At home COVID testing impact on healthcare costs
By: Mehb Khoja | May 2022
Earlier this year (January 10th, 2022), the Biden administration announced that at-home COVID tests would need to be covered by insurance starting January 15th, 2022. At the time, many thought the additional costs to cover OTC tests could substantially increase first-dollar healthcare cost projections to self-insured plan sponsors. In the stop loss world this could have an impact to the aggregate claims as groups may be pushed over their attachment point. Plan sponsors typically complete a budgeting exercise in the 3rd or 4th quarter (premium equivalent rate setting) the year prior the unexpected and mandated benefit change could have created a budgeting issue plan sponsors and potentially to stop loss carriers who assume the aggregate risk beyond the corridor. Looking back with hindsight, I think plan sponsors (and carriers) dodged a bullet. Let’s go back and look at the facts at the time.
Early January saw a rise in new COVID infections with the 7-day average ranging between 700,000 and 800,000. In fact, on January 11th the U.S. hit an all-time high (at the time) of 1.35M new COVID cases (https://www.reuters.com/business/healthcare-pharmaceuticals/us-reports-least-11-mln-covid-cases-day-shattering-global-record-2022-01-11/) and the trends at the time saw the 7-day average increase by 3x from two weeks prior. This renewed surge had the country and administration scrambling to offer testing solutions for Americans. When the administration implemented the COVID testing/coverage mandate, they required plans/plan sponsors to cover up to 8 tests per member per month at an approximate cost of $12 per test ($96 pmpm). If you start doing the math:
- $96 pmpm
- 2 members per contract
- Membership covered on average for 10 months
- Average annual cost of $10,000 per contract per year
You can start to see that covering testing costs could have added an additional 15%-25%, first-dollar costs (assumed by the health plan or self-insured employer). For the self-insured employer, this increase would start creeping very close to traditional aggregate corridors (25%) and likely blow through the small group/level-funded corridors (typically 10%-15%).
Keep in mind, the above costs/estimates were closer to a worst-case scenario. Of the eligible population, not everyone would consume 8 tests per person per month and many would exhaust other free options from local and national government first. There also needed to be an assumption for testing “fatigue” as well as just a general drop in infection rates.
Fast forward to May and infection rates (according to Google and their data from New York Times and Our World in Data) are about 90% lower than early January. That said, infection rates today (May 8th 7-day average) are more than double rates from March which suggests the need for testing supply could increase again – but likely the impact to employers/plans would be limited.
Many COVID related requirements have and continue to be lifted. Masks became optional at airports and planes as of April 20th and prior to that the guidance for restaurants and other indoor facilities had been lifted. The ease in restrictions is leading to business going back to usual in most places. Airport traveling is almost back to 2019 levels according to the TSA (https://www.tsa.gov/coronavirus/passenger-throughput). Large hotel operators point to increased bookings and expect pre-COVID demand to return this summer (https://www.costar.com/article/247489207/group-business-recovery-nears-as-bookings-accelerate-for-park-hotels-resorts). As life continues to go back to normal, perhaps healthcare costs will normalize as well. We continue to learn the impact on morbidity and mortality and its still too early to tell what long-term impacts COVID will have to health plans and plan sponsors.
Self-insured employers and health plans may have dodged a bullet with the additional expenses of testing but that doesn’t mean their wont be future impact. One area to pay close attention to is the shift between fully insured to self-insured plans, or even vice versa. In 2020, many fully insured carriers had higher than expected profitability due to deferred care. Same is true for self-insured plans who just had surplus towards their healthcare budgets that either stayed in reserves or were applied to the 2021 budgets. In 2021, anecdotally, we saw a reversion to the mean with utilization and expenses coming back to normal and perhaps slightly higher with COVID care (including high-cost COVID hospitalizations).
The “savings” seen in 2020 might have encouraged movement away from fully insured to self-insured plans, however, the “loss” from 2021 might just shift employers back. Most employers do not want volatility with their healthcare costs, especially smaller employers who consider in-between solutions like level-funded and captives.
COVID has created a ton of volatility on first dollar claims, but it's also expected to create volatility on high-cost claims as well. With the number of screenings that were missed in 2020 and 2021, many believe that conditions with early detection, like cancer, will have been missed and that more aggressive (and higher cost) treatments would be needed to treat these patients. The pandemic has also slowed the growth of gene therapy treatments which are high cost but curative. With the FDA tied up in reviewing COVID vaccinations, many gene therapy approvals were pushed out for later evaluations. As these high cost conditions come into utilization, we could see a shift back towards fully insured as smaller plan sponsors may not want to stomach the volatility.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email:
Mkhoja@MRMStopLoss.com
My opinions are my own and do not reflect the opinions of my company, its affiliates, or the clients we serve. My opinions are based on publicly available data through May 9th, 2022 and subject to change as additional information becomes available
"The Great Resignation" Will Have a Negative Impact on Loss Ratios Seen in Stop Loss in 2022
By: Mehb Khoja | January 2022
Its mid-January which means whether you're a stop loss carrier, MGU, health plan, TPA, or broker - chances are you're reconciling 2021 revenue, actual vs expected. The result? Many will see lower revenue than expected and the prime driver is "the great resignation". The COVID-19 pandemic has created all sorts of societal impacts such as issues to health (morbidity/mortality), technology surge and remote working, price increases and inflation, and a housing boom like we haven't seen since the mortgage crisis of the late 2000s. But how has it impacted health insurance practitioner's business?
The health insurance industry will closely monitor utilization and impacts will vary whether you're a first dollar health plan, stop loss carrier or reinsurer. Typically, we look at loss ratios to determine if we got it right - as in, earned more premium than spent on claims and expenses. In January (once policies are finalized), carriers (and others) will project premiums for the year - pretty simple calculation of multiplying January headcount by 12 as an assumption for annual. As claims come in and premium is reconciled, we can measure profitability. So in January of 2021, the health insurance community likely projected 2021 enrollment using January 2021 headcount - so how'd that workout for you?
Looking at our own business, we saw about a 2% slip in enrollment when comparing Dec 2021 to Jan 2021. We similarly measured the same time period for 2020 (COVID started impacting the U.S. economy in March of 2020) and similarly saw a 2% reduction in enrollment. When looking at groups that were consistent between 2020 and 2021, we saw a cumulative 5.5% decrease in enrollment when comparing Dec 21 to Jan 20. This certainly puts pressure on persistency calculations - which may have met expectations for rate increase and case counts but will look worse due to enrollment reductions.
Fast forward to January 2022 - and now we're similarly projecting 2022 revenue. For new business, this is a simple exercise and its all new enrollment. However, a close review of renewals is needed because something big happened between the time you renewed the case and January 1. The Great Resignation hit a historic high in November of 2021 when 4.5M workers willingly quit their jobs. Looking at our own data, we saw a 5% decrease in enrollment between renewal underwriting and January 1 enrollment. At a time when persistency is strong, renewal rate increase is strong, the biggest driver now of stop loss profitability might just be enrollment.
So what does this mean all mean in terms of running a stop loss business? To me, it says we need a diversified block of business in order to reduce the volatility seen in U.S. economic conditions. Typically, stop loss diversification means something different and as underwriters and actuaries we look at a good mix of small, medium, and large deductibles and premium; small groups, large groups; rate-cap business, no rate-caps, spread between broker/consultants and commission levels; lasers, RTM, etc. Most carriers/MGUs would have adhered to a diversification plan and while the economy was growing and self-insurance was growing, this would have meant a compounding increase to premium revenue (and I didn't even mention leveraged trend).
However, diversification now needs to extend to geography and industry - and while our rating algorithms take these into account we need to take it a level deeper. Many carriers have excluded industries in their underwriting guidelines (e.g. tribal business) - the Great Resignation may mean some changes in the view of industries most impacted by the pandemic - namely the food, lodging, retail and recreation industries as well as healthcare. Another trend seen during the pandemic is the shift in where people want to live. Every year, U-haul conducts an unscientific study on population migration by measuring one-way truck rentals (as in, you're leaving town with no plan on returning). The last two years show a migration out of high-cost / high tax states and a migration into sunbelt states, many that do not have state income tax and also happen to have significant job growth. While many "desk jobs" have remote options available, "hands-on" jobs would require a change in employers if someone were to relocate. That said, a block of hospitality focused business in California might require a remediation plan that can't be fixed purely by rate-action and chasing off bad risk.
How many economists work at insurance companies? Most might plead the fifth on this question. But their is a good argument to be made that making good risk decisions lies not only in the hands of actuaries, underwriter/raters, clinicians, sales people and other insurance professionals. A business plan can and should be built around focusing on the right industries and the right geographies - and when you get both right you stand to gain with compound growth. Which market will our next sales person focus in? Is it time to cut off a particular distribution partner? As a reinsurer, do we want to cover the risk of a regional health plan focused in a market seeing migration out? These are the questions that will need to be asked as the insurance industry builds its 2022 business plans. Looking at loss ratios is just the first layer of dissecting the problem and developing a plan for future business resilience. The Great Resignation will not last forever. Subsidies and stimulus will come to an end and then the Great Reshuffle will commence.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email:
Mkhoja@MRMStopLoss.com
My opinions are my own and do not reflect the opinions of my company, its affiliates, or the clients we serve. My opinions are based on publicly available data through January 23rd, 2022 and subject to change as additional information becomes available
Gene and Cell Therapy Updates
By: Mehb Khoja and Jon Forster | November, 1 2021
Gene & Cell therapy has been a hot topic the past few years with many big ticket medications up for approval. While these are potentially lifesaving therapeutics, they expose an enormous risk to payers. FDA commissioner Scott Gottlieb, MD stated “by 2025, we predict the FDA will be approving 10 to 20 cell and gene therapy a year based on the assessment of the current pipeline and the clinical success rates of these products” in a statement on January 15, 2019.
Let’s start with the difference between gene and cell therapy. Gene Therapy is the insertion of usually genetically altered genes into cells especially to replace defective genes in the treatment of generic disorders or to provide a specialized disease-fighting function. Cell therapy relies on transfusions to replace diseased or dysfunctional cells with healthy ones. In broad terms, we’ve seen current gene therapies cost between $1M and $2M while cell therapies have ranged between $500K and $1M. Also note that gene therapy treatment costs are predominantly in the cost of the ingredient while cell therapy treatments have both an ingredient as well as hospitalization cost. Many gene therapies in the pipeline are expected to be priced at $2M with some ranging as high as $3M-$4M.
While the number of eligible patients in the US is currently relatively low (< 5K), it is anticipated that this number will climb to 50K by 2026.1 This is due to the anticipated number of products to grow to around 40 during that time frame.1
Let’s start with the gene therapy treatments currently on the market. Zolgensma & Luxturna quickly became top drugs of discussion in this space as both have been in the market since 2019. Zolgensma carries a price tag of $2.2M, ingredient costs only. Zolgensma is used for the treatment of spinal muscular atrophy and was approved by the FDA in mid-2019. Luxturna approaches a $1M price tag and was approved in late 2017. The two treatments are given to children/infants with Luxturna having further use in adults. Recently, Novartis, the manufacturer of Zolgensma, indicated that they are further studying the use of Zolgensma in children and young adult patients as well.
Many gene therapies have been in the pipeline for several years but as testing continues, setbacks have occurred. All eyes were on Roctavian, a hemophilia gene therapy medication, with a targeted approval in late 2020. At the time, Roctavian was expected to carry a price tag of $2M - $4M. The FDA asked BioMarin to provide two additional years of data showing continued success of the treatment prior to being approved. BioMarin will be back in front of the FDA seeking approval in late 2022.
