Stable Rates Reflect Strength of ACA Marketplaces
Joel Ario, Manatt Health and Sabrina Corlette, Georgetown Center on Health Insurance Reforms
The start of the 2021 rate review process for the Affordable Care Act (ACA) Marketplaces coincided with the initial outbreak of COVID-19 cases, and early forecasts were ominous, with rate increases projected as high as 40 percent. There was also widespread concern about how to set rates when insurers’ COVID-related costs looked anything but predictable. In short, it looked like, after a period of relative stability in Marketplace rates, enrollees might be in for a rollercoaster ride.
Thankfully, the worst-case scenarios did not materialize, partly because the costs of treating COVID were lower than expected, and insurers benefited from enrollees deferring or canceling care in the early months of the pandemic. That is not the whole story, however. The failure to beat back the virus over the summer and the emergence of new treatments as well as a potential vaccine extended the uncertainty for insurers over their 2021 costs. This could have led to a turbulent rate review process were it not for the lessons learned in prior years about effective rate regulation.
The ACA Raised the Bar for Rate Review
Rate review practices varied widely across the states prior to the ACA, with some states requiring insurers to meet stringent standards and other states exercising minimal oversight. In the face of dramatic increases in premiums in some states, the authors of the ACA included provisions intended to constrain unjustified rate increases through a comprehensive, state-level review process that ensures that rates are based on accurate, verifiable data and realistic assumptions. Lawmakers also envisioned that robust rate review would help maintain insurers’ compliance with the ACA’s preexisting condition protections.
The U.S. Department of Health & Human Services’ (HHS) regulations established a process for the annual, state-level review of “unreasonable increases in premiums,” defined as annual increases of ten percent or more. The law also provided states with $250 million in grants to expand their rate review capacity. As a former Kansas insurance commissioner, HHS Secretary Sebelius promoted state-based enforcement of the new rate review standards both to achieve state buy-in and to avoid dueling federal and state regulators.
The ACA also included an 80 percent “medical loss ratio” (MLR) in the individual market, meaning that insurers were required at pay out at least 80 percent of their premium revenue in claims costs or rebate the “excess” premium to their enrollees. MLR standards did not restrain rates much in the early years when insurers typically paid out 90 percent or more of their premium revenue in claims costs. But the landscape has changed dramatically since 2018 when, as described below, loss ratios have plummeted and insurers have sought to realign their premiums with an 80 percent MLR to minimize their rebate obligations.
Most States Adopted the ACA’s Standards
The vast majority of states sought to maintain local control over the rate review process, using federal grants and state resources to meet the new federal standards, including use of federal templates and website postings of rate increase justifications, for conducting their own rate reviews.
By 2017, 47 states and the District of Columbia (DC) had achieved certification to conduct their own rate reviews in both the individual and small group markets. In the three remaining states (Oklahoma, Texas, and Wyoming), HHS conducts rate reviews. All state and federal reviews use the same federal tools, including uniform templates and actuarial memoranda to facilitate consistent application of ACA standards and a comprehensive, independent review of insurers’ data and projections.
Interestingly, this near universal level of federal-state collaboration was not achieved in other ACA arenas, such as the Marketplaces, where a majority of states defaulted to the Federally Facilitated Marketplace (FFM), which relies on HealthCare.gov for plan enrollment. The result has been less consistency and more acrimony over Marketplace issues, such as this year when 12 State-Based Marketplaces (SBMs) opened special enrollment periods for the uninsured to address the COVID-19 pandemic but HealthCare.gov did not.
States and Insurers Weathered a Crisis in 2017
The ACA rate review process was put to the test in 2017 when insurers had to abruptly adjust 2018 rates after they lost a critical revenue stream due to the federal Administration terminating cost sharing reduction (CSR) payments only weeks before the start of open enrollment. Fortunately, state regulators had anticipated the problem, discussed contingency plans in State Health & Value Strategies (SHVS)-sponsored calls over the summer, and were ready to act when the CSR termination occurred.
Most states allowed insurers to make up for CSR losses by “silver loading” their rates—adding increased premiums to silver Marketplace plans rather than all plans, thus increasing the premium tax credits available to subsidized consumers and enabling unsubsidized consumers to avoid the price hike by purchasing a non-silver or off-marketplace plan.
