Conventional wisdom has held that the ACA impact on Massachusetts will be small. Some high profile academics have gone as far as to attack presidential candidates with colorful language if they suggest otherwise. Well, the conventional wisdom has had a nuclear bomb dropped on its head with the release of an independent analysis by the major insurance companies in Massachusetts. The implications are clear– the ACA will supply a rough ride for many small companies in the state. Unlike other states where the rate shock will be most pronounced in the individual marketplace and/or for younger adults, the ACA will cause the most turmoil in the much larger small business market in the Bay State. For some companies in Massachusetts, the shock will be a premium spike of over 100%, when you include healthcare trend.
ACA Friendly Groups Are Supporting The Research
The report was commissioned by the Massachusetts Association of Health Plans (MAHP) and Blue Cross Blue Shield of Massachusetts, and conducted by Wakely Consulting group. All parties involved have spoken favorably about the ACA for years. In fact, Wakely Consulting was founded by the first Massachusetts Connector executive director John Kingsdale, who advised the Obama Administration on the ACA, and has made millions from ACA related consulting contracts. These leaders are far from right-wing ideologues. In fact, many have been vocal supporters of the ACA, dating back to the legislative debate.
Across the board, leaders of the insurance industry in Massachusetts have supported the ACA, until recently.
Privately the tone in the state has changed as carriers have become more familiar with the federal law, and regulations have come down from Washington. The frequency and urgency of closed door meetings increased as state officials discovered the damage the ACA could inflict on local insurance markets. State officials even went as far as to predict “extreme premium increases” in a letter to CMS. The issue came to a head recently when the Democrats in the legislature passed an amendment to force Governor Deval Patrick to publicly request a waiver from a portion of the federal law.
Aside: Imagine the headlines, if during the presidential campaign it became public that the state of Massachusetts, home of Romneycare and its now Democratic Governor and close friend to President Obama, was going to seek a waiver from the law that inspired national reform. What a difference a few months can make!
Premium Spikes Will Be In Small Group, Not Individual Market
Recent analysis of the impact of the ACA in California and Washington have found that the biggest increases will take hold in the individual (or nongroup market). However, since Massachusetts is one of the only states to have a merged market—the small and non-group markets are part of the same risk pool, a result of the 2006 Romney reform– the real losers in Massachusetts will be small businesses under the ACA.
It should be noted that Governor Romney originally agreed to merge the two markets to correct past failed government regulation, which led to an expensive and dysfunctional nongroup market. So the merger resulted in a partial deregulation in the individual market in Massachusetts, the direct opposite outcome of those imposed under the ACA.
A Number Of Factors Are Driving Up Premiums In The Bay State
ACA Rating Factor Changes
I have posted a handful of times before at Forbes, and more frequently on this blog, about the forced federal rating factor changes. A Massachusetts Division of Insurance report that examined just this one ACA change, found that 60% of small company covered members (employees and their families) will experience premium increases. 181,000 small employer members will see premiums increase by more than 10%; over 45,757 will see their premiums increase by over 30%.
However, this is only one small part of the ACA story in Massachusetts as the new insurer-backed study examines many of the additional factors that will further increase premiums in the state.
The Wakley report makes it clear that the ACA comes with a built-in average annual cost increase for those in Massachusetts.
Essential Health Benefits
The state of Massachusetts has numerous state mandates, so few additional benefits will be added due to the ACA’s essential health benefits. Yet, there will be some increase, ranging from .25%-2%.
Increases are due to required coverage of pediatric dental and vision care, as well as a state mental health parity law, and pharmacy coverage to the catastrophic plans for young adults.
ACA Insurer Tax
There will be a .8% increase due to the health insurance premium tax.. However, this tax is levied differently on carriers depending on their business mix of Medicare and Medicaid, and if a carrier is for-profit or not. It will average .8% in 2014, 1% in 2015, and .9% in 2016.