Likewise, the FDA recently placed a hold on the Bluebird Bio drug Eli-Cell slated for a 2022 approval. This gene therapy medication was developed to treat cerebral adrenoleukodystrohpy. There are still many treatments slated for a possible 2022 approval which we are studying closely to predict the impact on overall trends on first-dollar, stop loss, and excess of loss/reinsurance levels.
Kite, a Gilead company, received approval for two CAR-T therapies between the 2nd half of 2020 and first quarter of 2021. Tecartus & Yescarta carry a price tag of close to $1 Million dollars for total drug and treatment costs. Tecartus treats mantle cell lymphoma and was approved in July 2020. Yescarta was initially approved in 2017 for the treatment large B-cell lymphoma, and in March of 2021 received an approval for follicular lymphoma. “As we look to bring the hope of survival to more patients in need, today’s FDA decision represents a real step forward in our commitment in hematologic malignancies” Said Christie Shaw, executive Officer of Kite in Gilead’s press release of Yescarta’s approval.
Due to the high cost impact of these treatments, we will be keeping close tabs on the status of the FDA reviews. We closely track several sources of information regarding cell and gene therapy and will continue to share information we receive. Below are two charts detailing costs and estimated launch dates of known gene & cell therapies in production. Credit to Prime Therapeutics on this data as it was pulled from their presentation at the 2021 BCS Risk Navigators Conference.
1 Estimating the clinical pipeline of cell and gene therapies and their potential economic impact on the US healthcare system. Value in Health journal. Published May 16, 2019. Page 624.
Our opinions are our own and do not reflect the opinions of our company, its affiliates, or the clients we serve. Our opinions are based on publicly available data through November st, 2021 and subject to change as additional information becomes available
Employer Stop Loss and COVID19 - Impact on Business Results
By: Mehb Khoja and Jon Forster | July, 12 2021
In collaboration with Jon Forster, MRM's Chief Operating Officer.
When studying the earnings and financial results of public health insurers, one could see that 2020 was a good year for first dollar carriers. However, as a large claim carrier, we saw a different result and we’re sharing some of those results here.
The COVID-19 pandemic made 2020 a year of great challenges. The world had to deal with shutdowns, hospital overflows, short supply of PPE, children switching to homeschooling, and a variety of other challenges. The health insurance industry saw impacts as well. Utilization of healthcare services dropped during the year. This generally meant that first-dollar coverages ran at a surplus (i.e. loss ratios that were better than expected). Many individuals were foregoing routine annual checkups, dental cleanings, and voluntary procedures while healthcare systems shifted to taking care of COVID patients exclusively. When studying the earnings and financial results of public health insurers, one could see that 2020 was a good year for first dollar carriers. However, as a large claim carrier, we saw a different result and we’re sharing some of those results here. Prior to analyzing the impact of COVID on our block of business, its important to understand where we expected that impact to come from. About a year ago when the pandemic was seemingly reaching new daily highs, we looked at our block of business and costs from COVID claims (at that time) and determined that policies at a $50K individual deductible or below and 120% aggregate corridor or below were most at risk for volatility. We expected most COVID hospitalizations would cost less than $75K and thus limited impact on policies with a deductible greater than $50K.
As it turned out, we saw our fair share of COVID claims in excess of $75K. We specifically wanted to measure the impact of high-cost COVID claims on our business results. To do so, we analyzed all claimants in excess of $100,000 in policy-year spend that also had a COVID-19 diagnosis (whether primary or secondary). Note that a stop-loss carrier’s block is much smaller than a first-dollar carrier – and restricting claims above a certain threshold and diagnosis further reduces our claim count and credibility of the study. That is to say that these are our conclusions and that they should not be used to develop or predict/project results for other carriers.
In viewing our results, it was found that high cost COVID claims somewhat mirrored the infection rates in the US in 2020. From April through June, there were very low incidence of high cost COVID claims. We noticed a handful of large cases occurring early in the pandemic as cases started to spike. Throughout May & June infection rates dropped which corresponded to a drop in large COVID claims. After a slight increase in both infections rates in July and August we saw a drop in the fall months. Recall that in late summer of 2020, many businesses and municipalities considered and implemented “reopening/return-to-work” plans and ultimately we saw a second wave. During the second wave of infections, we similarly saw a spike in COVID large claims. Almost ½ of our total claim count came in the three months of Nov 2020 to January 2021.
Post January the infections and large claims have dropped sharply. With the percent of the US population becoming vaccinated rising, infection rates in June 2021 are lower than they have been since March 2020. This is a positive sign for society as a whole and, we believe, for things to come in large claims as well.
As part of our study, we also looked at claimant age, gender, hospital stays and survival rates. We saw 43% of our large claimants were above 60 years of age and 32% in the 50-59 range. This is in line with information released by the CDC which shows increased risk of hospitalization & death in older populations.
Our data showed 68% of large claimants were males. 71% of our large cases survived while unfortunately 29% passed away. 71% of our large claimants had a length of stay above 20 days with two claims accumulating stays over 100 days.
So what does this mean overall? In terms of block performance, we saw a small increase in 2020 loss ratios over 2019, though well within our pricing target for the year. First dollar carriers saw much more volatility as utilization on all claims starting coming back in the late fall/winter of 2020. Ultimately, COVID had a small impact on our business results. Conditions such as cancer and oncology treatments continued on in 2020 while other services were brought to a halt. So as a large claim carrier, we continued to see the traditional high cost claims such as cancers and specialty drugs along with COVID claims adding to our utilization mix for the year.
The latest infection rates suggest we’ll continue to see a decline in high cost COVID claims though as an industry we’ll need to monitor the residual effects of COVID on other medical conditions including mental health. With the lifting of restrictions and a return to a normal society the hope is these trends continue for the year to come.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email:
Mkhoja@MRMStopLoss.com
My opinions are my own and do not reflect the opinions of my company, its affiliates, or the clients we serve. My opinions are based on publicly available data through March 9th, 2021 and subject to change as additional information becomes available
Employer Stop Loss and COVID19 - Migration Trends Impacting High Cost Claims
By: Mehb Khoja | March, 9 2021
It should come as no surprise but people are moving during the pandemic. Several articles have been written about mass exodus from San Fransisco and New York and the next boomtown in Austin, TX. It should also be noted that some of the mass exodus discussion has been overblown, however, its safe to say the pandemic has changed the way we live and the way we work - and the impact of that has been seen in the real estate market where the supply is far below the demand. The demand for bigger homes, more space, a yard for the kids to play in, additional rooms for home offices for each spouse. Coupled with low interest rates and work from home, many residents who once lived in smaller homes but closer to the action are looking to move to the suburbs so they can spread their wings in this new environment. I'm going to tie this back to healthcare - just stick with me for a second.
Another data source of determining where people are leaving and where they are going is the U-haul annual migration study. U-haul tracks one-way rentals of trucks and compares departures to arrivals - meaning you're picking up your stuff and not coming back. This is different than renting a U-haul to pick up a new couch because you found a killer deal somewhere. In this instance, you're picking up the truck and returning in the same location. But how interesting would it be to know where people are leaving and where they are going? The good news is U-haul makes this data somewhat available.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email:
Mkhoja@MRMStopLoss.com
My opinions are my own and do not reflect the opinions of my company, its affiliates, or the clients we serve. My opinions are based on publicly available data through March 9th, 2021 and subject to change as additional information becomes available
Employer Stop Loss and COVID19 - Impact of Mental Health
By: Mehb Khoja | November, 22 2020
Mental health issues are on the rise during this pandemic and will likely be a significant unexpected cost going into 2021.
I recently read the American Health Association's
2021 Environmental Scan, a report that shows all the macro factors affecting hospitals including GDP, unemployment, supply chain, health equity/diversity, access/affordability and of course the impact of COVID19. As you’d expect, this year’s report was dominated by the impact of COVID19 and the topic I found most fascinating was the section on behavioral and mental health. These are some eye-opening statistics about mental health in the U.S and this is before COVID:
• Anxiety is the most common mental health disorder affecting 40 million adults every year
• 17 million adults experience a depressive disorder each year
• More than 42% cite cost and poor insurance coverage as the top barriers to accessing mental health care
• The U.S. spends approximately $200 billion due to mental health conditions
• Roughly 111 million Americans live in areas that have a shortage of mental health professionals.
Mental health is not as widely discussed as it should be and that’s due to the stigma (negative attitudes, thoughts, beliefs and stereotypes) towards those with mental health issues. While public campaigns such as Mental Health Awareness Month (May) and World Mental Health Day (October 10th) start conversations, having them sustain has been an issue. But according to the AHA report, we’re on the verge of a mental health crisis. The National Center for Health Statistics released a study in September 2020 (studied in July 2020) that showed 1 in 3 adults reported symptoms of an anxiety disorder, compared with 1 in 12 a year ago. 55% of adults also reported life to be more stressful.
What does this mean to the stop loss community? Quite frankly, mental health (and potentially substance abuse) may be the next largest growing segment of stop loss claims. At present, we’re focused on specialty drugs and gene therapy as these events are infrequent but high cost (in the case of gene therapy,
extremely high cost). However, mental health claims have the opportunity to be expensive and highly frequent based on the data shown in the AHA report. Inpatient stays for mental health treatment involve an overnight or longer stay in a psychiatric hospital or psychiatric unit of a general hospital. Inpatients hospitals provide treatment to more severely ill mental health patients, usually for less than 30 days. A person admitted to an inpatient setting might be in the acute phase of a mental illness and need help around the clock. Typically a person who requires long-term care would be transferred to another facility or a different setting within a psychiatric hospital after 30 days. (credit to northtexashelp.com)
Mental health can also lead to substance abuse. According to drugabuse.gov, any people who are addicted to drugs are also diagnosed with other mental disorders and vice versa. Compared with the general population, people addicted to drugs are roughly twice as likely to suffer from mood and anxiety disorders, with the reverse also true. So what is the treatment course for substance abuse? According to addictioncenter.com, inpatient and outpatient routes are available for those seeking treatment. As expected, inpatient stays are more expensive (28 days to six month programs) and designed to treat serious addictions. Conversely, outpatient treatment centers are designed for mild addictions and consist of 10-12 hours a week, though treatment can last from 3 months to over one year.
Whether mental health and substance abuse treatment is handled at the outpatient or inpatient setting, we should expect costs to treat these issues to increase in 2021. Inpatient hospital stays can cost anywhere between $3,000 to $6,000 per day (allowed costs) so start multiplying that by the number of treatment days and you’ll see we’re not just talking about agg claims.
Being able to predict utilization and costs are a major part of our role as stop loss professionals, whether you serve carriers or employers. However, helping those in need is an even larger part of our responsibility as insurance professionals that we can all work on together. There are several resources that employers make available, such as EAP, and its important that we understand how these benefits work so we can relay that with easy-to-understand terminology to those who need the support. This month is Movember (or No Shave November) and you’ll see several supporting men’s health issues and awareness. Movember.com has some great resources for mental health that apply to everyone and I found this site very helpful:
https://us.movember.com/about/mental-health
They use an acronym, ALEC, to start the conversation about mental health:
A – Ask
L – Listen
E – Encourage Action
C – Check-in
These are some simple steps for all of us to follow and more detail can be found here:
https://us.movember.com/mens-health/spot-the-signs
The holidays can be an equally joyous and stressful/challenging time. Now is a great time to use ALEC to see how your loved ones, colleagues, and acquaintances are doing. Wishing you a happy and healthy Thanksgiving and upcoming holiday season.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email:
Mkhoja@MRMStopLoss.com
My opinions are my own and do not reflect the opinions of my company, its affiliates, or the clients we serve. My opinions are based on publicly available data through November 22nd, 2020 and subject to change as additional information becomes available
As of this writing, more than 25M people are collecting unemployment benefits and over 1M people filed for unemployment for the first time last week. The unemployment rate is hovering near 8% and these are some of the worse jobless reports we've seen since the great depression.
