John Larew is the leader of the Office of Reform for Oliver Wyman, a leading strategy consulting firm and a sister company to Mercer. John’s guest commentary here provides a broader glimpse into the health insurance market and the forces affecting product pricing.
Have the public exchanges put downward pressure on individual health insurance premiums? The architects of the Affordable Care Act (ACA) made a bet that managed competition among issuers could tame the growth of premiums even as millions of previously uninsured individuals were welcomed into the risk pool. The public exchanges, or “marketplaces,” were a central pillar of the managed competition strategy. In a transparent marketplace, so the theory goes, health insurers would start to behave like airlines matching the lowest fares available on Expedia or Travelocity. But is that happening in reality?
We’re just starting to see data that will help us answer that question. A recently released analysis by HealthPocket, a website that provides consumer information on health insurance options, came to conclusions that seem favorable, at least at first glance.
HealthPocket compared the lowest on-exchange premiums at each metal level with the premiums for products sold by national carriers off-exchange in each of 39 markets. They found that that the most competitive on-exchange premiums were lower than off-exchange policies in 35 out of 39 markets examined — frequently by 40% or more.
While the results are intriguing, the story is more complicated than “exchanges = competition = lower premiums.” If competition were the primary driver of the difference between on- and off-exchange premiums, we would expect the disparities to be greatest in the states with the most on-exchange competition. However, there is no discernible correlation between the number of carriers on a state’s exchange and the “discount” to prevailing off-exchange rates.
Interestingly, some of the least competitive exchange markets have some of the highest “exchange discounts”: 32% in Alabama (two exchange issuers), 34% in West Virginia (one exchange issuer), and 35% in New Hampshire (one exchange issuer). Meanwhile, some of the larger states that attracted vigorous exchange competition show little difference between the lowest on- and off-exchange rates: 12% in Pennsylvania with its 10 issuers and 5% in Ohio with 12 issuers. Clearly, there is more going on here than competition among exchange issuers. We see three other major factors at work.
First are product differences. When Oliver Wyman was working with health insurers to develop their 2014 on-exchange offerings, we advised them that this price-sensitive market would require price points 15% to 20% below prevailing individual premiums. Because ACA rules restricted insurers’ ability to trim benefits or increase patient cost sharing, most carriers went aggressively after the one lever they could still pull: provider prices. As a result, the networks for exchange plans typically are more narrow than comparable off-exchange plans. In New Hampshire, for example, one carrier’s exchange product excluded 10 of the state’s 26 acute care facilities. In other words, exchange products are sometimes cheaper because they were designed to appeal to a different audience.
A second possible reason for the lower on-exchange premiums is that some of the carriers with the cheapest rates simply priced too low. An underappreciated aspect in the pricing of 2014 exchange plans was the sheer amount of guesswork involved. When pricing an off-exchange product, carriers could look at historical claims experience and competitor pricing. For on-exchange products, they had neither. Health insurers had to set premiums based on their best forecast of who would enroll in the marketplaces and how much pent-up demand for health care they would bring with them.
Inevitably, some carriers’ predictions were more optimistic than others, and this is reflected in the wide dispersion of premiums in some states. When exchange products go on sale for the 2015 plan year, we will see some of these outliers converging toward the market average.
A third possible reason: Off-exchange plans were not necessarily priced to sell. Some issuers took a “wait-and-see” attitude toward the individual market in 2014, not just by staying out of the exchange market, but playing cautiously in the off-exchange market as well. Carriers selling off-exchange faced the same uncertainties from guaranteed issue and community rating as their on-exchange counterparts. To manage the downside risk, some carriers in the individual market kept 2014 rates at the high end of what could be supported by the regulator. That way, they could stay in the market (exiting a market generally means waiting five years to re-enter) while attracting few new customers from the uncharted risk pool.
Still, evidence is accumulating that individual market consumers benefited where carrier competition was strongest. A recent US Health and Human Services report concluded that each additional competitor in a rating area was associated with a 4% lower benchmark premium (i.e., the cost of the second-lowest silver plan). As more carriers enter the on-exchange market, and as more 2015 carrier rate filings become available, we will learn more about the impact of exchange competition on premiums — and what it may mean for the long-term sustainability of the post-ACA individual marketplace. For now, it’s best to interpret the available data with caution — there is a lot going on behind those numbers.