Risk Adjustment Requirements
Not all ACA changes will be felt equally in the Commonwealth. In fact many residents with similar backgrounds, but different carriers, will see dramatically different impacts on their premiums. The risk adjustment requirements are a good example.
The report notes,
The risk adjustment mechanism is intended to help mitigate adverse selection by encouraging issuers to: 1. set premium rates based on average morbidity of the pool, 2. offer benefit plans that attract higher risk, such as higher AV plans or more expanded networks…. impact of the risk adjustment will vary by carrier, but will be premium neutral to the overall market. The distribution of premium impacts by health plan is shown in the following table.
Actuarial Value Requirements
As the report explains,
Beginning in 2014 there will be four primary levels of plan designs that may be offered, varying by their actuarial value (AV). The four plans are: Bronze at 60% AV, Silver at 70%, Gold at 80% and Platinum at 90%….
Because Massachusetts already has a requirement for Minimum Creditable Coverage under [M.G.L] chapter 58 that matches the minimum 60% AV requirement of small groups and individual coverage under the ACA, we do not expect the AV requirement to have any significant overall impacts to premiums in 2014…. [However], The impact of this AV change on any particular purchaser could be as much as approximately +/- 4.6% impact to premium.
Transitional Reinsurance Program Could End Up Costing Money
The report argues that the reinsurance program could save -0.6% in premiums in 2014, -0.5% in 2015, and -0.3% in 2016. However, it also includes a footnote that makes clear that the estimates don’t include a fixed 0.2% administrative cost to run the program. As a result, the final savings estimates for the reinsurance program are misleading.
The report goes on to say, “In any given pool of membership, if the ratio of assessed members to individual members is less than this ratio, the average premium rate will decline (the program will result in a savings). If the ratio of assessed members to individual members is higher than this ratio, the average market rate will increase (the program will result in a cost).”
Subsidized Commonwealth Care Membership Entering The Merged Market
There will be a 1.6%-3.4% increase due to the merging of 100,000 individuals out of a state subsidized program, Commonwealth Care, into the “regular” marketplace, as these members tend to have a higher age-adjusted morbidity.
The Wakely report rightfully notes, “The range of variation in rate changes for 2014, due to changes made by the ACA, will be broad.”
One-Size-Fits-None ACA Rating Factors Largely Drive Increases
With all of these factors taken into account, buried in another footnote is the real headline from the report, “…Wakely estimates the potential range of impacts on premium is from a low of -66% to a high of +97% (plus trend)...”
In other words, ACA cheerleader Governor Deval Patrick’s Administration and the ACA-friendly insurers in Massachusetts are all in agreement; the federal law will raise premiums for hundreds of thousands in the Bay State.
ACA Premium Increases Are On Top of The Highest Premiums In The Country
It is very important for readers to remember that any ACA-related increases are on top of the highest average premiums. Small companies have especially felt this burden as they are subject to many more state mandates than self-insured companies, and saw premium increases when the individual and small groups markets were merged in 2007.
One can imagine their shock when premiums increase by double digits for the next three years.
Rate Increases In Massachusetts Are Not Due To ACA’s Modified Community Rating and Guarantee Issue Regs
Massachusetts has had a heavily regulated insurance marketplace for decades.
Most relevant to the ACA, the state has had modified community rating and guarantee issue regulations on the books since 1996. While these two regulation changes will drive much of the premium increases in other states, Massachusetts has been experiencing their inflationary premium effect for years. The factors listed above are the real reasons behind the increases.
Don’t Forget ACA’s Other Taxes
Keep in mind the discussion above only relates to ACA provisions that directly impact insurance companies, and doesn’t take into account the indirect fallout of the 18 new taxes on individuals. Pioneer Institute has started a series on the impact of specific ACA provisions, such as the Cadillac tax, which is projected to impact 50% of the state’s residents.
The story of the ACA in Massachusetts is one of some winners, but also many losers. Its time for our government leaders to leave behind the talking points, and start to understand the economics behind the law.