What Health Insurers Should Consider Before Implementing a Premium Discount
The period of reduced economic activity in the United States due to the novel coronavirus pandemic has resulted in fewer in-office health care visits and procedures and, therefore, reduced claims costs for health insurers. This situation will likely continue for some time beyond the official reopenings of states and municipalities.
Even before the pandemic, insurers in the individual market reported an estimated record-high $2 billion in Affordable Care Act-required Medical Loss Ratio (MLR) rebates this year based on preliminary financial performance in 2017, 2018 and 2019. According to the Kaiser Family Foundation, the estimated average loss ratios of insurers in the individual market for these years were 82% in 2017, 70% in 2018 and 79% in 2019. On average, these loss ratios are lower than the requisite 80% MLR threshold below which a rebate is required. While less dramatic than the individual market’s performance, the small group and large group markets also reported large rebate positions in 2020, totaling an estimated $348 million and $341 million in rebates respectively.
With total claims now expected to be lower in 2020 due to the pandemic, health insurers may seek to offer policyholders discounted premiums, such as premium “holidays” or premium “credits.” Whatever the label or form, these reductions generally lower a policy’s monthly premium by a specified fixed amount or percentage. The discounted premium results from modifying the underlying assumptions (e.g., covered lives or expected claims) built into the original premium based on actuarial review. Therefore, unlike a premium grace period or deferral, there is no expectation or obligation on the policyholder to repay the discounted amount.
Before an insurer implements a premium discount, however, it needs to account for several factors to understand the implications of such an action. These factors are influenced by a particular insurer’s circumstances, including the specific state and market to which the discount would apply. A sampling of these factors is addressed below.
- Medical Loss Ratio (MLR): A premium discount not only mitigates the potential for another round of substantial premium rebates in the next MLR cycle but also provides much-needed immediate relief to existing 2020 policyholders amid massive and widespread furloughs and layoffs. (By contrast, MLR rebates will be issued in the fall of 2020 to 2019 subscribers.) Still, the uncertainty around the long-term impact of the novel coronavirus keeps the MLR picture in 2020 and 2021 somewhat cloudy; so too does the impact of the U.S. Supreme Court’s recent risk corridors decision, which found that insurers that participated in the health insurance exchanges in 2014, 2015 or 2016 may collect unpaid risk corridors obligations from the federal government through a damages action in the Court of Federal Claims. The timing and accounting of these payments could have important MLR implications that should be considered by an insurer contemplating a premium discount.
- State Law: A premium discount is only permitted if authorized under state law. Insurers will need to seek approval in each relevant state in which a discounted policy is offered. This may require considering and addressing anti-rebating or inducement laws as well as outlining planned member communications.
- Coronavirus Business Relief Programs: If an insurer is considering a premium discount for its group market line of business, it should be mindful of relief programs group sponsors may have availed themselves of under recent federal legislation. The two primary programs which may impact this analysis are the Payment Protection Program (PPP) and Employee Retention Credit. These programs each have their own sets of detailed requirements designed to ensure employers are dedicating a minimum level of their outlays toward payroll costs or qualified wages, among other goals. However, to the extent an employer’s health plan expenses decrease for a specific month (or months) in which a premium discount is applied, the employer will need to confirm that it continues to meet the relevant program rules to maintain PPP loan forgiveness or Employee Retention Credit eligibility (as applicable).
- On- vs. Off-Exchange Considerations and Rate Uniformity: Federal or state law regarding rate uniformity and nondiscrimination, as well as Exchange operational limitations, may limit the ability of an insurer to apply a premium discount to a particular market segment mid-year. For example, if a premium discount were to be applied to on-Exchange coverage, the insurer would need to understand whether or to what extent this discount impacts each rating area’s second-lowest cost silver plan which is used as a benchmark to calculate premium tax credits and cost-sharing reductions for qualified individuals. In general, an insurer that only participates in the off-Exchange individual market will have more flexibility in implementing a premium discount.
- State Reinsurance Waivers: Thirteen states currently operate a reinsurance program for the individual market, including on- and off-Exchange coverage. Under a reinsurance program authorized by Section 1332 of the Affordable Care Act (ACA), a state receives federal pass-through funding resulting from premium reductions that lower federal subsidies (e.g., premium tax credits) for the state’s residents. Per federal guidance, pass-through funding for the reinsurance program in the 2020 plan year was estimated initially in the fall of 2019 but is subject to an adjustment by the federal government to reflect “subsequent developments” such as changes in state law or a change to the reinsurance program. As federal guidance does not address whether a premium discount program would be considered a change in circumstances sufficient to trigger recalculating pass-through funding to the state, an insurer should consider engaging in a review of this issue prior to finalizing a premium discount.
The complexity of implementing a premium discount is a reflection of the complexities of operating in the health insurance markets today. Health insurance companies should undertake a multifaceted review of the specific regulatory and market conditions in their state before operationalizing a premium discount program.