So what does unemployment mean to the employer sponsored health insurance industry?
According to Kaiser, 157M people are covered by employer sponsored health insurance or nearly half the country. Employers provide benefits as a means to attract and retain employees. Benefits are a big part of overall compensation and the provide a tax benefit to employers. With the cost of benefits being so high, employers will typically subsidize a majority of expense making it an easy decision for employees to obtain benefits from their employers as opposed to other private means.
This all sounds great until an unexpected change in employment occurs - like what is happening today with the impact of COVID19. When employees lose their employment, they also lose access to employer sponsored coverage. Most would seek benefit coverage from a new employer but in the interim the member could elect to keep benefits with their current employer (under COBRA) or they could seek other private options for insurance. Or – they could choose not to get covered which unfortunately happens at a significant rate due to the costs of insurance. When members seek coverage through COBRA, they remain on the employer plan for a certain amount of time while paying nearly the full cost of coverage. While the full cost of coverage may seem like a large expense, those members who are in the midst of a major course of treatment (i.e. dialysis, specialty meds, pre/post operation, etc.) would likely prefer to keep their current coverage as they may have already eclipsed their out of pockets as well as be very comfortable with their current care team. These are also the members who are likely to have high cost claims that could lead to stop loss claims.
During this time, it’s very important that carriers evaluate their current block of business for large reductions in headcount. Most employers have a re-rating provision in their stop loss contract that addresses changes in enrollment or demographics and most trigger at a +/- 10% shift. We recently evaluated our block of business and found 15% of cases since 10/1/19 had a greater than 10% reduction in enrollment from the effective date to the most recent reporting period. We also found 7% of groups had seen an enrollment increase of 10% or greater.
Not only is it important to identify cases that may need to be re-rated, but it’s also important to start measuring emerging loss ratios on cases seeing a large enrollment shift. We looked back at our groups since 2016 that had a greater than 15% reduction in enrollment and saw that loss ratios on that cohort were 14 points higher than the cohort with less than 15% enrollment reduction. This furthers the point previously made that during enrollment reductions, the higher cost claimants are likely to stay on the plan and continue to incur expenses – all while premiums will reduce creating volatility on both sides of the equation.
The reduction in enrollment is not just a loss ratio problem for carriers. It’s also a revenue problem for brokers, MGUs, and even the department of insurance that collects premium tax. Essentially any percentage-based add-on to risk premium is at risk due to enrollment reductions. When January 1, 2020 business was written (in Oct/Nov/Dec of 2019) and projections on revenue were made, capital set aside for risk taking, and annual expenses were allotted to revenue that was intended to be collected, no one thought a pandemic would create the kind of havoc we’ve seen over the last 8 months. While we are seeing some instances of enrollment increase – the majority of shift is downward which means we all need to expect a reduction not only in risk margin but also in revenue, commissions, sales comp, underwriting/administrative fees, and premium tax.
This issue of headcount reduction leading to decreases in revenue is a good reason to start talking about fixed fees vs a commission model. Many brokers will see a reduction in commission revenue due to unemployment and it has the potential to create revenue and profitability issues. Let’s not get too upset for the brokers who have benefited from leveraged trend increases in comp for several years. The topic of fixed fees or revenue for value is sure to come up in renewal discussions over the next few cycles. But this subtopic is not related to COVID so I’ll save it for another day.
“Nobody knew health care could be so complicated” – the famous words uttered by President Trump in 2017 as he sought to upend the Affordable Care Act and bring healthcare reform under a new administration. But three years later, healthcare continues to be complicated and the volatility created by COVID19 continues to wreak havoc on a system in need of change.
Ask most people what they think makes healthcare so complicated and my guess is most would mention costs. Billed charges, covered/uncovered charges, network discounts, and then ultimately the amount the patient shares in (the allowed charges). Copays vs coinsurance, deductibles and out-of-pockets – it’s not easy, even for those who work in healthcare or consult/advise in healthcare. It is complicated!
Of the myriad of cost-containment solutions available in the market, one of the favorites of the stop loss industry is referenced-based pricing (RBP). RBP is typically a non-network solution where patients seeking hospital care will work with RBP vendors to secure lower pricing for facility charges. These charges are usually a reference point to Medicare. It’s no secret that Medicare has a better with hospitals in most cases (if Medicare secures a price of $100, the commercial carriers are typically reimbursing between 2x to 4x for the same service). I’m not going to get into why a service negotiated by Medicare is lower than that of a traditional health insurer – it’s beyond the scope of this discussion. I will, though, mention again that RBP is a favorite amongst stop loss carriers as RBP can significantly reduce hospital charges which leads to lower stop loss premiums for the employer (and lower claims for the carrier).
How does RBP work? I’m going to keep this super simple. Basically, a member goes to the hospital seeking care and receives a bill that is, for example, 300% of Medicare. The RBP vendor says to the hospital: “That’s too high. We’ll reimburse you 150% of Medicare, take it or leave it”. Some providers take it wanting to collect the immediate cash flow while they can, some fight back. Again – that part is being the scope of this discussion.
Medicare is the largest payer of healthcare in town, which means they can drive a good bargain (or discount) on healthcare charges. The lower charges mean lower premiums for Medicare enrollees and less out-of-pocket expenses. This all sounds well and good, so long as Medicare can continue paying healthcare costs. Only two things can create volatility for Medicare: the outflow (higher than expected charges and utilization ) and the inflow (collecting Medicare taxes from wage earners). While most of us in healthcare have focused on cost/utilization volatility, we now need to divert some attention to the inflow (for Medicare, its tax dollars and for employer sponsored plans its contributions).
With unemployment at historical highs, the ability to collect tax dollars that fund Medicare is in jeopardy. According to the Medicare Trustees report, the Part A Trust Fund which pays for hospital and other inpatient care would start to run out of money in 2026 – and that projection was made prior to the reduction in Medicare taxes seen recently due to unemployment. If Medicare is unable to collect the necessary dollars needed to keep the program solvent, how will it reimburse healthcare claims? And if they’re challenged to reimburse healthcare claims, how will an RBP vendor use Medicare as a reference point?
This is purely my opinion, but if Medicare struggles to stay solvent I would expect Medicare will reimburse a lower amount to providers and providers will have little recourse other than raising commercial rates in order to subsidize their shortfalls. So now instead of asking 200% to 400% of Medicare, those same providers may be asking 250% to 500% of Medicare all while not even increasing their actual dollars/reimbursement request. So in the scenario where the RBP vendors suggest: “150% of Medicare – take it or leave it” I would expect the provider community will largely leave it and continue efforts to recoup through litigation.
In the commercial space, non-COVID related services such as elective surgeries are way down. Just follow the latest earnings reports of most publicly traded insurers and you’ll see them commenting in this direction. That reduction in elective care has led to larger than expected profits. What is unclear, at least to me, is how the experience for Medicare has fared over the last 4 months. Early indications were that Medicare and Medicaid populations were more at-risk for COVID infections (and thus downstream costs and utilization). Perhaps Medicare has seen a similar reprieve in non-COVID care and the “outflows” haven’t been as bad which could help subsidize the lack of “inflows”. But if Medicare is in trouble, then expect the RBP vendors to be in trouble as well. The increase in litigation in this space could expose more transparency to price – which may ultimately be great outcome for consumers.
This article was inspired by this Kaiser article from July 22nd: Another Problem on the Health Horizon: Medicare Is Running Out of Money
The rise in the pandemic and the early surge in infection rates occurred in March which means we've now gone through two market earnings' cycles. As we view data from the latest earnings reports, what can we learn and forecast for the stop loss market?
Two entities reporting earnings last week reveal some telling signs ahead for the stop loss industry.
UnitedHealthcare
Last week UHC said that second quarter profits were substantially higher because of the unprecedented delay in elective and nonemergency procedures, as hospitals and clinics prepared for and responded to the pandemic.
David Wichmann, UnitedHealth Group's CEO said "We currently expect care access patterns, while somewhat more volatile than in the past, to moderately exceed normal baselines in the second half [of the year], as people seek previously deferred care." He also stated "It's kind of hard to ignore the number of new diagnoses that dropped off," he said. "It's hard to ignore the drop-off in [care for] heart attacks, stroke. It may be speculative here, but I think the data that we see suggests that there will be some intensity in services that people receive."
I read this as there has been a significant decline in total healthcare utilization. The sum of emergent/non-emergent care plus COVID-19 care is significantly less than the baseline. In fact, UHC reported an improvement in medical loss ratios from 83% to 70% during the one-year period. That means a substantial decrease in utilization and a spike in profitability. But what does it mean for high cost claims and stop loss? An analyst asked about acuity and what trends UHC sees in the coming months. UHC responded that they expect individuals with chronic conditions that have missed treatments to come back into the system and coming back potentially with a higher acuity level. This could mean higher high-cost claims for the the stop loss industry, however UHC also stated "its little too soon to really be seeing that in the current trending that we're looking at as we sit here today and that "it really isn't showing up yet, but we expect that to show up as the systems continue to reopen and, really importantly, consumer comfort level increases."
It feels like from these statements that UHC wants to be prepared for an uptick in chronic care treatment and they essentially want to reserve for those expenses. However, they fully admit that they're not seeing it yet in the data. That tells me that the stop loss policies with year-ends as of June 30th 2020 likely produced better loss ratios than were expected. But can how long can we expect that good fortune to continue? Let's look at another earnings report that gives insight into forecasting.
Johnson & Johnson
Johnson & Johnson (from Yahoo Finance) researches and develops, manufactures, and sells various products in the health care field worldwide. It operates in three segments: Consumer, Pharmaceutical, and Medical Devices. Medical Devices segment provides orthopedic products; general surgery, biosurgical, endomechanical, and energy products; electrophysiology products to treat cardiovascular diseases; sterilization and disinfection products to reduce surgical infection; diabetes care products; and vision care products.
J&J is the maker of several devices and tools used by surgeons for both elective and emergency procedures. Demand of their products can be a precursor of what to expect. So what happened with demand of their products? "Worldwide medical devices sales were $4.3 billion, declining by 32.7% due to the negative impact of COVID-19 restricting elective procedures across all regions. Sales declined in the US by 39.6% and declined 26.4% outside the US."
This could mean that hospitals across the country have less of a need for J&J's products heading into the second-half of the year because they're still fully stocked with their products sitting on the shelves from the first-half of the year. J&J did acknowledge that demand is slightly increasing. "With respect to the healthcare industry, we are encouraged to see many procedures starting to return versus what we saw in the back half of the first quarter across the globe. For example, according to IQVIA, office visits are down approximately 10 to 15% as of late June compared to the earlier stages of the pandemic in mid-April when office visits were down almost 70%. So still down, but showing improvement. This is indicator for our pharmaceutical and medical device segments." Office visits are the initial entry point for future high cost claims. While some high-cost claims are unexpected and catastrophic short-term events, many are planned events based on diagnosis after review of diagnostic and imaging procedures (transplants, cancer treatments, etc.). Those procedures have been down for the last few months as hospitals were reserving resources for COVID19 patients but (and as acknowledged by UHC) and consumer comfort returns and patients return to the healthcare system, we will likely start seeing a normalization of utilization.
It is still hard to tell what the stop loss industry should expect from calendar year policies. The initial thoughts were that demand for high cost procedures would return late in the year and that full year utilization would be in-line with expectations though highly volatile month to month. But the recent surge in infection rates throughout the country could force a second wave of stay-at-home orders and further suppress the use of healthcare for non-COVID patients. That would mean lower loss ratios for the stop loss industry.
Another outcome to closely monitor over the next few months will be the shift from fully insured to self-insurance. As companies like UHC release earnings that show strong profitability, we can expect proponents of self-insurance will grab those headlines and convince plan sponsors to leave traditional insured coverage. But companies like UHC may make it difficult for plan sponsors to shift funding vehicles as future rebates may be tied to renewal decisions. This will be an interesting conversation during the 1/1 cycle.
