Risk adjustment, early retirees, MLR are 3 of 10 issues to watch

In a 5-4 ruling, the U.S. Supreme Court has preserved the individual mandate and upheld the constitutionality of the Patient Protection and Affordable Care Act (PPACA), with the notable exception that states can now opt out of Medicaid expansion. Milliman consultants cannot offer legal interpretations of this historic decision, but we can offer perspective on what it means to the healthcare system. The many stakeholders that have been preparing for PPACA for more than two years can continue that preparation. And while there remains some uncertainty—a Republican victory in November could still lead to a repeal of the law—many stakeholders that have been slow to move may now see an incentive to do so.

We outline 10 strategic considerations for insurers, employers, providers, taxpayers, and the government.

Background

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In 2009, as the American healthcare reform conversation began in earnest, Milliman was already several years into an effort to better understand American healthcare reform. We had invested millions of dollars in research, developing models and methodologies that could study vast changes to the current system. At that time, we recognized that there were certain ideas that might have been controversial before but that are now anticipated to be part of the solution. Value-based pricing. Prevention. Managed care. Evidence-based medicine. A move away from fee-for-service. Improved transparency, especially around costs. Electronic health records. Consumerism.

But there is a difference between knowing what to do and doing it. PPACA jumpstarted several efforts, forced lessons around some of these concepts (sometimes difficult lessons), and mobilized the industry to change. Now in 2012, the healthcare industry—especially insurers, employers, providers, and the government—has learned some things it did not know before. The ultimate test is acceptance by the public once these concepts are implemented on a widespread basis.

As we awaited the Supreme Court’s decision, we realized that regardless of the outcome many of these concepts are now becoming entrenched in the system. While this decision has important and unique ramifications, much of the change coming to American healthcare is already underway.

Ten strategic considerations

Adverse selection may still be a challenge. Guaranteed issue and community rating make the individual insurance market more accessible to the uninsured, but without an effective individual mandate these reforms create adverse selection.(1)The key word there is effective. If enrolling in a healthcare plan is viewed as optional for U.S. citizens because the penalties have limited teeth, those who consider themselves healthy are less likely to enroll because it may not be in their immediate economic best interest. For pricing to be sustainable, these healthier people must enroll in order to balance out the insurance pool costs and health risk.Milliman analysis on the effectiveness of the individual mandate indicates that much depends on a person’s household income, age, and family type.(2)As the exchanges come online in 2014, many will be focused on the enrollment to determine how this theoretical underpinning bears out in actuality.One new wild card: The court’s ruling on Medicaid expansion complicates the adverse selection question, because the decision raises access questions for certain low-income individuals. Which brings us to Consideration #2…

Medicaid expansion just became a far more complex and variable proposition. The Supreme Court decision gives states the option not to participate in Medicaid expansion. In states that opt not to participate, there are big questions about how their Medicaid programs will function and how all this may affect the population that would have been Medicaid-eligible through the expanded coverage. If a state does not participate in the Medicaid expansion, to what extent will those below the 133% federal poverty level (FPL) threshold qualify for premium tax credits and cost sharing subsidies?Is a partial expansion possible? Are states that opt out of Medicaid expansion able to receive any portion of the enhanced federal funding available under PPACA through a partial expansion using waivers or a state plan amendment?
Are provisions of PPACA that are not explicitly tied to Medicaid expansion still in effect for states that opt out of the expansion? For example, will states have to abide by the primary care physician fee schedule increase that is scheduled for 2013 and 2014?
With the court upholding the exchanges and other components of the law, the interaction between Medicaid and these components creates a maze of issues for states, insurers, employers, and the uninsured.

Employers grapple with new options and plan requirements. Employers need to consider how the employer-sponsored insurance (ESI) model fits in their future. Many employers are intent on maintaining such benefits, recognizing a distinct recruiting and retention mechanism. Reports of ESI’s demise are premature as of this date. Employers will continue to review and amend their plans in efforts to control costs, and there are distinct advantages and cost pressures brought on by PPACA. There may also be new incentives for pursuing a self-funded approach, even by certain small employers. And the law does include some disruptive elements for ESI that bear watching. For example, many feel that the summary of benefits and coverage statements that employers must send to employees are burdensome and won’t be sufficiently useful to employees.The change to Medicaid expansion could also complicate matters for employers. Under PPACA, employers with over 50 employees may be subject to additional plan affordability penalties for employees under 133% FPL—unless these individuals are Medicaid eligible. If a state does not expand Medicaid, employers above 50 lives may be subject to more plan affordability penalties than they would be were their state to pursue Medicaid expansion. In this sense, a state’s decision to expand Medicaid may have cost implications for employers. How will the anticipated healthplan costs for employers change now that low-income employees may not be able to qualify for Medicaid in certain states?

