Will COVID-19 cause California Small Business Medical Insurance rates to rise or fall?

Although COVID-19 is a crisis on both a human and economic level, one small silver lining is it may cause medical insurance rates to fall in 2021. The reason: A massive reduction in elective medical care.

The Best-Case Scenario—A Reduction in Medical Expense Spending

Two recently released reports dig deep into the question of whether COVID-19 will result in more or less money spent on healthcare this year. Milliman, a well-respected actuarial firm, just released a white paper entitled Estimating the impact of COVID-19 on healthcare costs in 2020. The Peterson Center on Healthcare and KFF (Kaiser Family Foundation) published a brief entitled How health costs might change with COVID-19.

Both reports describe the increased cost of COVID-19 testing and treatment, but they also report on a reduction in medical spending for other illness and diseases. As more and more patients avoid hospitals for fear of contracting COVID-19, many treatments have either been cancelled or delayed.

Milliman studied 18 different scenarios. (Here’s an easy-to-understand summary video of the report by Dr. Eric Bricker, M.D.)

According to page three of the Milliman report:

A significant proportion of healthcare services, both elective and non-elective, are currently being deferred and eliminated relative to when they would have taken place in the absence of COVID-19.

For example:

Deferral: A knee replacement scheduled for April 2020 might be deferred to August 2020. Nearly all elective procedures are being deferred at this time, and some non-elective procedures are being deferred as well.

Elimination: We expect fewer discretionary medical visits. For example, a persistent headache or a badly sprained ankle might have elicited a visit to a healthcare provider in normal times but not during the COVID-19 pandemic.

The Milliman report expects a higher level of savings and states:

Almost every [area studied] is expected to see a net decline in health expenditures, though most hot spots (the New York City area and New Orleans) [will] see less of a decline, because they are treating more COVID-19 patients. (page 6)

The Peterson–KFF report is less optimistic, saying:

There is additionally some concern that certain types of delayed care could worsen health outcomes and cause higher spending later. For example, delaying or forgoing chronic disease management, either because of reduced access to medical providers or pharmacy services, could lead to more complications later

The Peterson–KKF report concludes by:

On net, health spending could be higher this year and next than otherwise expected before the pandemic hit, but it is yet to be seen how upward and downward cost pressures will balance out.

The Worst-Case Scenario—An Increase in Medical Insurance Rates in 2021

While the Milliman report envisioned 2021 small business medical insurance rates to be lower or unchanged, Covered California’s Chief Actuary concluded that COVID-19 could cause huge rate increases, saying:

2021 premium increases to individuals and employers from COVID-19 alone could range from 4 percent to more than 40 percent.

Covered California issued this statement in a policy/actuarial brief entitled, The Potential National Health Cost Impacts to Consumers, Employers and Insurers Due to the Coronavirus (COVID-19).

We can only hope Covered California for Small Business is wrong, and the fact that they released this report March 22, 2020—very early into the shelter-in-place order—suggests they may not have factored in the savings from deferred and eliminated elective medical procedures.

An Estimation: 2021 Medical Insurance Premiums

The potential savings from elective medical procedures, along with increased costs from COVID-19 treatment, will factor into next year’s medical insurance rates in this way:

Commercial insurers must submit premiums for 2021 to state regulators for review and approval in… [May and June]. In their premium calculations, insurers are not allowed to justify future premium increases based on any losses they expect this year. Instead, premium justifications must be based on assumptions about claims costs for next calendar year. If claims costs are exceptionally high this year, though, insurers might need to replenish surplus in order to remain solvent. Once finalized, in late summer, premiums will be locked in and insurers will be unable to change those rates for the duration of the coming calendar year. (Source: How health costs might change with COVID-19)

The “Medical Loss Ratio” and Its Impact on Rates

There’s another factor influencing 2021 rates for California small business medical insurance rates: the Obamacare requirement that insurance companies spend 80 percent of the money they collect on medical expenses. This requirement is referred to as the “Medical Loss Ratio” or MLR.

If insurance companies spend less than 80 percent of the premium they collect from small employers on medical expenses, then the insurance companies must return the amount underspend on healthcare to employers. For example, if an insurance company spends 79 percent of the premium on medical expenses, they must return or “rebate” one percent of the premium to the employers and employees who paid for the insurance coverage.

Insurance companies set 2020 rates last year in 2019. Abrupt changes from COVID-19 will likely cause a big difference between the actual money insurance companies pay for medical this year compared to the amount they expected to pay last year.

A report by the Peterson Center on Healthcare and the Kaiser Family Foundation (KFF), Data Note: 2020 Medical Loss Ratio Rebates estimates that the rebates could be as high as $358 billion nation-wide in 2020, and this is without any impacts from COVID-19.

Currently, MLR rebates are based on a three-year average, meaning that 2020 rebates are calculated using insurers’ financial data in 2017, 2018, and 2019.

2021 rates will be impacted by COVID-19 expenses and savings. As the report says:

These high rebate estimates come at a time when insurers are working on submissions to regulators for proposed premiums for 2021, in the midst of significant uncertainty about how the coronavirus pandemic will affect healthcare costs.

So, this is a challenging time for insurance companies to set their 2021 rates. This article summarizes many of the issues insurers face. If they set their rates too high, they risk losing customers and being forced to rebate premium because of the MLR. If they set their rates too low, they risk losing a lot of money. Stay tuned. We should know soon enough.

If you’re an employer who needs assistance with your group medical insurance, contact us at 800-746-0045 and we’ll help guide you through these challenging times.

By Bruce Jugan, June 11, 2020