Note that the comments from this article were inspired by a recent Robinhood podcast I listened to last week. Typically, my thoughts are my own but the idea to research these two companies were inspired by Robinhood.
Given the dispersion of risk between employers, employer stop loss carriers and reinsurers we should expect reinsurers to be the experts at cell and gene therapy, employer stop loss carriers to be the experts at cancers, congenital anomalies and high cost drugs and for employers (and their advisors) to be the experts on claims below traditional stop loss deductible thresholds. So who should be the experts on COVID-19 claims?
I recently wrote this article for the Society of Actuaries' "Reinsurance News" newsletter where I explore this topic as well as how knowledge of healthcare claims differs between self-insured employers (and their advisors), employer stop loss carriers, and medical reinsurers. Are the medical reinsurers equipped with the right tools and resources to understand COVID-19 infection rates and subsequent healthcare costs and utilization?
COVID-19 will ultimately have an impact on self-insurance that is almost an immediate opposite impact that cell/gene therapy has had. I think of this as a "Push" and "Pull" on risk tolerance. I believe COVID-19 will "pull" more plans towards self-insurance with stop loss. I also believe cell/gene therapy will "push" larger employers, regional health plans, and even large direct carriers towards newly purchasing stop loss coverage, newly purchasing excess of loss coverage, or purchasing these coverages at newer/lower levels. The impact of today's healthcare economy is creating a fascinating change in risk tolerance and something all self-insured/stop loss experts should be closely monitoring.
The Pull - COVID-19
Proponents of self-insurance have preached the benefits for years: custom plan design, not subject to certain state requirements, no premium tax, no carrier margin, less expense. All good reasons to accept the volatility of self-insurance - and volatility can be mitigated with stop loss coverage. According to Kaiser (Figure 10.2), the percentage of employees covered by a self-insured plan has grown steadily from 1999 to 2019. The trend amongst smaller employers (200 - 999) has been volatile ranging from 44% to 58% (1999 to 2019) with several peaks and valleys during that time. In fact, Kaiser's data shows a growth amongst this size segment between 2011 and 2013 (leading up to the ACA) followed by a steep decline into 2017. From 2017 to 2019, we see another surge in self-insurance amongst these smaller employers.
Especially this year, brokers/consultants and non-health plan TPAs will point to the reduced healthcare expenses paid by self-insured plans in 2020 due to the COVID-19 pandemic compared to the fully insured plans. We've already heard from several insurers that the increase in COVID-19 related expenses has been far offset by the reduction in elective surgeries and a general reduced use of healthcare. Milliman expects lower commercial healthcare spend in 2020 compared to previous estimates. Many TPAs are looking to capitalize on this short-term trend by advocating for more self-insurance. We've seen several TPAs and even some health plan ASOs suggesting reduced or waived ASO/TPA fees for a period of time to entice the smaller groups to move to self-insurance. This movement will likely create an uptick in self-insurance and stop loss coverage. However, buyer beware. ASO/TPA fees only make up a small portion of total healthcare costs (typically 3-7%). Even stop loss premiums on smaller groups will only make up at most 20% of the total costs. It's the underlying variable claims that will make up the lion's share of spend - and valuing the underlying network is an exercise that takes precision (more than just comparing the stop loss carrier's agg factors). Plan sponsors will want to ensure they're getting good advice - and if you're not sure, get a second opinion in order to add confidence towards your decision to self-insure. Those plan sponsors who newly self-insure will also want a firm understanding of stop loss and how policy coverage is evaluated. Many employers are shocked at the rate increase in stop loss premium in the first renewal following self-insurance. This is due to the contract changing from immature to mature as well as having more data to evaluate potential new high cost claimants. Overall, self-insurance is a great strategy to pursue especially during this time in healthcare economy where costs are lower. Plan sponsors should just make sure they are educated on all aspects of funding before making the adjustment.
The Push - Cell/Gene Therapy
If COVID-19 is enticing a growth in risk tolerance, cell and gene therapy might be having an opposite impact. Cell and gene therapy are treatments that are curative and therefore come with life-saving benefits as well as reduced long-term costs of treatments. Sounds great - but the downside is these treatments are very expensive. Costs of $2M to $3M per treatment are now becoming more commonplace and the self-insured plan, along with the stop loss carrier, will assume this new burden.
Employers purchase stop loss coverage for volatility protection and stop loss usually covers between 0 and 4 claims per year. In the pre-gene therapy world and even in the pre-ACA world, rarely would annual claimant expenses exceed $1M (in most cases, the providers would not charge above $1M because they knew they wouldn't be able to collect). So - plan sponsors that had 10,000 employees and above typically would not purchase stop loss coverage. An employer with 10,000 employees is spending roughly $100M to $125M a year in healthcare costs - so a $1M claim wouldn't create a ton of volatility (that roughly 1% impact could be budgeted for with additional margin in the premium equivalent rates). However, with the increase in cell and gene therapy treatments, larger plan sponsors are seeing volatility that they may want to mitigate with stop loss coverage. With over 40 FDA approved gene therapy treatments expected by 2022, large plan sponsors are taking notice as are large direct carriers who may have previously not purchased excess of loss coverage.
Large plan sponsors and direct carriers are likely seeking volatility protection at a $2M threshold and above - and the marketplace isn't stocked with carriers/reinsurers looking to collect very little premium in exchange for huge risk. A few gene therapy-only coverage options are now available (Cigna, Aetna, Blues for example) yet it's unclear how these coverages (policy and premium) will grow as new gene therapies emerge and if the thresholds proposed fit the risk tolerance needs of large employers. One thing is clear - there is a new need for volatility protection that didn't exist a few years ago. Large plan sponsors will seek to evaluate stop loss coverage or other alternative financing structures such as captives and pooling mechanisms more today than they have previously.
Conclusion
The push and pull of COVID-19 and gene/cell therapy on risk tolerance/aversion is fascinating. Some employers are happy to assume new risk while others are newly averse and this change is occurring in segments that were on the complete other side of risk tolerance (if you're a nerd like me, you're smiling ear to ear in amazement watching this new market occurrence). The stop loss/reinsurance industry will need to develop coverage that fits its new plan sponsor entrants whether they be from very small employers to very large employers/direct carriers. One could argue that more development has occurred down market than up market with products like level-funding, group captives, and terminal liability provisions. Now is the time for expanded development for the larger market. Healthcare financing professionals are distracted (rightfully so) by COVID-19 but before we know it - it will be 2022 and those 40 gene therapy treatments will have price tags that put a financial toll on plan sponsors who forego stop loss coverage. This is a special time for the stop loss industry as it gets to participate in new product development and organic market growth.
For the fully insured plan sponsors wishing to join in the self-insured market, buyer beware. There's a term called reversion to the mean - which basically means if costs are lower today they may be higher tomorrow (and the average of the two will equal out). Said another way, if you were already self-insured you stand to benefit during these times but becoming newly self-insured could pose an impact to trend you weren't expecting.
Both COVID-19 and cell/gene therapy pose a financing risk to self-insured plan sponsors, stop loss carriers and reinsurers. We will closely monitor the impact of this risk over the next few months.
By: Mehb Khoja | May, 29 2020
I have mentioned in a previous article that I believe the utilization changes due to COVID19 will lead to lower individual stop loss claims due to less surgeries occurring at the facility. This position has been confirmed by many large carriers during recent public announcements such as UHC, the Blues, and other insurers. High cost procedures, like transplants, are even further delayed due to a shortage of donors due to stay-at-home orders that are reducing accidental deaths. I still believe individual stop loss claims will be lower this year and as such I expect policyholders with experience refund features (experience-rated refund, return of premium, participating contracts, profit-share, gain-share, etc.) in their 2020 policies will benefit due to lower high claim utilization. Let's review how experience refund features work.
Refund Features
Experience refunds in stop loss policies come in different shapes and sizes. Refunds can be based on a single case (one policyholder's experience) or based on a pool where the pool organizer could be a broker/consultant or association. Typically, the calculation is based on claims compared to gross or net premiums. A simple example could look like this: return of 50% of excess profits where a policy is expected to be profitable at a 70% gross loss ratio. In this example, let's assume a policyholder's experience for a policy year runs at a 55% gross loss ratio - this would suggest there is 15% (70% less 55%) excess profit. The profit share would be 50% of the 15% or 7.5%. This is one example and its common for carriers to file a wide range of feature characteristics such as the percent returned and the loss ratio threshold where the calculation of profit occurs. Some broker/consultant panels also base the calculation on net loss ratios to remove broker commissions/overrides from the calculation.
Experience Refunds, MLR, VBC
The use of experience refunds have been around for several years. They give the self-insured policyholder comfort in that should the stop-loss carrier excessively profit on a case, they are able to recoup some of that overage. Most carriers attach a renewal obligation to the refund which increases persistency.
Experience refunds could be looked at a similar lens as minimum loss ratios on fully insured coverages (80% - 85% depending on employer size) or even value-based care contracts between providers and payers. With minimum loss ratio thresholds, carriers are expected to spend 80%-85% of premium on claims and return premium should that threshold not be met. Many carriers, like BCBS of Michigan, are already returning fully insured premiums to their policyholders due to the significantly reduced utilization seen over the last 3 months.
Value-based contracts work in a similar fashion as experience refunds - except they look to incent providers to manage patient care at lower costs. However - no incentive is needed right now! Due to the significantly reduced utilization seen in the past three months, providers are expecting a big win on their value-based care contracts. Diving into this topic is beyond the scope of this article, however, Milliman just released a great article that speaks to this very issue. The topic has many similarities to employer stop loss / experience refund contracts.
Considerations for Carriers with Experience Refund Contracts
Carriers with experience refund contracts will need to address two key issues this coming fall as they look to renew these policies: reserves and rate-action.
Reserving
Carriers with a high concentration of experience refund contracts will need to think of adjustments to their reserving methodology. Historical completion factors applied to most recent experience may suggest a "win-fall" and carriers may look to release reserves. While the reduced utilization will likely mean a more profitable result for stop-loss carriers, carriers will want to reserve for expected return of premium. Using a pegged loss ratio inside of the last 8 months (December 31 valuation date) instead of completion factors may be needed while awaiting ultimate results of the policy year. Incurred contracts with 6 to 12 months of run-out provision will take even longer to reconcile and carriers may want to use additional conservatism for these policies.
Rate-Action
Most carriers blend a manual with experience to develop a formula premium. In today's environment, we can expect the manual and experience premium to be on opposite ends which will lead to a lower rate action (in general). Carriers should expect their broker/consulting partners to push hard on renewals as they'll undoubtedly view 2020 as a strong year for the carrier. While this may ultimately be true, carriers will need to think through expected utilization in 2021 as pent-up demand returns. Do your manuals take into account this added demand? If you pass along a rate-pass or rate decrease, are you setting up your 2021 policy to be hit hard? These are some of the issues carriers will have to think through as they enter into the next January 1 cycle.
Conclusion
Return of premium features in a stop-loss policy bring added value to the employer and brings additional persistency to the carrier. 2020 policies may run better than expected due to COVID-19s impact on hospital utilization and this will mean lower stop loss claims. Stop-loss carrier may need to think of 2020 and 2021 in concert as the lower demand today will lead to pent-up demand in 2021 and profitability in 2020 may need to be used to subsidize 2021 earnings.
I hope you had a wonderful Memorial Day today. More than just a day off, its a day to remember and recognize the men and women who sacrificed their lives for our country. Not only is it a great time to remember those men and women, but also the front-line responders helping the nation through this pandemic. I am beyond grateful!