The process was far from perfect. Rates for the benchmark plan (second-lowest cost silver plan) increased by an average of 37 percent – the largest annual increase under the ACA. Evidence now suggests that this hike was far more than insurers needed to cover their costs. As a result, insurers collectively are projected to owe nearly $1.97 billion in MLR rebates this year, reflecting high levels of profitability in the years 2017 – 2019 (the rebate is calculated on a 3-year rolling average).
The low MLRs of recent years may have prompted some regulators to be wary of insurers overreacting to uncertainty with large rate increases. However, the deeper lesson from 2017 is that contingency planning, creative thinking (with respect to the silver loading concept), and enabling last-minute rate adjustments can work to preserve market stability.
2017 Experience Helped Foster Stability for 2021
The CSR experience has been a helpful guide this year, leading states to work together through the NAIC and look to actuarially based models to respond to the uncertainty caused by COVID. Most states required insurers to file their 2021 proposed rates in the spring of 2020 according to their normal schedules, though HHS delayed its deadlines for states using HealthCare.gov. More importantly, though, most states embraced the key takeaway from 2017 – that rates could be changed quite late in the process without disrupting open enrollment – by leaving open the option for insurers to refile their rates if circumstances changed.
Many states also relied on actuarial resources, including the NAIC Health Actuarial Task Force (HATF) and a Society of Actuaries (SOA) toolkit, which assimilated massive data sets and produced templates to help states assess individual carrier filings. These actuarial resources were used to analyze numerous categories of data, and helped shape a new consensus: instead of COVID driving up rates in most scenarios, the net impact of the pandemic on 2021 claims costs was more likely to be a wash.
The SOA toolkit demonstrated that when carriers faced new costs due to COVID, the higher the incidence of the virus, the steeper the reduction in utilization of non-COVID primary and elective services. At least one study found that “COVID-19 may actually reduce insurers’ claims spending on net rather than increase it” for 2020. Indeed, if insurers’ 2020 COVID experience is any guide, the virus has improved, not harmed, their bottom lines, though insurers could face utilization spikes from pent-up demand when the pandemic subsides.
State Variations Remain
While national actuarial work has been critical this year, the role of states has been equally important. In virtually every national discussion, the question of whether to require all states to adapt a particular approach has been raised and rejected. Although having the states in charge rather than a single federal regulator can sometimes result in a patchwork of results, the ACA was designed for federal-state collaboration. The rate review process exemplifies how the ACA can work when federal standards are enforced by the states, with uniformity on core principles, but significant state flexibility to account for local variations in market dynamics and regulatory norms.
State regulators also are more familiar with local insurers and more attuned to differences among insurers based on their market history, regions of the state they serve, and their business strategies. These factors can lead to substantial differences in rate filings. A recent Kaiser Family Foundation study of insurer filings in all 50 states found proposed rates ranging from a 42 percent decrease to a 25.6 percent increase, though half of the rate proposals were within a small band between a 3.5 percent decrease and a 4.6 percent increase. An HHS analysis of final rates in FFM and SBM-FP states finds that the average benchmark silver plan premium for a 27-year-old will decrease by 2 percent in 2021.
Many states have not yet published final rates and some will not do so until open enrollment begins on November 1, but the available evidence continues to point to generally modest increases or decreases for most issuers, with COVID-related costs having a minimal net impact. Some state highlights include:
- Oregon was one of the first states to release proposed rates in May (2.2 percent weighted average increase) and after public hearings, released final rates in August (1.8 percent weighted average increase, ranging from a 3.5 percent decrease to an 11.1 percent increase).
- Connecticut and New York were among the most aggressive states in reducing proposed increases: Connecticut cut proposed average increases of 6.3 percent to less than 1 percent, and New York reduced proposed rates by 85 percent to an average increase of 1.8 percent.
- California had its lowest increase ever – averaging .5 percent for 2021 to beat the .8 percent average increase for 2020.
- States with decreasing average rates include New Hampshire (-22.1 percent proposed), Maine (-13.1 percent), Virginia (-6.9 percent proposed), and Pennsylvania (-3.3 percent).
Marketplaces Poised for Strong Enrollment Year
On the eve of the 2021 OEP, the Marketplaces are more stable than ever with their third straight year of stable rates. Insurer participation is increasing as insurers embrace a more predictable rating environment and seek new customers with a record number of people losing employer-based coverage. Although the ACA Marketplaces face a number of challenges in 2021, a key factor in Marketplace stability is the state-level rate review system.
 This includes both FFM and State-based Marketplace-Federal Platform (SBM-FP) states.