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Covered California 2018 Rates Complicated By Federal Uncertainty and Rural Challenges

This week, Covered California, California’s Affordable Care Act (ACA) exchange, announced preliminary 2018 premium rates for exchange health plan offerings. Health plan proposed rates are still subject to regulatory review by the state Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI).

  • Covered California announced an average rate increase of 12.5 percent, weighted for the number of enrollees in each plan and region. The weighted average rate increase varies significantly by rating region from a high of 33.2 percent in the rural north region to a low of 4.3 percent in the San Mateo region. The proposed 2018 average increase is lower than last year and, according to Covered California, includes a one-time increase of 2.8 percent because health plans must pay the ACA health insurance tax which Congress delayed until the 2018 plan year.
  • All 11 health insurance companies will return to the market in 2018, and 96 percent of consumers will be able to choose from two companies. Eighty-two percent will be able to choose from three companies or more. Approximately, four percent of consumers (about 60,000 of the 1.4 million consumers) will have only one company providing individual market coverage in their area caused, in part, by Anthem leaving some markets that comprise about half of its enrollment.
  • According to Covered California, the competition among health plans allows consumers to avoid a significant increase by switching to the lowest-cost plan in the same metal tier, and see rate increases of closer to 3.3 percent. However, consumers in the rural north, where fewer health plan choices exist, will still face an average rate increase of 29.5 percent even if they switch to a lower priced plan.

Pre-ACA Regional Challenges Still impact Insurance Premiums

Covered California pointed out that provider concentration and regional factors continue to drive regional variation in premiums. Rural residents, in particular, have historically faced barriers to accessing both providers and insurance coverage. According to the Office of Statewide Health Planning and Development, half of the counties in Covered California’s rural north rating region (Region 1) have only one hospital and Alpine County has no hospital. Historically, significant portions of these counties have been designated federal health professional shortage areas or medically underserved areas due to chronic provider shortages. These challenges, and the resulting higher insurance rates in this region (and other rural regions to a lesser extent), pre-date the ACA.

Despite the continued challenges, the ACA makes a difference in helping rural consumers secure individual market coverage. First, Covered California uses its leverage as an active purchaser to negotiate with insurers on behalf of its enrollees ensuring that the overwhelming majority of enrollees have at least two health plan choices and rates are as competitive as possible. Second, the ACA’s premium tax credits adjust based on geography. Regardless of the rating region, premium payments for all subsidized consumers are limited to a specific percentage of income with the remainder covered by the ACA tax credit, adjusted as premiums increase. This critical affordability protection is utilized by 91 percent of the enrollees in the rural north region and 87 percent of all Covered California enrollees. On average, ACA tax credits cover 71 percent of the monthly premium of household policies.

In the rural north region, Covered California enrollees not eligible for premium assistance (those over 400 percent of the federal poverty level (FPL)) will face rate increases of 3 to 54 percent.

Federal Threats Result in Cost-Sharing Reduction Surcharge

One complicating factor for 2018 Covered California rates is the uncertain status of payments to health insurers that support reductions in out-of-pocket costs for low-income consumers. In addition to premium assistance in the form of tax credits, the ACA also provides cost sharing reduction (CSR) subsidies that lower deductibles, co-pays and coinsurance. Almost half of Covered California consumers benefit from CSR subsidies, which reduce out-of-pocket costs on average $1,000/year, according to Covered California.

ACA CSRs Under Threat. The Trump Administration has chosen to fund CSR payments to insurers month-by-month and repeatedly threatened to unilaterally stop this funding – creating significant uncertainty in the market.  (See “How CSR Subsidies Work.”) The ACA requirement for insurers to reduce consumer cost sharing for those eligible applies, whether or not insurers are reimbursed by the federal government. According to Covered California, insurers participating in the state’s exchange annually receive $750 million in CSR payments from the federal government. Knowing whether the Trump Administration will fund CSRs is critical as Covered California finalizes rate negotiations and executes final contracts.

Response to Federal Uncertainty. While Covered California leadership, insurers and other stakeholders would prefer that federal CSR payments continue, for the 2018 rate year Covered California developed a contingency plan.

Covered California required insurers to submit two different premium rates: one rate calculation that includes federal CSR funding and one assuming the payments discontinue. Covered California also required insurers to create a “non-mirrored silver plan” outside the exchange. (Under California law, if a Covered California issuer participates outside the exchange, the health plan must offer “mirrored” exchange products outside the exchange – products with the same benefits, premiums and provider networks. The “non-mirrored silver plan” parallels the silver plan benefit design, but without the costs of providing CSRs included in rate calculations.)

How CSR Subsidies Work. Federal funding for CSR subsidies is paid directly to Covered California insurers for their silver plan enrollees between 138-250 percent of the federal poverty level. A silver plan is a standardized insurance plan within Covered California that is benchmarked at the actuarial value of 70 percent. Generally, the actuarial value represents the percent of health services covered by the plan. For a silver plan, the insurer covers 70 percent of the costs of services and the remaining 30 percent is covered by the enrollee as their out-of-pocket cost responsibility. Federal funding for CSR subsidies provide revenue so insurers can increase the actuarial value of coverage for eligible enrollees, which lowers the subsidized enrollee’s out-of-pocket costs. Subsidized enrollees are responsible for 10-20 percent of the out-of-pocket costs versus 30 percent.

Loading the costs of subsidies solely on silver plans increased premiums on average by 23.5 percent for standard silver plans inside Covered California and its mirrored plans outside the exchange. Subsidized consumers are insulated from this increase because tax credits adjust to ensure consumer spending on premiums is capped at a specific percent of their income. Consumers not eligible for premium assistance would be subject to higher premiums.

In an effort to ensure all consumers have the ability to remain in a silver plan without experiencing extreme premium increases even with the loss of federal CSR funding, Covered California proposed the creation of “non-mirrored silver plans” outside the exchange. If federal CSR funding is lost or if uncertainty remains when rates must be finalized, Covered California will inform current silver plan enrollees above 400 percent FPL about the new off-exchange, non-mirrored silver plan option, as well as other in-exchange options that may better suit their needs, such as gold plans.

Ironically, if the Administration chooses not to make the federal payments, federal costs will actually go up. According to Kaiser Family Foundation, in 2018, the federal government will incure a net increase in costs of $2.3 billion if CSR funding is halted because ACA tax credits will adjust to cover the increased premiums that result.

Choices Remain in Most Areas, Even as Anthem Pulls Out of Many Regions

Covered California negotiated to maintain all 11 carriers offering coverage in the exchange and ensured choice of at least two health plans for 96 percent of existing enrollees. Anthem is pulling out of 16 of 19 Covered California regions. This departure is partially responsible for 4 percent of enrollees having only one health plan option. Anthem’s stated reason for leaving some markets was the uncertainty surrounding federal health reform and federal funding for CSRs. However, it will be important for Covered California to monitor the communities impacted by the Anthem withdrawal, and the impact on health plans and consumers in those areas, to identify potential strategies to increase carrier participation going forward.

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