ACTUARIAL ASPECTS OF MASSACHUSETTS REFORM

Ian Duncan FSA FIA FCIA MAAA

New England Actuaries Club November 2012

Agenda

1. History and accomplishments of Massachusetts Reform

2. Actuarial Implications of Massachusetts Reform

Introductions

Author of several books and peer-reviewed studies in healthcare management and predictive modeling. 2011 publication has chapter on Massachusetts Reform.

Published 2008 May 2011

Ian Duncan FSA FIA FCIA MAAA. Vice President, Clinical Outcomes & Analytics and Head of Research, Walgreen Co. Chicago. Adjunct Professor at UC Santa Barbara and Adjunct Research Professor, Georgetown Dept. of Health Administration.

Board member, Massachusetts Health Insurance Connector Authority.

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Comparison of Massachusetts and US Health Care Reform Laws

Massachusetts US

Medicaid Expansions √ √

Subsidized Coverage √ √

Insurance market reforms √ √

Health Insurance “Exchange” √ √

Individual Mandate √ √

Employer Responsibilities √ √

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Commonwealth of Massachusetts

Population: 6.5 million Second highest average per capita income in the US ($51,500 in 2010). Home to 65 universities and colleges (Harvard; MIT; BU; BC; etc.) Home to many famous medical facilities: Mass General; Brigham & Womens; Dana-Farber Cancer Institute, etc. Prior to passage of reform in 2005, Massachusetts had the lowest rate of uninsured in the US (9%)

Massachusetts Facts

• High income state.

• Strong base of employer coverage.

• Relatively low rate of uninsurance.

• ~20% of state economy is health care.

• Uninsured (prior to reform) ~9%.

Long history of bi-partisan efforts to expand insurance coverage and introduce reforms.

• Expansive Medicaid program with 1115 waiver.

• Well-funded safety net.

• Strong advocacy groups.

• Earlier reforms of individual and small group insurance market.

• Medicaid waiver pays for approximately half of the additional cost of coverage (~ $850 million).

The Most Democratic Legislature in the United States

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Major Components of Massachusetts Health Reform Law

• Subsidize insurance for low and moderate income – Medicaid expansions (mostly for children) – Commonwealth Care (for adults up to 300% FPL) – Flow of funds: Massachusetts Treasury => Connector Authority => insurers

• Reform the individual health insurance market – Merge individual and small group markets – Health Insurance “Connector”/Exchange – Commonwealth Choice Products (Gold, Silver, Bronze and Young Adult Plans) – Dependent coverage to age 26. – Flow of funds: employer (or insured) => insurer. Funds do not flow through the Connector

(Connector charges between 2.5% and 4% administrative fee for enrollment/marketing services).

• Require adults to have insurance if it’s affordable

– Or pay state income tax penalties (between $228 and $1,260 in 2012).

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Section 125 plans

Small Employers Unsubsidized

Subsidized CommCare

Unsubsidized CommChoice

Massachusetts Connector The “Travelocity” of Health Insurance

Individual Market

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Subsidized Insurance: Commonwealth Care

• Household income <300% federal poverty level

– No employer coverage available

– Sliding scale premium

• 5 private health insurers

• Benefits comparable to employer plans

• Run by the Connector

Percent of

Federal

Poverty Level

Individual

Premium

Per Month

Couple with

children:

Premium

Per Month

<151% $0 $0

150.1 - 200% $39 $78

200.1 – 250% $77 $154

250.1 – 300% $116 $232

300% FPL ~ $31,000 for individual; $62,000 for family of three

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One Stop Shopping at www.mahealthconnector.org

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Mass 2.0: Standardized Products

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Affordability Schedule for Single Person: Monthly Premium

Same as

Commonwealth

Care Premium

Schedule

Annual Income Mass 2011 Affordability Scale

$0 - $13,538 $0

$13,539 - $16,260 $0

$16,261 - $21,672 $39

$21,673 - $27,096 $77

$27,097 - $32,508 $116

$32,509 - $39,000 $175

$39,001 - $44,200 $235

$44,201 - $54,600 $354

$54,601+ Affordable

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Individual Mandate: The Tax Penalties

Penalty Schedule for Failure to Comply with the Individual Mandate. 2007 - 2012

2007 2008 2009 2010 2011 2012

per year* per year** per year** per year** per year** per year**

150.1 - 200% FPL $219 $210 $204 $228 $228 $228

200.1 - 250% FPL $219 $420 $420 $456 $456 $456

250.1 - 300% FPL $219 $630 $624 $696 $696 $696

Above 300% FPL. Age 18-26 $219 $672 $624 $792 $864 $996

Above 300% FPL. Age 27+ $219 $912 $1,068 $1,116 $1,212 $1,260

* For Tax Year 2007, the penalty for not having insurance as of December 31, 2007 was $219. ** If the individual is without insurance for all twelve months of the year.

