Crystal balls have been associated with fortune telling for several hundred years. Today, actuaries do not use crystal balls to help insurers predict utilization and costs — they use math and stats and, of course, data on prior utilization and costs. This usually works, because the past is often the best predictor of the future. But all bets are off when the past is not comparable and the future is laced with uncertainties. Such is the case in the days of COVID-19.
Oversight of premiums
Health insurance premiums have been rising fast for years. In response to insurers’ record profits, the Affordable Care Act (ACA) requires that: A) in any state, large premium increases be evaluated by experts to ensure that they are based on reasonable cost assumptions and solid evidence; and B) insurers provide consumers with easy-to-understand reasons for rate increases deemed unreasonable and publicly justify such increases on their websites.
The ACA also requires that insurers spend the vast majority of premium dollars on medical care and quality-improvement activities, as opposed to administrative functions. When the medical-loss ratio (MLR) falls below a certain threshold, insurers must issue a rebate to policyholders or reduce their premiums.
Although insurers’ profits or “administrative fees” are capped, their losses are not. Regulators don’t mind if insurers are in the red, but they do require that insurers carry reserves to weather a rainy day or even an unexpected storm like COVID-19. Insurers must maintain an adequate surplus to stay solvent and meet their obligations.
Why insurers want to predict the future
All organizations want, or should want, predictable costs for planning and budgeting, and when applicable, for pricing as well. Insurers rely on actuaries to develop premiums that are high enough to keep them in the black, but not too high. When insurers overprice their products, they may be less competitive and lose customers to other insurers. When insurers underprice their products, they leave money on the table and do not optimize profits (or excess revenues, in the case of a not-for-profit insurer).
Then there is the court of public opinion. Insurers would like to avoid the negative PR if premiums are deemed unreasonable and require public justification, and insurers would prefer to avoid premium rebates altogether. Doing too well financially is particularly awkward for not-for-profit insurers.
Insurers need to align revenues with costs. Premiums are the largest source of revenue and medical expense is the largest source of costs. Actuaries predict revenues and costs when setting premiums, though neither is certain. And this hard work is made much harder during these uncertain times.
When developing premium rates for 2021, insurers started with 2019 — a pre-COVID-19 year — as a base and adjusted for differences based on experience to date during 2020, a most unusual COVID-19 year. The question is not whether insurers’ predictions will be wrong — the question is how wrong they will be.
What insurers know and don’t know
During 2020, some utilization was up, some was down. Telehealth visits were up — way up — as were unforeseen expenses like COVID-19 testing and treatment. Elective procedures were down — way down — and emergency department visits were down as well. Lots of other utilization, like prescription drugs, was relatively flat.
How do we know insurers were confused about what 2021 portends? Just look at their 2021 premiums. Among insurers that specified the effects of COVID-19 in their premium rates for next year, some raised premiums and some reduced premiums. Most states required insurers to file proposed premium increases last summer, when the timing and magnitude of a second spike in COVID-19 cases would have been difficult to predict with accuracy. And how could they predict when deferred elective care, such as hip- and knee replacements, would be delivered? Or the effect of morbidity from preventive or chronic care that was foregone?
A fuzzy picture emerges
So, will medical costs be higher or lower during 2021? It largely depends on how much care is deferred during the first half of the year and any rebound during the second half of the year due to pent-up demand. Fuzzier still are the implications of COVID-19 in future years. The medium- and long-term impacts of delayed care can only be hypothesized until utilization and cost insights emerge. And the long-term effects of COVID-19 infection cannot be predicted, let alone monetized.
Insurers know that COVID-19 will still be raging in early 2021 as vaccines are being rolled out. They know it will be months before vaccines have an appreciable impact on utilization and costs. And insurers know for sure that COVID-19 vaccine costs will be significant during 2021 — and that they will have to foot the entire bill without imposing cost sharing if the CDC’s Advisory Committee on Immunization Practices issues a final recommendation endorsing routine COVID-19 vaccination, as it does with flu shots.
Gaze into a crystal ball and imagine the upcoming 2022 premium rate-setting exercises where the experience of 2020 is used as a base. By then, utilization and cost will hopefully be trending in a more familiar direction. Insurers will surely be looking for — but may not soon see — signs of how COVID-19 may lead to higher utilization and costs in the future. But as the Danish proverb says, it is difficult to make predictions, especially about the future.
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