By: Mehb Khoja | April, 20 2020
I have mentioned in a previous article that I believe the larger impact from COVID19 on stop loss will be seen in aggregate claims more so than individual/specific claims. While I still believe that to be true, I also believe loss ratio performance on individual stop loss will worsen. Not from unexpected claims but due to premium reduction seen from unemployment.
Unemployment Rate
As of this writing, the U.S. unemployed count is up to 22M individuals. In the week ending April 11, the advance figure for seasonally adjusted initial claims was 5,245,000, a decrease of 1,370,000 from the previous week's revised level. The previous week's level was revised up by 9,000 from 6,606,000 to 6,615,000. The 4-week moving average was 5,508,500, an increase of 1,240,750 from the previous week's revised average. The previous week's average was revised up by 2,250 from 4,265,500 to 4,267,750. The advance seasonally adjusted insured unemployment rate was 8.2 percent for the week ending April 4, an increase of 3.1 percentage points from the previous week's unrevised rate. This marks the highest level of the seasonally adjusted insured unemployment rate in the history of the seasonally adjusted series. The previous high was 7.0 percent in May of 1975.
Industries disproportionately affected by unemployment include agriculture, leisure/hospitality, and construction. While the federal government has passed measures such as the Paycheck Protection Plan to provide payroll and other operational support to businesses, it sounds like that money dried up quick ($350B in two weeks) and went to bigger businesses before the smaller businesses could get their share. According to this report from the Small Business Administration, the industries to see the most PPP loans include construction, professional/scientific/technical services, manufacturing and healthcare/social assistance. This report also shows a disproportionate amount of funds going to states with lower infection rates. For example, Texas received just over $28M making it the second highest (California was 1st with $33M and New York was 3rd with $20M). According to Wikipedia and the WHO, New York by far has the most COVID infections with 237,000. Texas ranks 10th in the country with just over 18,000 and California ranks 7th with 29,000 cases. This could potentially mean a harder business recovery for the states receiving disproportionately less funds and that has impact on employee benefits and stop loss.
Unemployment and Employee Benefits
As employers deal with the downturn in the economy, we should expect many employers will permanently reduce headcount in order to operate their businesses. Many employers are using temporary measure such as reduced hours and furloughs while they hope to receive federal funds to help bridge the gap.
From a stop loss perspective, we've seen several employers and health plans seeking to make amendments to eligibility to allow for coverage of furloughed, reduced hour, and even terminated or temporarily laid off employees.
There are several issues related to offering benefits to furloughed, reduced hour, or temporary lay-offs. Instead of revising all those thoughts here, I'd suggest checking out the resource centers/pages setup by many employee benefit consulting firms. I found this one to be quite helpful: Alera Group.
Impact on Loss Ratios
The unemployment in the country will eventually affect the insurance carriers (both first dollar and stop loss). Stop loss, like other coverages, is expected to run as a pool and run close to a normal distribution - meaning a bulk of cases run at a range of expected while some cases are outliers (both super profitable or super unprofitable). That said, unemployment will cause the pool to shrink which will create volatility. You might be thinking that a reduction in headcount could also mean a reduction in claims. While that would be true for the first-dollar carrier, I would suspect most stop loss carriers will see the same level of stop loss claims. Those with chronic conditions or morbidity risk will seek COBRA coverage should their employment come to an end. So essentially, stop loss carriers could see the same level of catastrophic claims but with a reduction in premium - which means higher loss ratios than projected.
Its hard to suggest appropriate scenarios of headcount reduction especially since most believe the unemployment rate will quickly reverse once the infection rate slows and more testing/treatment/vaccination is available. In fact, President Trump released his "Operation Re-open America" plans this past week which talks about three phases towards reopening the economy.
Carriers looking to scenario test unemployment should look at their block of business, the industries they largely cover and determine how the impact of unemployment by industry directly affects its block. For example, carriers who focus in on construction or retail industries may need to use a higher unemployment assumption. A starting point could be to use 5% and 10% reductions in count starting on July 1 for January 1 policies with no adjustment to claims. Using that as a baseline, I calculated an impact of roughly 2 to 3 points on a target loss ratio (from 65% to 68% for example). This also assumes that employers are able to meet their premium obligations. Many stop loss carriers, along with almost every business, are granting additional grace periods for premium remittance. As carriers hold a receivable on their balance sheets awaiting premium, the impact of "bad debt" from employers unable to fulfill their obligations will also affect ultimate loss ratios.
If loss ratios are worse off than expected, we can expect the stop loss carriers will look to adjust/recoup at renewal time. Renewals will face all types of uncertainty this year:
a. impact of coronavirus claims on spec and agg as well as the inclusion of testing/treatment costs towards employer expenses
b. impact of non-COVID19 claims due to suspended/postponed treatment and the future trend impact on delayed services
c. eligibility and headcount changes due to unemployment
d. reserving/IBNR and how brokers/TPAs will assess carrier performance when negotiating rates.
e. Removal/adjustment of policy features such as changes in minimum aggregate thresholds.
These are really just the some of the issues current policyholders, their brokers/consultants, and carriers will face as we go into 7/1 and 1/1 renewal cycles. We haven't even begun the conversation of how this uncertainty will affect fully insured policyholders from seeking self-insured alternatives or the risk appetite of current and new carriers from entering this space. During these times, we'd be best served with a ton of transparency on both sides as we seek to better understand the affects of COVID-19 on healthcare policyholders and insurers.
COVID-19 is certainly putting pressure on the health insurance industry but for stop loss carriers, that pressure is seen on the aggregate stop loss policy and potentially the individual policy. Stop Loss carriers collect little premium for aggregate coverage because the probability of an aggregate claim is low, but with the coronavirus pandemic all stop loss carriers are closely monitoring their aggregate policies.
Aggregate coverage protects an employer from total claims below the individual deductible exceeding a corridor, such as 125% of expected claims. Assuming the aggregate attachment factors are set properly and assuming underlying trend is 6%, on a 125% corridor coverage claims would need to increase 32.5% (1.25 x 1.06) year over year before an aggregate claim could occur. Individual employer claim trends of 32.5% are highly unlikely as evidence by a recent Milliman study that said healthcare inflation between 2018 and 2019 was 3.8%. The study, the Milliman Medical Index, also said “healthcare costs are increasing at a slower rate by historical standards”.
With recent first dollar trends in the 3%-7% range, it becomes hard for an employer to truly have an aggregate event. This is why most stop loss carriers charge a few dollars ($2 - $6 per subscriber per month) for aggregate coverage at a 125% corridor.
How does aggregate risk increase?
Aggregate risk, and thus the premiums assessed, can increase due to the following characteristics:
1. Lower corridor (such as 115% or 120%, or even as low as 110% for carriers who sell a “level-funded” product)
2. Lower headcount
3. Liability limits (or lack thereof)
Lower corridors
This one is pretty obvious. As the corridor decreases, the risk to the carrier increases. Lower corridors are typically coupled with lower individual stop loss deductibles as well. That combination means more risk shifted from the self-insured employer to the stop loss carrier – thus higher premiums for coverage.
Lower headcount
This is the opposite of the law of large numbers. With less headcount, stop loss carriers price in the additional volatility and expectation of an aggregate event. This is accomplished with a higher per subscriber premium, additional margin in trend assumptions, or both.
Liability limits
Here’s the big differentiator for health plans and third party carriers. Most third party carriers limit their aggregate exposure to $1M and in some cases to $5M. Many health plan carriers, such as regional BCBS plans, have unlimited coverage on their aggregate policy. For larger self-insured groups, aggregate coverage becomes less attractive because of the law of large numbers and the potential cap on aggregate coverage. It is common to see self-insured employers skip the aggregate coverage once they are between 1,000 and 2,000 subscribers or above. Here’s how the math shakes out:
Employer size: 1,500 employees
Average projected annual healthcare spend: $12,000 per subscriber per year
Total employer spend (annual): $18M
Aggregate attachment at 125% corridor: $22.5M
Total spend where coverage limit is met: $23.5M
As you can see in this example, an aggregate limit of $1M not only caps the stop loss carrier’s liability but also brings lesser value to larger employers (and continues to decrease as headcount increases).
Why do employer buy aggregate coverage?
They buy it for sleep at night protection: that off-chance that inflation spikes so high that the volatility to self-insured expenses could put a strain on the employer’s underlying business – creating/selling widgets. They won’t want to worry about this volatility so they purchase volatility protection – stop loss coverage. What can create this type of spike in claim trend? Changes in networks, new PBM, mergers/acquisitions (where underlying demographics change significantly), reductions in force, and even potentially pandemics. Employers aren't purchasing aggregate coverage in the hopes of having to use it - its quite the opposite. But it's sound risk management (just ask the CFO) to have some top line protection. You may have read this week about the All-England Lawn Tennis Club having purchased pandemic insurance in the event a pandemic kept Wimbledon from occurring. After purchasing the coverage for 17 years and paying $34M for it over that time, the policy will help the policyholder recoup $141M which is nearly half of the projected revenue from the event in 2020.
COVID and Stop Loss
Stop loss carriers are in the midst of stress testing their stop loss policies – meaning, they’re running various scenarios of claims occurring and how they may impact potential stop loss payouts to policyholders. Modeling exercises consist of determining the potential COVID infection rate. At the time of this writing, the U.S. infection count is less than 550,000 but it is believed that the actual infection rates are much higher due to the virus spread as well as lack of testing availability. This FAIR Health study models low/medium/high infection rates of 20%/40%/60% of the country. At present, if we were to take a multiple of 10x the current infection count and compare to the U.S. population, we’d be at about a 1.67% infection rate. That’s not to say the infection couldn’t reach the 20%/40%/60% suggested in the FAIR Health study, it’s just to say we have a long way to go before we get to that level.
After determining the infection rate, carriers need to project the severity of treatment and costs. Using the same study, FAIR Health suggests that of those infected 50% will seek medical care with inpatient stays ranging from 15% to 20% of those seeking care. Inpatient stays would need to be further stratified to high cost inpatient stays (12-20 days in the ICU and on a ventilator - this is to measure impact to the individual policies) and low cost inpatient stays (fever and other symptom management over the course of 5-8 days). Keep in mind that the FAIR Health study looks at the entire US population, regardless of age and insurance access. The stop loss community would need to adjust these figures to exclude the Medicare/Medicaid population where severity of treatment is higher but costs are lower compared to the commercial population. This step is critical as the CDC has stated the hospitalization rate is highest for those aged 65 and older and these lives are not typically a part of a self-insured population. This study from Peterson-Kaiser Family Foundation shows some ranges for high-cost and low-cost hospitalization that could be modeled as part of any stress testing.
Thus far, we’ve discussed the additional costs towards the aggregate due to COVID19 claims but it would also be fair to think through potential reductions in cost during this time. Several hospitals have reported a significant reduction in revenue due to non-COVID treatments being postponed or suspended. Further, several hospitals are postponing/suspending diagnostics like MRIs, CTs, and echocardiograms. These tests are what determine the future surgery needs of patients and if they’re too being postponed for the next 4 to 6 weeks, we can expect hospital revenue loss (and, thus, costs to the self-insured employer) will equally be extended.
Finally, thought should be given to the stop loss effective date and contract basis. Simply looking at current aggregate factors for 12 month and modeling the additional cost impact and stress to attachment points would be a conservative route. In reality, the new costs from COVID may overlap effective dates/contracts and thus the employer could be on the hook for two accumulation periods. This fact alone significantly reduces the liability to the stop loss carrier not to mention the opportunity to renew policies will come at higher short-term trends/margins while carriers look to understand the impact better.
Stress testing is an exercise all carriers should be conducting right about now but the potential impact from COVID expenses is definitely high for carriers who sell lower deductible / lower agg corridor products like level-funded. My guess is those carriers will pull-back these products for the time being until as an insurance community we can better understand the impact of these new short term utilization changes.
