The Harver Group: How Will 2015 Health Insurance Premiums Compare to 2014?

The Affordable Care Act’s (ACA) 2014 open enrollment period for the individual health insurance market has only just ended, and actuaries for health insurers already are developing premium rates for the 2015 plan year. Much of the uncertainty regarding the health spending by plan enrollees that existed when insurers submitted their 2014 rates remains for 2015.  Although insurers have information on enrollee demographics, only limited information will be available on enrollee health status and health spending when premium submissions are due this spring.

Key drivers of 2015 premium changes include how the composition of the risk pools in 2014 compares to what was expected, the reduction of funds available through the temporary reinsurance program, and the underlying growth in health costs. How enrollment differs from projected will vary by insurer and by state, with larger premium increases possible in states that adopted the transition policy allowing non-ACA-compliant plans to be renewed.

The composition of the risk pool and how it compares to what was projected

When calculating 2014 premiums, insurers had to make assumptions regarding which individuals would purchase coverage and what their medical spending would be. There was much uncertainty regarding these assumptions because insurers had only limited experience data on individuals who would be newly insured.

Insurers face a similar uncertainty for 2015. Although they have information regarding the age and gender of their 2014 enrollees, they have only limited information on enrollee health status, due to the reporting lag between when health care services are provided and when claims are processed. Practitioners are observing that while some insurers are seeing 2014 enrollee demographics fairly similar to what they projected, others are seeing an older-than-expected enrollee population. Any available medical claims data will need to be adjusted to reflect any expectations that individuals enrolling later during the open enrollment period are healthier.

The composition of the risk pool and the impact on premiums will vary by state. Many states opted for the transitional policy that allowed non-ACA-compliant plans to be renewed. In these states, the risk profile of 2014 ACA-compliant plans might be worse than insurers projected if lower-cost individuals retained their prior coverage and higher-cost people moved to new coverage. The transitional policy was instituted after 2014 premiums were finalized, meaning insurers weren’t able to incorporate this policy into their premiums. For most states, the transitional policy for 2015 is known in advance and can be incorporated into assumptions regarding the composition of the 2015 risk pool. The impact on premiums could be greatest in states that had large, heavily-underwritten individual markets in place prior to 2014.

Differences by state in enrollment outreach efforts or technical problems with the marketplaces could also have affected the composition of the 2014 risk pool. Insurers will incorporate that experience into their 2015 premium assumptions to the extent they expect such trends to continue.

Importantly, if actual experience regarding the risk profile of 2014 enrollees differs from assumptions and losses occur in 2014, insurers cannot recoup past losses through higher future premiums. Instead, assumptions for 2015 will be reset incorporating available 2014 experience.

Reduction of reinsurance program funds

The ACA transitional reinsurance program compensates plans in the individual market when they have enrollees with especially high claims. Reinsurance payments reduce net claims, allowing insurers to offer premiums lower than they otherwise would be.

For the 2014 plan year, $10 billion will be used to reimburse plans for a portion of the spending for high-cost individuals. These payments generally have reduced projected 2014 net claims by about 10 to 14 percent. For the 2015 plan year, the amount collected for the reinsurance program will decline to $6 billion, and will likely reduce net claims by about 6 to 8 percent. This lower reduction in claims translates to about a 4 to 7 percent increase in projected claims for 2015 relative to 2014, due solely to the reduction in the reinsurance program and not factoring in any other factors such as medical trend. This increase could be offset to the extent that insurers expect a healthier risk pool profile in 2015, arising for instance from lower-cost individuals delaying enrollment until 2015 rather than enrolling in 2014.

Underlying growth in health care costs

The increase in costs of medical services, referred to as medical trend, reflects not only the increase in per-unit costs of services, but also increases in health care utilization and intensity. In recent years, health spending growth has been low relative to historical levels. Premiums for 2015 will reflect assumptions regarding the extent to which the recent slowdown will persist.

Other drivers of 2015 premium changes

Other factors potentially contributing to rate changes include any modifications to provider networks; provider reimbursement structures; benefit packages; risk margins; administrative costs; or geographic region definitions. The increase in the health insurance fee imposed by the ACA could put upward pressure on premiums if it is not offset by a commensurate increase in enrollment. Insurers will also incorporate market considerations when determining 2015 premiums.