By Ron Lang, CEO of CalCPA Health
For more information, email questions@calcpahealth.com.

With doctor office and medical facilities shuttered for much of the second quarter, many were thinking their health insurance rates may not be going up for their 2021 renewal. But most everyone will see increases for next year. Why?

The Affordable Care Act (ACA) established mandatory operating margins for health insurance companies. These regulations mean that premium increases are driven almost exclusively by underlying medical expense increases. This is the short answer: Insurance premiums increase because medical expenses are continuing to increase.

 

2020 Rundown

Beginning in late March there were a few months when elective procedures and routine care were not readily available. Emergency care, chronic care and prescription drugs were still being consumed at regular levels. Medicare and Medicaid, (Medi-Cal in California) have taken the brunt of COVID-19 claims, but commercial plans (group and individual) have still incurred their percentage of these unforeseen pandemic expenses. Mid-year regulation changes requiring no cost sharing for COVID-19 testing and treatment also add to the commercial carrier’s totals.

How will 2020 turn out? The lock down created pent-up demand for some services while other services will not materialize. For example, someone who was to have knee replacement surgery in April may have rescheduled for later in 2020 or even into 2021. Another, who would have normally gone to their doctor for a hangnail; the hangnail may have gotten better on its own and the doctor visit does not occur later, resulting in no pent-up demand.

And there are people, particularly high COVID-19 risk folks, who do not feel comfortable venturing out to get the treatment they need. For these people, their pent-up demand could materialize after a vaccine is available and may unfortunately result in a more serious condition caused by delaying initial treatments.

With all these unique pandemic induced variables in play, how will 2020 turn out? We will not know with certainty until February when the year-end actuarial work is completed. Should commercial carriers end the year with medical expenses under the ACA’s loss ratio mandate, the law prescribes a rebate mechanism and timeline.

Moving to 2021, what will a normal year or the new normal look like? Health insurance premium rate calculations are a complicated process requiring estimating expenses (medical and operating) up to 18 months in advance. An improbable task for almost any business, further complicated by the pandemic.

There are five great unknowns going in to 2021 that effect the estimation of medical expenses:

  1. When will a vaccine be available to the masses?
  2. How much will it cost?
  3. Will the government pick up some or all of the tab?
  4. How long will the pandemic last, meaning how many COVID-19 claims will there be in 2021?
  5. How much pent-up demand will materialize in 2021?

In addition to these uncertainties, as it has for the past couple decades, regular medical inflation and more so, prescription drugs costs, continue to outpace consumer inflation many-fold.

The underlying medical expenses that drive premium increases have two components: the cost of a service/ procedure/product that doctors and hospitals charge, and the frequency (amount) they are consumed.

While frequency took a break during the lock down, both categories are expected to resume their inflationary progression.

People are living better lives and surviving serious illnesses due to scores of new drug therapies. Most of these are very expensive and the actual cost of these treatments are not well known to the public. Many of the drugs advertised on TV costs tens of thousands of dollars a year. While these new drug treatments mean increased utilization, manufacturers have increased drug ingredient costs, all resulting double digit drug expense inflation.

With many factors—a pandemic, a lock down, new drug and gene therapies— health care is expensive and continues getting more so.

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