasing Premiums

Insurers are also predicting that their risk pool will be smaller and sicker due to “potential movement into other markets.” These markets include association health plans (AHPs) and short-term, limited duration insurance, both of which are exempt from many of the ACA’s consumer protections and have been promoted by the Trump administration as cheaper coverage alternative.

For example, insurers such as Optima and CareFirst in Virginia note that the “availability of association health plans and expanded availability of short term medical plans” was affecting their rate projections, with CareFirst adding a 10% premium load as a result. BlueCross BlueShield of Vermont also forecasts that proposed alternatives to ACA-compliant options “could significantly disrupt the single risk pool,” although they did not build that disruption into their proposed rate for 2019, perhaps because those policies are not yet finalized.

For Providence Health Plan in Oregon, AHPs are a significant risk, with the company expressing concern that that the administration’s proposed rule will “result in market segmentation and increased morbidity in ACA markets.” The insurer is increasing premiums by 2.3 percent to reflect the added risk. Coupled with the repeal of the individual mandate, the insurer predicts an overall increase in morbidity of 10 percent. However, other insurers in Oregon, such as Regence Blue Cross Blue Shield, Moda, and Kaiser Permanente, do not forecast that AHPs will have a significant impact on rates.

Factors Reducing Rate Increases

The Health Insurer Tax

In addition to repealing the individual mandate penalty, Congress has suspended for 2019 the Health Insurer Tax (HIT), an annual fee imposed on insurers to help fund the ACA. Insurers in our sample estimate that waiving the HIT for 2019 will reduce premiums by 1-2 percent.

Federal Income Tax Cuts

The Tax Cuts and Jobs Act reduced the corporate income tax rate from 35 percent to 21 percent, resulting in a big tax break for insurance companies. Among our sample, only one insurer is clearly building that tax cut into its rate filing. Blue Cross Blue Shield of Vermont was able to moderate rate increases by passing on to consumers “100% of federal income tax savings” from the tax bill. They estimate that this decision, combined with efforts to trim network and prescription drug costs, will reduce rates by 4.2 percent.

Less Generous Benefits

Federal rules published in 2017 gave individual market insurers more flexibility over plan benefit design. In response, several companies in our sample have made changes to their benefit designs that reduced the upward pressure on premiums. For example, in both its Maryland and Virginia filings, CareFirst notes that increases in plan deductibles and higher annual out-of-pocket caps reduced their proposed premium increase.

State Actions to Reduce Premiums

Maryland’s legislation to limit the marketing of short-term health plans has led insurers in that state to project better overall morbidity in the risk pool than would otherwise be the case. For example, CareFirst notes that they chose the “low end” of projected morbidity deterioration (5 percent instead of 10 percent) because the bill “mitigated” the risks of adverse selection in the market.

Oregon’s reinsurance program is keeping premium rate increases lower than they otherwise would be. For example, Providence Health Plan, Moda, Kaiser, and PacificSource all project reductions in claims expense as a result of the program. Also, none of the insurer filings reviewed in Oregon predict that the expansion of short-term plans will adversely impact rates, perhaps because Oregon recently limited them to a 3-month duration.

Proposed Rates are Preliminary – Public Policy and Market Dynamics Matter

The insurers all caveat that market changes could require them to adjust their rates or re-evaluate their market participation, which they have some leeway to do until marketplace contracts are signed September. For example, Anthem in Virginia observes that if other insurers enter or exit the market it can “create a need for reconsideration and revision of proposed premium rates.” However, none of the insurers in our sample have announced plans at this juncture to reduce their market footprint. On the contrary, two in Oregon – PacificSource and Kaiser – intend to expand their service areas.

State or federal policy decisions could also require a reconsideration of rates. For example, insurers in Maryland noted that approval of that state’s reinsurance waiver application would result in a reduction in the proposed rate increases.

Looking Forward

The findings summarized above are derived from a review of actuarial memos submitted by 14 insurers to support proposed individual market 2019 premium rate changes in four states: Maryland, Oregon, Vermont, and Virginia. The filings in these states may not be representative of premium rate trends nationally. Three of the four run their own state-based marketplace and have adopted policies, such as reinsurance, limits on short-term plans, and a merger of the individual and small-group market, that have mitigated – or could mitigate – market instability due to federal policy changes. States that have been less proactive in protecting their markets could face higher proposed premium increases. However, as these insurers’ rate proposal are first out of the gate thanks to their state’s early rate filing deadlines, their actuarial memos can provide helpful insights into the factors behind the premiums that consumers will face in 2019.