What is the effect on early retirees? PPACA may change the landscape for how employers handle early retiree healthcare coverage.(3) New options emerge for those between ages 55 and 65, with the exchanges becoming very attractive for attaining affordable coverage. The absence of medical underwriting, the limitations placed on age rating (i.e., a maximum 3-to-1 ratio between insurance premiums for the oldest and youngest), and the availability of premium and benefit subsidies make the exchanges an affordable place for people 55-65 years old to purchase coverage.

Rate review scrutiny and no risk selection: Something’s got to give. PPACA has brought about increased scrutiny of rate increases, and it seems likely this will continue. But with a 10% increase now deemed potentially “unreasonable” by federal regulators, and with traditional underwriting/risk selection taken out of the system, there are all the signs of an inevitable collision. An influx of less-healthy people could make it very difficult for many plans to stay below the 10% ceiling without losing money and risking financial instability. If the individual mandate works as hoped, this may be mitigated. Risk adjustment, reinsurance, and risk corridors are also supposed to help with this issue, but will they be enough? This is one to watch.

Which states will get on the exchange bandwagon? Some states have pushed forward aggressively with implementing a state health insurance exchange, while others have resisted. Will the Court decision set exchange efforts in motion in the states that were not already proceeding?
Given the often political nature of this resistance, and the outstanding question of the presidential election and whether a Republican victory could bring about a repeal of PPACA, in many states the delay may continue. With states empowered to opt out of Medicaid expansion, states that have pushed back against exchanges have another front on which to not participate with PPACA.
But states with efforts already under way now have more wind at their backs. The 2014 deadline is becoming imminent, creating an incentive to get moving. And states also face a deadline on January 1, 2013, at which time the federal government will assess whether states have the infrastructure in place to proceed with an exchange. For some states these two deadlines may be enough to begin implementation efforts.

Minimum loss ratios (MLR) pose an ongoing challenge for insurers. While the minimum loss ratio requirement—the idea that 80-85 cents of every healthcare dollar should go toward medical care—sounds good, it is out of step with the financial realities many insurers face. Claims do not always move in a predictable way, meaning that medical costs can be volatile.(4)Previously, an insurer’s lower claim cost years could help balance out the higher claim cost years. However, under the MLR rules, insurers need to pay out rebates during lower claim cost years as opposed to building up reserves for higher claim cost years. This dynamic will be amplified if the individual mandate is ineffective and adverse selection ensues.The MLR rules, as written, also present challenges to high-deductible health plans (HDHPs), because the MLR calculation only includes plan expenses, not patient expenses. These plans give consumers greater skin in the game, thereby encouraging more judicious use of care.(5) Expenses to administer these plans are typically higher as a percentage of premium than they are for richer benefit plans. To the extent that the MLR requirement takes these plans off the table, it could also remove a possible cost-reducing concept from the mix.
The MLR rules challenge smaller insurers, which are more susceptible to the underwriting cycle because they lack the volume to absorb down years or to spread risk across multiple business lines.(6) The MLR rules also do not allow smaller health plans to pool large claims across states, creating a significant issue for small multi-state plans.
Efforts are afoot to tweak the MLR rules and fix these problems, but that doesn’t change the reality that this rule is hard on insurers. The difficulty is exacerbated by new rating rules. Insurers face a low ceiling and a high floor, without much room to stand up.

Risk adjustment is essential. The idea that fee-for-service is broken and the reimbursement paradigm should be turned on its head has popular support. Risk adjustment (7)is an important part of this new paradigm because it helps align revenue with health status, a key calculus in a system that competes on health and efficiency rather than volume.To the extent that the exchanges face adverse selection challenges, risk adjustment may be even more important. With a higher concentration of morbidity potentially entering the market, there’s an increased need to balance those costs between carriers based on their relative risk factors.

Will cost shifting hold steady, increase, or decrease? The current system includes various examples of cost shifting. Uncompensated care pushes the cost of the uninsured onto other payors,(8) and many providers cite low Medicare and Medicaid rates as an excuse to push higher costs onto the employer-sponsored insurance market.(9) While cost shifting is not inevitable, (10) it bears watching. If PPACA’s efforts to cover the uninsured are successful, the uncompensated care cost shifting will decrease. But with Baby Boomers increasing the number of Medicare enrollees and at least some Medicaid expansion ongoing, there will be added pressure to cost shift—unless providers can find the efficiency to keep their costs in order.(11)
Costs will also shift on the consumer level. The changing rules around age rating and medical underwriting will create subsidies funded by young and healthy people to lower costs for older and less-healthy people. Consumers who receive care in this market may not always understand why their costs are going up—especially young people and young men in particular—who will be subsidizing other more expensive populations thanks to limited age, gender, and health ratings.(12)