MRM has setup a resource page on our website where we'll track useful information for the stop loss industry.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email: Mkhoja@MRMStopLoss.com
Employer Stop Loss and COVID19 - Rush, Hush, and Crush
The premise of Ms. Barrett's article was that significant plan change, such as moving from a traditional low deductible PPO to a HDHP, would cause members to rush to use services before the new plan cycle took effect. With the additional utilization at the end of the prior plan year, the thought was that benefit usage would be slowed (hush) at the beginning of the new plan year since services were over-consumed in the prior period. Finally, as members were adjusted to the new plan design (roughly half way through the year) and back to needing services, utilization would go back to normal though it would seem like a spike in utilization if compared to the utilization in the early months of the plan cycle causing a trend crush.
I believe we're in store for a similar event with COVID-19 though the utilization patterns are likely to be more abrupt and with higher acuity.
Hospital Services and Revenue
This week I spoke with a Chief Medical Officer of a hospital in the Chicago area that is part of a large system. He shared some stats about his hospital that I think is valuable information for the actuaries helping self-insured employers, health plans and stop loss carriers.
I need to preface that this information is related to one hospital in one geography. Utilization will vary by geography and that you shouldn't use this information to model out any utilization or cost changes without further research in your specific geography.
What this doctor told me is that his hospital has suspended all non-COVID related procedures, except oncology, for the next 3 to 4 weeks. Procedures are down 80% while this hospital waits for the influx of COVID treatment that they know is coming. Not only are current non-COVID treatments suspended, so are diagnostic services such as MRIs, CTs, and echos which identify the future needed procedures. He said that emergency room revenue is down 50% and operating room revenue is down 70%-80%.
Benefit Utilization
How does this information impact our work? I think the reserving and pricing actuaries have some thinking to do. The geographies that are "gearing-up" for their COVID rush might actually see a steep reduction in near-term utilization and costs. The benefit consulting actuaries should be careful not to call this as "savings" and instead should inform their self-insured clients that the dollars should be reserved for not only the COVID rush but also the backlog of procedures that are currently suspended and could come back before the year ends.
The opposite could hold true in geographies where COVID has a deeper penetration. Based on this map and other publicly available data, we know the penetration is much higher in the northeast and utilization of services has already spiked in those areas. It could be that a similar spike will come to other areas - its hard to say right now but all the smart people are telling us shelter-in-place and practice social distancing which, of course, is meant to curb the infection rate.
The math for the stop loss actuary is a little harder since large deductibles cause leveraging. The stop loss actuary needs to think about how utilization of high cost claims would be impacted by this pandemic. We will certainly see more COVID high cost claims but will we see a reduction in other high cost claims? This study by FAIR Health suggests that the average billed charges for a COVID patient who is hospitalized will be approximately $75,000 (allowed charges will vary by network but an estimate is included in this study). This is an average, but higher acuity patients will definitely cost more. Based on my conversation with the Chief Medical Officer, a patient who is on a ventilator is expected to be in the ICU for 14 days. I would estimate the highest acuity patients will have billed charges at or slightly above $100,000. These are just the facility charges and we'd fully expect additional costs from professional services and pharmacy.
While we will see an uptick in COVID hospitalization, what should we expect to happen on other high cost claims? If diagnostics testing is suspended for the next few weeks to months, how will the next tumor or inflammation be detected which would have lead to a high-cost procedure? And if diagnostic testing is suspended, will the delay in care lead to higher acuity patients which will eventually cost more?
These are just some of the questions we need to be asking as we measure the new rush/hush/crush. Today's utilization patterns will certainly affect reserve setting and carriers (both fully insured and stop loss) will need to consider premium deficiency reserves if they expect they're premiums will be inadequate. Self-insured employers will need to increase internal budgets if they believe first-dollar costs will rise. I'd like to see more data before thinking about what pricing adjustments are needed for future policies. I think its fair to say that most carriers will take a conservative approach by increasing near-term trend assumptions while more data becomes available. Understanding treatment costs, long-term health consequences for infected patients, vaccines/cures along with new/expanded claims for mental health and substance abuse will all play a role in future pricing assumptions.
MRM has setup a resource page on our website where we'll track useful information for the stop loss industry.
I invite you to share your thoughts/opinions with me either on LinkedIn or by email: Mkhoja@MRMStopLoss.com
With the passing of the Families First Coronavirus Response Act, fully insured carriers are providing coverage for COVID-19 testing and testing related expenses. Taking that a step further, many fully insured plans are providing access to telemedicine at no cost as well as early refills on maintenance medications. While these benefits are automatic for those on a fully insured plan, members of a self-insured plan need their plan sponsor to make the same benefit enhancements during this time and most TPAs and large ASO health plans are suggesting that path. As mentioned last week, self-insured plans with stop loss should seek approval of these plan design changes with their stop loss carrier to ensure the stop loss carrier will allow these adjusted claims to accumulate towards stop loss.
Adding additional complexity to this topic, Aetna/CVS, Humana, and Cigna have all come out saying not only will they cover testing and testing related expenses, but that that they'll also cover COVID-19 related treatment which could include a trip to the ER or several days in the ICU for treatment of pneumonia.
This is a very generous position for these fully insured carriers to take and its likely a matter of time until the other large ASOs and even regional health plans come to the market with similar solutions. This will, however, create significant confusion for members covered under a self-insured health plan. Self-insured plan sponsors will need to make decisions on behalf of the plan if they want to cover similar expenses. Typically, self-insured plans will budget at the expected costs plus some nominal margin (2%-5%) to protect from volatility. Making the decision to cover treatment costs will be done individually by plan sponsors creating a ton of confusion for members of self-insured plans that choose not to cover treatment expenses. As previously mentioned, most members do not know if their plan is self-insured or fully insured - they just know the name of the carrier that is on their insurance card. Thus, self-insured Aetna members who belong to plans where treatment costs are not covered risk confusion and financial impact should they need to seek care for COVID-19. Further, self-insured plans with stop loss should understand that the stop loss carrier has a right to handle the plan design change in one of three ways:
1. include plan design changes with no cost adjustment or re-rating of aggregate factors.
2. include plan design changes with a cost and/or factor adjustment
3. exclude plan design changes from coverage
As I mentioned last week, I do not believe the costs of COVID-19 pose an issue to stop loss carriers (spec of $50k or above; agg corridors of 120% or above). Should plan sponsors choose to cover treatment costs towards the plan, I still do not see it having a major impact on stop loss carriers (we're talking a few thousand dollars of the member's OOP that shifts over to employer paid expenses). That said, stop loss carriers with low aggregate corridors and all level-funded plans are at higher risk and will need to make more thoughtful decisions on covering treatment related expenses towards the plan.
Unemployment
Unemployment creates many issues for employers, brokers, and stop loss carriers. The unemployment rate sky-rocketed to 3.28M - the largest number ever recorded. As employers wrestle with their expenses amid the coronavirus, all parties should have a clear understanding of how changes in enrollment could affect a stop loss policy.
First off, with the unemployment figures increasing, stop loss carriers should expect having a fair share of groups who see massive reductions inforce which could mean a significant premium reduction compared to annualized projections. This may cause a restatement of annual revenue and profitability - especially for stop loss carriers that are publicly traded firms. As employers face a reduction inforce and look to maintain their current stop loss structure, they should understand that the stop loss carrier usually has a threshold in their contract that allows for re-rating of premium and factors should a headcount or demographic change occur. Typically carriers will call this option should headcount or demographics change by 10%; some larger brokers are successful in getting carriers to adjust this threshold to 15%.
While many employers will need to reduce their headcount, many will still want to provide health insurance benefits during this global pandemic. As such, it is expected that eligibility requirements may be amended for a short period of time (such as 90 days) to allow greater flexibility to affected plan members. Keep in mind, eligibility amendments need to be approved by the stop loss carrier so its important that plan sponsors work with their broker and carrier to acknowledge these changes.
Additional Carrier Flexibility
The next few months will require everyone to be more flexible. Another way stop loss carriers will likely be more flexible will be with premium payments. Most times, carriers will require monthly premium payments to be paid by the first of the month (with a grace period of a week). However, during this time it is expected that plan sponsors will need additional time to make payments and it is expected that most stop loss carriers and reinsurers will extend additional grace periods (from 30 to 90 days) to allow plan sponsors additional time.
On the same token, we may see stop loss carriers extend some courtesy on contract basis. Every industry is affected by the coronavirus and TPAs/ASOs are no different. As such, we should expect these players to have headcount reductions as any other employer during this time and should those reductions happen in the claims team, we could see a slow down in claim payments (additional lag time). This additional lag time could put strain on both paid (24/12, 18/12) and incurred (12/12, 12/18) contracts and plan sponsors may seek additional leniency from their stop loss carrier in situations where a claim could have been filed/paid earlier.
Reserving/IBNR for Employers and Stop Loss Carriers
Incurred but not reported liability on the self-insured plan is set by the plan sponsor's actuary. Typically, the actuary will look at historical claim payment patterns (amount and completion) and apply to the most recent claim incurrals. The problem with this approach is that the most recent claim activity most likely looks nothing like historical patterns. As such, another method such as the loss ratio method or PMPM method could be used to appropriately set reserves. Regardless of methods, most actuaries will likely take a conservative approach for setting reserves for plan sponsors over the next few months.
Similarly, stop loss carriers also need to set reserves for incurred but not report claims. Stop loss carriers also use methods such as completion factors but they also will need to make adjustments for COVID-19. They may use the loss ratio method with a higher loss ratio to reflect additional claim liability. Ultimately, the adjustment to reserves will be based on the the risk the carrier is assuming and that goes back to the additional costs from testing and treatment mentioned above.
Costs of Services
As mentioned in last week's article, the cost of treating COVID-19 could range from $12,000 to $25,000 based on this report. Additional reporting of costs, treatments, and lengths of hospital stays is sure to come out over the next few days to these figures/opinion is subject to change. That said, many states are preparing for overwhelmed hospital systems. In Chicago, McCormick Place, a popular convention site, is being turned into a hospital. In New York, the Javits Center has similarly been converted into a temporary hospital. As the healthcare system becomes overwhelmed, we will need to understand the implications of COVID-care at these centers. For example, employee benefits are usually structured with in-network and out-of-network benefits - how will these centers be treated? Also, other emergency/chronic care is taking a back-seat to COVID care. Eventually, that decision could lead to worse outcomes for those with other conditions seeking their normal care and this could have a pricing implication to self-insured plans and stop loss carriers.
A lot is yet to be determined. As information becomes available, I'll make every effort to keep the industry informed.
Even before the federal government passed the Families First Coronavirus Response Act on March 18th, many health plans put out notices that they would cover tests and test-related visits (PCP, UC, telehealth) to COVID under the health plan. Health plans and PBMs also expanded eligibility to early Rx refills to ensure members had sufficient medication on hand in advance of any potential "stay-at-home" orders such as those seen in Illinois, California, and Connecticut in recent days.
While health plans can make these decisions on the lives that they cover, self-insured employer plans administered by health plans and TPAs would need to make similar decisions on behalf of their plan. Most health plans and TPAs are suggesting their self-insured employers take similar actions and in some cases asking plan sponsors to opt-out of suggested changes. This process is meant to reflect uniformity of coverage for plan members regardless of their plan sponsor's funding basis - a detail that most members will not be aware of.
