Friday, February 24, 2012

HDHPs Will Be Adversely Affected By MLR Rules Under Health Reform

High-deductible health plans (HDHPs), including those compatible with health savings accounts (HSAs), likely will be more adversely affected by the medical loss ratio requirements under the Patient Protection and Affordable Care Act (ACA) than other types of comprehensive medical plans, according to a new report from actuarial and consulting firm Milliman and the American Bankers Association’s HSA Council. The report found that consumers who rely on HSA-qualified plans to finance their health care may experience greater costs in their current health plans and may eventually have to find more expensive replacement coverage. However, my own observation based on practical experience is that this purportedly “more expensive” coverage ultimately may provide more necessary coverage and better value over time.

According to Public Health Service Act Sec. 2718, as added by the ACA, insurers offering group or individual health insurance must report annually, to the Department of Health and Human Services (HHS), on the percentage of health premiums used for claims reimbursement and must maintain certain minimum medical loss ratios (MLRs). If minimums are not maintained, rebates must be provided to health plan participants.

HHS has established MLRs for large group plans, small group plans, and individual plans as follows (note that a state may impose a higher percentage):
• Large group plans (plans with 101 or more employees)--85 percent; and
• Individuals and small group plans (plans with 100 or fewer employees)--80 percent. HHS may adjust the percentage if it determines that an 80 percent loss ratio would destabilize the individual market due to the establishment of the state exchanges.

“HSAs were widely anticipated to be the low-cost bronze plans for consumers under the ACA,” said Kevin McKechnie, executive director of the HSA Council. “The MLR requirements make this very difficult and the requirements with respect to HSAs need to be adjusted.”

The study noted that the primary issues of concern for HDHPs are that:

• The medical loss ratio formula does not take into account contributions to HSAs. Many HDHPs are accompanied by an HSA, which covers much of the first-dollar costs before the plan’s deductible is reached. HSA contributions are currently not reflected in the medical loss ratio calculations (I note that this is probably because the participant is mostly, if not entirely, self-insuring the HSA portion).

• HDHPs may not be able to raise rates fast enough to keep up with rising costs. HDHPs will require larger annual rate increases than typical medical plans because medical inflation will have a greater impact on claim levels than plans with lower deductibles, the study noted.

• HDHPs have fewer premium dollars to cover their fixed expenses. Every plan has fixed expenses that it covers with premiums. Since HDHPs have lower premiums than other plans, a greater percentage of the premium must be used to pay these fixed expenses. For example, $400 of fixed expenses represents 40 percent of a $1,000 premium, but only 20 percent of a $2,000 premium and just 8 percent of a $5,000 premium. Therefore, it is harder for a lower premium plan to keep its non-claim expenses below 20 percent of its adjusted premiums as the MLR rule requires.

• HDHPs have less predictable claims experience that could increase the risk of paying rebates. HDHPs pay fewer claims than plans with low deductibles. But when HDHPs pay claims, the claim dollar amounts tend to be larger. This lower-frequency/high-payment creates less actuarial predictability which can result in high claims in one year and low claims in another. If the plan has low claims, it may not meet the 80 percent medical loss ratio and be required to pay rebates. If the plan has high claims, it may lose money that it cannot “make up” in other years.

In June 2011, America's Health Insurance Plans' Center for Policy and Research reported that the number of people with HSA/HDHP coverage rose to more than 11.4 million in January 2011, up from 10 million in January 2010, 8 million in January 2009, and 6.1 million in January 2008. Overall, enrollment in HSA/HDHP coverage in the group market rose to 9.1 million in January, up from 8 million in January 2010. Enrollment in the individual market rose to 2.4 million covered lives in January 2011, up from 2.1 million in January 2010. HSA/HDHP plans accounted for 10 percent of all new health insurance purchases in January 2011.

Quite frankly, I have never been a fan of account-based HDHPs--they essentially shift significant cost burdens to participants at the times when they most need the financial coverage and forces them to postpone needed medical care. I speak from personal experience as a previous participant in one such plan. Insurance is meant to cover major expenses incurred as a result of unanticipatable accidents and incidents of illness, yet HDHPs leave participants vulnerable when they most need the support.


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