The cost problem persists.What can be done about it? PPACA focuses on expanding coverage and insurance reform, and in some cases it shifts costs from one party to another, but it does not directly affect the unit costs and utilization that are among the major underlying drivers of healthcare costs.Certain aspects of PPACA have the potential to affect costs. The option to implement an accountable care organization (ACO) (13) reprises the managed care movement of the ’80s and ’90s, but with better technology and information, and by transferring the financial risk onto the provider to create an incentive for efficiency. With many potential ACOs already establishing the tools required to succeed, (14) this reinvigorated movement is already in motion. The nuts and bolts of an ACO are still the parts needed for a more efficient system.
Most of PPACA’s explicit ACO efforts center on Medicare, and while the Medicare Shared Savings Program (MSSP) and Pioneer Programs will continue, the potential for commercial ACOs (15) may prove just as significant.
Accountable care is not a solution to everything that ails the entire healthcare system, but it offers some hope and, to the extent it can meaningfully control unit costs and utilization, it just may work.

Questions persist as reform marches forward

There is still at least one major point of uncertainty: the November 6 presidential and Congressional elections. PPACA has survived the first of its existential challenges. But with four months of intense debate and a presidential election still to come, it is not yet out of the woods.

In the coming days and weeks the Supreme Court’s decision will be dissected by experts from many fields, especially as it pertains to Medicaid expansion. Milliman will continue to publish actuarial and financial analysis of healthcare reform, and will have more to say about this decision specifically. Check back for more at www.milliman.com/hcr and www.healthcaretownhall.com.

References
1. Snook, T. & Harris, R. (October 2009). Adverse Selection and the Individual Mandate. Milliman Health Reform Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/research/health-rr/pdfs/adverse-selection-individual-mandate.pdf.

2. Houchens, P. (March 2012). Measuring the Strength of the Individual Mandate. Milliman Research Report. Retrieved May 24, 2012, from http://publications.milliman.com/publications/health-published/pdfs/measuring-strength-individual-mandate.pdf.

3. Ge, J. (June 2012). Health insurance exchanges and early retiree health coverage. Milliman Benefits Perspectives. Retrieved June 16, 2012, from http://publications.milliman.com/periodicals/bp/pdfs/BP-06-07-12.pdf.

4. Cookson, J. (May 2011). Healthcare Reform’s Minimum Medical Loss Ratios: How to Manage the Increased Risk? Milliman Healthcare Reform Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/healthcare-reform-minimum-medical.pdf.

5. Burke, J. & Pipich, R. (April 2008). Consumer-Driven Impact Study. Milliman Research Report. Retrieved May 24, 2012, from http://publications.milliman.com/research/health-rr/pdfs/consumer-driven-impact-studyRR-04-01-08.pdf.

6. See http://www.healthcaretownhall.com/?p=3060.

7. See http://www.healthcaretownhall.com/?tag=risk-adjustment.

8. Families USA (2009). Hidden Health Tax: Americans Pay a Premium. Retrieved June 16, 2012, from http://familiesusa2.org/assets/pdfs/hidden-health-tax.pdf.

9. Fox, W. & Pickering, J. (December 2008). Hospital & Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid, and Commercial Payers. Milliman Client Report. Retrieved June 20, 2012, from http://publications.milliman.com/research/health-rr/pdfs/hospital-physician-cost-shift-RR12-01-08.pdf.

10. Pyenson, B. et al. (March 18, 2010). High Value for Hospital Care: High Value for All? Milliman Client Report. Retrieved June 20, 2012, from http://publications.milliman.com/research/health-rr/pdfs/high-value-hospital-care.pdf.

11. Proebsting, D. (June 2010). Why Hospital Cost Shifting Is No Longer a Viable Strategy. Milliman Healthcare Reform Briefing Paper. Retrieved June 20, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/why-hospital-cost-shifting.pdf.

12. van der Heijde, M. & Norris, D. (August 30, 2011). The young are the restless: Demographic changes under health reform. Milliman Insight. Retrieved June 20, 2012, from http://insight.milliman.com/article.php?cntid=7879.

13. Parke, R. & Fitch, K. (October 13, 2009). Accountable care organizations: The new provider model? Milliman Insight. Retrieved May 24, 2012, from http://insight.milliman.com/article.php?cntid=6056.

14. Fitch, K. et al. (July 2010). Nuts and Bolts of ACO Financial and Operational Success: Calculating and Managing to Actuarial Utilization Targets. Milliman Healthcare Reform Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/828_HDP.pdf.

15. Boyarsky, V. et al. (April 22, 2011). ACOs Beyond Medicare. Milliman Healthcare Reform Briefing Paper. Retrieved May 24, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/acos-beyond-medicare.pdf.