Impact to Aggregate Stop Loss (ASL)
The added coverage for testing and related services will have impact on the plan. Self-insured plan sponsors and fully insured carriers may see higher first dollar trends due to expanded utilization. This article on CNBC based on research done by S&P, suggests that medical costs for commercial carriers may increase by 3% to 4% should a "moderate" outbreak occur. While the increase in costs will eat into health insurer margins and self-insured plan sponsor budgets, it likely will not impact aggregate stop loss thresholds of 120% or higher. At these levels and assuming the aggregate factors were appropriately priced, I don't expect COVID-19 to cause widespread aggregate breaches. The impact seen to plans with lower corridors may be significantly different. Thresholds of 110% and 115% are seen widely with level-funded programs and could be under pressure should the groups have a higher age/gender make-up or be centrally situated in higher risk areas. It should also be noted that the general course of treatment for those with mild symptoms is isolation (self-quarantine) and the use of OTC medications such as Tylenol. So while the outbreak is expected to continue for at least the next few months, the treatment course for most will keep incurred expenses lower for health plans and self-insured employers.
Impact to Specific/Individual Stop Loss (ISL, SSL, SIR)
According to Peterson Health Center on Healthcare and the Kaiser Family Foundation, the costs for hospitalization for COVID-19 could range between $12,000 and $25,000 for patients on commercial insurance (2018 data, 8% trend). These costs will certainly vary by geography and underlying networks and significant stays in the ICU will be much more expensive ($50,000 to $100,000). However, this data tells me that the costs of COVID-19 will have a minor impact on stop loss carriers and reinsurers as the bulk of expenses will be below traditional stop loss thresholds ($50,000 to $100,000 deductible per claimant per year on the low-end).
Further, while it is believed that COVID-19 will continue to spread, the data seen from China suggests that most will suffer mild symptoms and then recover. This data suggests that 19% of cases were classified as "severe" or "critical" and that the elderly (70+) are most at risk. This article shows the mortality rate by age-band and if we use mortality as a proxy for morbidity, we can assume that those most at-risk are not on a traditional employer self-insured health plan - they instead are likely on Medicare or Medicaid. When combining morbidity and costs seen for treatment, I do not expect we'll see an increase in spec breaches (claims above the deductible) due to COVID-19.
Plan Sponsor - Action Needed
While my opinion is that COVID-19 will not lead to material liability impact to employer stop loss carriers, employers still need to take prudent steps to ensure the costs incurred by their population is subject to stop loss coverage. Should employers want to cover the costs of testing or potentially the cost of treatment towards the plan, they will want to make the necessary plan amendments and ensure approval by their stop loss carrier. I don't expect stop loss carriers to push back on covering the cost of testing and related services as these are small expenses. The cost of treatment could be a different story. While the data suggests this wont be a large expense, covering those expenses under the plan is a plan sponsor decision while covering those expenses towards stop loss is ultimately a decision the stop loss carrier will need to sign-off on.
The issue I see most affecting plan sponsors and stop loss carriers is member eligibility. The economy has been devastated by COVID-19 and ultimately many employers will need to make some tough decisions on employment by considering reduced hours, furloughs and lay-offs. The federal government is expecting the unemployment rate to increase significantly as evidenced by this news release by the Department of Labor. As employers make these tough decisions, they may choose to keep members on their health plan for an extended period of time at similar employee cost share premiums. This is unlike COBRA where we expect an adverse selection load - in this situation we believe employers will extend coverage to all those affected and we expect a high adoption rate by members. Thus, we would support the continued stop loss coverage for those members as long as the employer continues payment for ASO and stop loss premiums. Ultimately, each stop loss carrier will make this decision but the employer's role is to ensure a plan amendment is created and signed-off by their stop loss carrier.
Impact to Brokers/Consultants/TPAs who Procure Stop Loss
Stop loss coverage has become a highly commoditized product and its common to see employers shop coverage annually. I believe we'll see a sharp reduction in the number of RFP opportunities this year as brokers and consultants will be busy helping employers with non-transactional services. Human capital is the life-blood of most organizations and I believe most consultants and brokers will be busy helping their clients with this need over the traditional transactional/procurement services. As such, I believe carriers will make adjustments to their new business vs renewal underwriting strategy/philosophy as they brace for this change in annual procurement process.
Brokers and consultants should also prepare for the procurement process to get a little harder. Carriers will likely ask for more detail/data, have stricter disclosure processes, and will most likely pull back or reduce product features like rate caps and profit share. These features typically put pressure on carrier profitability and with COVID-19 potentially already putting pressure on carriers, we should expect carriers to tighten up.
Stop Loss Carriers and Reinsurers
As previously mentioned, this pandemic will likely cause stop loss carriers to tighten up. That could mean additional underwriting requirements, stricter disclosure process, and less use of early locks, rate caps, and profit share/dividend products. Stop loss carriers have seen a deterioration in loss ratios since 2014 (since the Affordable Care Act) and risks associated with COVID-19 certainly will have most underwriting firms reluctant about getting aggressive on new business quotes or even extending the type of product features that have reduced profitability over the past 6 years.
Expect additional conservatism from the reinsurance markets as well. In the Excess of Loss space, reinsurers collect small premiums but take on big risks. This model has been under pressure since high cost (and ongoing) specialty drugs have exploded in utilization. Further pressure has been seen from the gene/cell therapy treatments, some of which will have price tags in excess of $2M. Keep in mind also that the reinsurers who provide cover to the employer stop loss carriers are also reinsurers over other health plans (HMOs, Provider Loss, Medicare Advantage,etc.) where their exposure could be much different. So while their exposure from the self-insured / employer stop loss space may be minor, they will be affected by the other plans they cover. Adding COVID-19 as a new risk, my belief is that the reinsurance market will adapt with pricing changes and potentially some mega-reinsurers exiting the accident/health space due to a lack of underwriting capacity.
Summary
The COVID-19 pandemic is affecting society across the board and until the spread subsides, no one will really be able to predict when we'll get back to some normalcy. Insurance, especially employee benefits, will play a critical role in bringing that normalcy as society grips with issues like health (access, costs), absence, disability/income replacement, retirement/401(k), and life insurance to name a few.
For the self-insured market where stop loss insurance is procured, expect the landscape to be completely different. Brokers/consultants will shift from transactional to human capital needs for employers. Carriers and reinsurers will be more risk averse. Pricing will go up to offset potential risks. Annual metrics to measure performance such as close ratios, RFP volumes, persistency, and loss ratios will be out of whack over the next year. However, with the uncertainty comes significant opportunity. The employee benefits market, including stop loss carriers, will need to develop new solutions for employers and the brokerage/consulting market will need to adapt to the changing needs of their employer clients. Its time to roll up our sleeves - but most of us need to do it from home. Maintain your social distancing requirements and follow your local "shelter-in-place" ordinances.
Also, make sure you and those around you are mentally fit for the challenges ahead. There are several resources, including EAP programs, available through most employers. Learn up about them so you're ready to advise those who may need them.
The growth of drugs is not new news for anyone working in the health insurance space though according to Express Scripts, they’ve seen drug trends (both utilization and unit cost) decrease from 2016 to 2018 where overall trend was .4% (lowest in 25 years). Let’s refer to this as net trend (everything that adds to costs and everything that reduces costs). What reduces the costs? Manufacturer rebates! The same Pew article above also notes that manufacturer rebates increased 185% from 2012 to 2016 in commercial health plans (Figure 6 in article mentioned above). The article states “rebates and other discounts have played an increasingly important role in partially offsetting the continued growth of list prices for brand name drugs”. While this good news to purchasers of commercial health plans, how does it affect the stop loss and reinsurance community?
Stop loss coverage is intended to cover high cost claims – with the keyword being claims. When individuals have an inpatient stay at a hospital or go to their local pharmacy to fill a script, that triggers a “claim”. That claim is typically split between an individual (through deductibles and copays) and their health plan (or self-insured employer). In the employer stop loss world, the self-insured employer that purchases stop loss coverage will pay claims up to their deductible level and the stop loss carrier is on the hook for claims above the deductible. I’m emphasizing the word claim because there are other expenses and offsets associated with a claim that are not eligible for stop loss reimbursements. Administrative fees, out-of-network contract negotiations and pharmacy rebates are a few items that are not considered claims. While admin fees and out-of-network negotiations are additional expenses to an employer, the pharmacy rebate is an offset. This offset typically comes in the form of a reimbursement to the employer or plan several months after the members originally received their drugs.
Rebates pull down the total (net) cost of a script where net cost equals the claim less rebates. However, stop loss carriers reimburse only the claim portion which will always exceed the net cost of a script when that script has rebates attached to it. This creates an inefficiency for stop loss carriers where their pricing needs to acknowledge the gross costs of drugs – not the net. Look at figure 11 from the Pew article:
Let’s face it – the health insurance industry is in need of significant reform and we’ve heard the Trump administration signal a willingness to do anything on prescription drugs but the focus has been on reducing costs for individuals which is the right thing to do. But it doesn’t change the pharmacy supply chain which is a tangled web of transactions from one player to another with costs going one way and offsets going another. In terms of stop loss pricing, we’re adding the frequency/severity of certain claims that equate to liability to us but not to the employer – and that’s just plain inefficient and costly to self-insured employers. As an industry, we could “bake in” these costs and pass them along to employers or we could find ways to do things different and mitigate the trends seen in the reinsurance community. I invite you to share your thoughts on this issue. Email me at MKhoja@mrmstoploss.com or reply to the article post on Linked In.
Employer stop loss coverage is the policy that covers the self-insured employer from high cost claims (heart attacks, cancers, premature babies, etc.). This coverage is typically placed by brokers who work as intermediaries between employers and carriers. Employers receive a coverage policy from the stop loss carrier. The stop loss carrier caps the employer’s risk and they assume the remainder – from the deductible level (or attachment point) to infinity. But that exposure puts a risk and capital burden on the stop loss carrier where they could find efficiency by purchasing reinsurance. Said another way – the employer stop loss carrier doesn’t want the unlimited liability so they purchase reinsurance to offload risk to another carrier.
There are two forms of reinsurance: quota-share and excess of loss. For the purposes of this article, we will focus on excess of loss but will explain both.
Quota-share reinsurance is a proportional share of both risk and premium. An underwriter will set the premium for a policy and the carrier and reinsurer will share that premium proportionally. For example, the carrier may want to assume 75% exposure so they partner with a reinsurer to assume the other 25%. Once claims need to be paid, the claims adjudicator determines the total reimbursement owed to the employer and then assesses the claim liability based on proportional share to the carrier and reinsurer (75/25 in this example). All of this happens in the background without, in most cases, the broker or employer’s knowledge. Smaller carriers will use quota-share reinsurance as a means of volatility protection to protect their growing block of business.
Excess of loss coverage is basically the same as traditional stop loss coverage, just at a higher attachment. It’s the deductible where the stop loss carrier’s risk is capped. For example, if a carrier purchases excess of loss at $2M per claimant and the employer purchases a $200,000 stop loss deductible, the carrier’s risk is between $200,000 and $2,000,000. Risk would be shared like this:
a. Employer assumes first dollar exposure up to $200,000
b. Stop loss carrier assumes from $200,000 to $2,000,000
c. Reinsurer assumes from $2M to infinity
Small and large carriers purchase excess of loss coverage. The largest carriers will purchase excess-only coverage as their means of volatility protection and capital efficiency.
Here’s a graphic that explains the risk share:
These super high cost claims are coming from organ transplants, cancer, and congenital anomalies. More than ever, reinsurers need to understand the costs of treatments and more importantly the emerging treatments coming to market that will save/extend life but will also come at high price tags. What we hear anecdotally (there isn’t, to my knowledge, a central repository of this information) is that reinsurers have taken it on the chin the last few years on both their quota share and excess of loss products. In fact, we’re aware of one prominent reinsurer that is exiting the health/accident lines due to recent experience. As such, we expect the reinsurance market will harden and this will affect pricing on traditional stop loss coverage. Moreover, this will affect the ability to provide rate caps and no-new laser protection as these features bring “year two” protection to one-year contracts. Reinsurance terms are typically one-year terms meaning the reinsurer may not be around to participate in the renewal year that is capped. Further, known and ongoing claimants into the renewal year will need additional reserves and perhaps a deficiency reserve to account for policies that will run at a loss due to the rate cap.
Looking at the graphic above, you can see that reinsurers accept little dollars relative to the total healthcare pot but they assume unlimited exposure. In fact, the graphic above reminds me of the risk/reward situation seen in credit default swaps that lead to the financial crisis in the late 2000’s. This hasn’t been an issue historically but since the passage of the Affordable Care Act we’ve seen the cost of services skyrocket fueling the growth of the employer stop loss market We’re now seeing the effects on the reinsurance market with coverage costs increasing and more scrutiny on underwriting practices. To the brokers/consultants who place stop loss coverage, expect to hear more about the role of reinsurance in the costs of your employer’s policy.
Why would a company want to use a captive instead of buying traditional insurance? The first reason is price. In most cases, insurance companies will price for risk and then add in their expenses, profit margin and premium tax. Expenses include their costs of doing business such as paying employees (you need actuaries, underwriters, claims adjudicators, etc.) and sales compensation (internal as well as to brokers and perhaps wholesalers). When using a captive, presumably the captive can set a price tag that excludes much of the expense portion which in their mind could drastically lower costs. Captives also allow for investment gains to be held by the captive. When you pay premiums to the insurance company, they will invest the funds and investment gains can be used to offset claims. This is a benefit that traditional insurance companies see and the use of a captive brings a similar result. It is common to see the use of captives by savvy risk management entities on high cost and long-tail coverages. What is long-tail? It’s an actuaries way of saying something that takes a long time to get paid. Liability coverage is one that has a long-tail because in between a claim being incurred and paid, you may have several layers of adjudication as well as litigation. Medical malpractice is a common exposure that is funded through single parent captives because the cost of coverage is high and the hospital who needs the coverage understands this exposure very well and would rather sock away funds to pay the claims as opposed to purchasing traditional insurance coverage.
Does using a signal parent captive for employer stop loss coverage make sense? I’m of the opinion that there is little gain for most companies seeking this route. Let’s examine the value of captives and see if plan sponsors can make a case for putting employer stop loss into a captive.
Captives are for high cost coverages such as liability. While I’m not an expert in this space, I’ve heard from captive experts that coverages that exceed $2M in annual premium are a good candidate for funding through a captive. Coverages this high will have some “juice” to squeeze out. Keep in mind though that using a captive doesn’t mean that the expense/retention component goes down to zero. Captives still need various services such as attorneys, actuaries, underwriters, and captive managers. These expenses need to be added on top of the risk component similar to how an insurance company would add to the coverage they sell. But employer stop loss policies rarely exceed $2M in annual premium. Groups spending this much in stop loss coverage are either over-insured or just not getting an optimal deal on their current coverage. Both of those issues could be resolved with traditional stop loss insurance with the help of a qualified agent.
Further, the expenses/retention components mentioned above are real dollars that the captive entity/employer need to fund. These same dollars are real for the insurer as well but they are folded into the broader coverage and are expenses that an insurer can socialize across an entire block. Make no mistake – expenses/retention are included in the premium but the premium is always up for negotiation. Carriers, at times, may write premium below their desired targets for various reasons – key producer, meeting a sales target, etc. The point being that the market offers employers several carrier options and those carriers are willing to negotiate in order to win the employer’s business.
Finally, the “juice” has to be worth the squeeze. Again, I’m not an expert on property/casualty coverages like liability but my understanding is these polices operate at 50% to 65% loss ratios. This NAIC data..
In this example, the liability to the stop loss carrier increases by double the underlying trend. It is common for stop loss carriers to suggest leveraged trend increases in the 15% - 30% range and sometimes higher if the current deductible is higher than $350,000. Leveraged trend can be mitigated by increasing the stop loss deductible by underlying trend. Here’s a numerical example:
- Deductible $100,000 $110,000 10%
Liability $100,000 $110,000 10%
Stop loss carriers have been talking about an increase in risk exposure since the Affordable Care Act when annual and lifetime maximums were removed. A study of historical NAIC data suggests the stop loss market has nearly doubled since 2013 (from $10.7B to $21.0B in 2018) but loss ratios have eroded over the same time frame (from the low 70s to nearly 80%). This means either carriers are accepting a lower margin in a competitive space or they’ve mispriced the actuarial risk. Stop loss trends can be hard to understand when first dollar trend surveys suggest healthcare inflation has been largely reasonable the past few years. Milliman recently released its MMI trend study report (http://assets.milliman.com/ektron/2019-milliman-medical-index.pdf) which confirms first dollar trends have been in the 3% to 4% range between 2017 and 2019.
So what makes trends for stop loss carriers so different than first dollar carriers and self-insured plan sponsors? First off, stop loss carriers do not see small claims such as doctor’s office visits (flu shots, sick visits, annual physicals, etc.), preventive medications, and low cost outpatient surgical procedures. This leaves high cost surgeries such as transplants, high cost procedures such as chemotherapy and dialysis, and high cost specialty drugs which treat high cost conditions such as cancer and blood disorders, to name a few. You’ve probably picked up on the theme of high costs! While its common to hear about the 80/20 split of medical and pharmacy costs on first dollar claims, stop loss claims have historically skewed towards inpatient surgeries. However, with the increased utilization of specialty drugs the mix of pharmacy towards stop loss has increased over the past few years. Specialty drug utilization hovers around 1% but their costs make up 40%-50% of all pharmacy costs. These drugs can have significant rebates, some as high as 50%, which are paid retroactively to plan sponsors based on utilization. Rebates will lower the total costs for employers and first-dollar carriers which is reflected in first-dollar trends surveys like the MMI. Rebates, however, are not considered a claim and therefore not a liability offset to stop loss carriers. This means the employer will pay higher trends for stop loss coverage over specialty drugs even though some of these net claims (after rebate) may not be a stop loss claim. This is a clear inefficiency of stop loss coverage.
Finally, stop loss coverage provides employers protection from the newest life savings and life extending procedures. The latest buzz is in this space is gene therapy treatments which can cost several millions of dollars. These treatments are in the infancy stage and we don’t have data on costs and utilization that can be trended forward. Instead, we reflect higher pharmacy trends in our billed charge base rates to account for new utilization and costs. The emergence of these treatments also means that it wouldn’t be reflected in many industry trend surveys as these studies are retrospective and stop loss pricing is prospective (i.e. setting risk on future exposure).
With the erosion seen in loss ratios across the stop loss market coupled with the emergence of high cost gene therapy treatments, seeing higher than average stop loss renewal increases will be a common complaint amongst plan sponsors this renewal season. This doesn’t mean that carriers will not compete for business – but it does mean that many carriers will focus on achieving rates closer to their manuals which intend to accurately reflect the latest costs and utilization seen in the industry. Expect to see some near term volatility in the stop loss industry as we all come to grips with the latest treatments affecting stop loss pricing.
But we all know stats at the combine can only contribute so much to the formula of player success and we also want to know how the player did in in-game situations throughout their college career. This is similar to how carriers want to know how an employer’s large claims experience has historically performed (claims vs premium, or loss ratio where most carriers target between 65% and 75%) and this is why carriers will ask for historical large claim reporting (like NFL coaches, we also like to see 3 – 4 years of experience!). This allows us to project prior claims to the new policy period and develop a premium where we can cover the risk as well as cover expenses such as carrier fees, premium tax, and commissions.
At the end of the day, most stop loss carriers develop a price tag that is based on a blend of manual rates and experience – similar to how a potential NFL rookie’s draft score is developed as a blend of their combine results and college game experience. There you go – now you know how stop loss is rated!
Sometimes a player doesn’t attend the combine and sometimes a player doesn’t play in college as long as others. This can have a profound effect on the player’s draft score and ultimately where they get drafted. In the cases where the player hasn’t played much in college, but had an awesome combine – we would consider that synonymous with a stop loss price largely built off of manual rates (a player that comes to mind is my Chicago Bears’ quarterback Mitchell Trubisky who only started in 13 games at North Carolina but had strong manual rates). Conversely, some players don’t attend the combine or have a pro-day and teams are basing their draft score purely based on the player’s game day experience. This would be synonymous with 100% experience rating (but probably with some margin to protect the carrier from adverse selection – sorry, I’m an actuary – can’t help it!).
You may have also heard of lasers – these are when a carrier excludes a person completely or sets a higher threshold for coverage due to that person having a known high cost treatment either in progress or in the near future. Since stop loss coverage is to protect from unknown claims, carriers will typically steer clear of known risks or set a higher threshold for coverage. This is no different than when a NFL team drafts a player later in the draft due to the player having an injury just before the draft. Think of Willis McGahee who was projected to be a top 5 draft pick in 2003 (https://en.wikipedia.org/wiki/Willis_McGahee) but his draft stock dropped because of an injury (tore his ACL, PCL, and MCL) he sustained during the 2003 Fiesta Bowl.
If you have any questions about the NFL draft – don’t ask us. But I wish you and your teams much success in the draft and the upcoming NFL season. If you have questions about large claims and employer stop loss – give us a shout and maybe we can help. I don’t know about you – but I’m ready for some football!
Durable therapies do pose a cost issue – but cost is not new for health insurers. We call this actuarial risk:
Though “durable” is becoming a sexy term used to describe treatments that extend/save lives, health insurers have been pricing high cost “durable” treatments/procedures (e.g. cancer treatment, surgeries, to name a few) for quite some time. I would suggest a new risk is emerging for ESL carriers when it comes to durable therapies. Here’s what we know about durable therapies5:
In plain speak, this means durable therapies will cost a lot of money today with benefit coming in the years ahead but we don’t know if that benefit will last forever. Since the price tags will be high, many treatment providers will guarantee the outcomes and return treatment costs for those members where the treatment stops working (hence the term durable vs curable). For ESL carriers, this poses a significant timing risk that is exacerbated by “mobility”. Follow along on this timeline:
Sounds easy right? Well, stop loss is a one-year product and carriers typically limit their exposure to one year before or after policy inception (24/12 or 12/24). It’s also priced with a mix of experience and “manuals” meaning year 2 premium may include an upcharge due to the large year 1 claim. But there are other dynamics at play as well between year 2 and 5:
All of this mobility doesn’t change the fact that a claim was incurred, it was paid, it no longer was a claim, and it no longer should be a stop loss liability. But an ESL carrier’s ability to follow this claim into the future is severely limited due to mobility risk mentioned above. Further, most stop loss carriers do not have a relationship with the policyholder – let alone the member. This is because stop loss, by and large, is placed by employee benefit brokers and consultants. These brokers and consultants also help collect premiums and assist the employer in filing claims. Most ESL carriers view the broker as their client instead of the policyholder.
In the Amazon/Orbitz world that we live in, we can expect a lot about the health insurance procurement is going to change. While that change is part of natural progression that we see in many industries, I would bet the employer stop loss insurance industry will change significantly and rapidly due to the exposure seen from durable therapies. These are new risks and the way we mitigate them will lead to very structural changes in relationship between patients, policyholders, and insurance carriers. More to come, but for now I invite your thoughts and opinions. Share them with me by email at Mkhoja@MRMStopLoss.com.
1 https://www.kff.org/report-section/2018-employer-health-benefits-survey-summary-of-findings/
2 https://www.kff.org/report-section/2018-employer-health-benefits-survey-section-10-plan-funding/
3 Society of Actuaries: Health Watch (Issue 86 June 2018, authors Jim Mange and Hobson Carroll)
4 http://us.milliman.com/insight/2017/2016-employer-stop-loss-market-A-Milliman-survey/
5 https://newdigs.mit.edu/sites/default/files/MIT%20FoCUS%20Precision%20Financing%202019F201v023.pdf