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Result After 4 Years: Lowest Rate of Uninsurance in the Country

Massachusetts: Uninsured as % of Population

10.20%

11.30%

9.2%

10.4%

5.4%

2003 2004 2005 2006 2007

Source: Current Population Survey, 2003-2008, US Census Bureau

1.9% 2010

Source: Massachusetts Division of Health Care Finance and Policy, 2010 Household Insurance survey

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As of December 2010: 412,000 More People Have Health Insurance Than in June 2006

Commonwealth

Care (+159,000 )

Private Coverage +7000

(Individual +34,000 and

Employer -27,000)

Medicaid

+193,000

Source: Division of Health Care Finance and Policy

Bridge Program

+21,000

Medical Security

+32,000

Change in Number of Newly Insured Since Health Reform: December 2008 vs. December 2010

175000

246000

404000

7000

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

December 40513

Private Public

+421,000 +412,000

March 2010

December

2008:

Private

=42% of

increased

coverage

December

2010:

Private

=2% of

increased

coverage

December

2008

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Support for Health Reform Among Massachusetts Physicians

Source: “Physician Views of the Massachusetts Health Care Reform Law” NEJM Oct 2009

Support

Continuation

of MA

Reform

Believe MA

Reform

Helped

Previously

Uninsured

Believe MA

Reform

Improved /

Did Not

Impact Care

Quality

88%

79%

75%

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“Crowd-Out” Has Not Occurred: No Evidence of Decline in Proportion of Employers Offering

Health Insurance

70% 68%72%

60%

76%

60%

77%

69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

MA US

2005

2007

2009

2010

Sources: DHCFP and KFF annual survey

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Details of Uninsured from Mass Tax Filings: 2008

Uninsured part of year

(n=156,000)

Uninsured Full Year

(n=140,000)

Paid penalty 17% 17%

Nothing affordable 16% 15%

Lapse<3 mo 32% --

Income <150% FPL:

exempt

31% 63%

Appealed penalty 3% 2%

Religious/other

exemption

1% 3%

Most of the Remaining Uninsured Have Very

Low Incomes

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Remaining Uninsured are Disproportionately Young Men

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Uninsured Rate Pre- and Post-Reform (Among people <65 years old)

19%

3%

8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

US Mass

2009

2019

On Coverage, Massachusetts is Already Far Ahead

of Where the US Will Be in Nine Years After National

Health Reform

Actuarial Implications of Reform: the 3 Rs

Many of the early and continuing actuarial issues in Massachusetts are focused on attempts to address the unpredictable risk that plans faced in assuming nearly 200,000 previously-uninsured lives. As experience has emerged on these lives, risk management centered around more traditional risk-transfer mechanisms. • The initial risk imposed by members without prior experience has been

managed by a gainsharing mechanism. • Ongoing risk has been managed with Risk Adjusted revenue transfers between

plans. • Ongoing losses are managed with stop-loss pool. => The 3 Rs: Risk-adjustment, Risk-Transfer and Reinsurance.

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Gainsharing (Risk Corridors)

• The Connector has operated different corridors/gainsharing arrangements in different years.

• Recognize that the newly-insured lives represented an unknown risk; Risk Adjustment, while useful for addressing selection between MCOs, did not provide additional revenue to offset a revenue shortfall if claims should exceed the actuarial rate estimates.

• The Connector also implemented a stop-loss pool to which all participating plans contributed. It is essentially a self-insured arrangement (no new revenue is involved). Claims on (and contributions to) the pool are applied before gainsharing.

Only the gain-sharing mechanism involves additional revue; Reinsurance and Risk-adjustment move existing revenue between health plans.

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Gainsharing (Risk Corridors)

Gainsharing limits and terms have changed since 2006, but the principles remain fundamentally the same. The most recent gainsharing arrangement works as follows: Aggregate risk sharing corridors apply to all Commonwealth Care Health Plans:

• Aggregate risk sharing corridors of 4% apply above and below the target medical capitation rate (“Health Plan Full Risk Corridor”);

• The Connector Authority shares 50% above and below the Health Plan Full Risk Corridor; and

• The Health Plans return to 100% full risk at 50% above and below the medical capitation revenue (closed-end risk sharing).

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Gainsharing (Risk Corridors) (contd.)

2011 Target Capitation Rate

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Health Plan Payments Health Plan Payments

Health Plan Liability

$442.70

$425.67

$408.64

$408.64 $425.67 $442.70 $638.50 $212.84

$638.50

$540.60

$212.84

Health Plan Full Risk Corridor

Stop-loss (Reinsurance)

The Connector operates a stop-loss pool to which all Commonwealth Care Health Plans must contribute. No state money is included (i.e. the pool is entirely self-insured). Health Plans fund the pool at 1.25% of the capitation rate and the pool pays 75% of incurred claims above a $150,000 attachment point. Experience-rating also occurs if the pool runs a surplus or deficit.

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Risk Adjustment

• Risk Adjustment is just one of the techniques used by The Connector to

manage the selection risk of the Commonwealth Care program.

• The Connector does not fund the Commonwealth Choice program. The

number of Connector Commercial members is small and so direct risk

mitigation is not an issue; nor is the Connector able to influence pricing or

underwriting of Commercial individual and small-group insurance.

• Initially, lacking claims data, risk adjustment was applied based on age and

sex of enrolling members. The relative age-sex factor adjusted the base

(Connector established) premium rate.

• As experience developed claims-based risk factors (using DxCG Medicaid

Model) were developed and apply in the most recent year to members with

more than 6 months of experience. New entrants continue to be age-sex

adjusted.

• Adjustment calculations are performed by the Connector Authority staff

using data provided by MassHealth (Medicaid), the enrollment and billing

administrator.

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Risk Adjustment

The PMPM capitation rate to be paid to the Health Plan is equal to: Target PMPM x RFHP + Admin.

Where: Target = Statewide Medical only Target for the Commonwealth Care Program = $394.00 PMPM[1] (before any adjustment for hospital tax, but includes pharmacy costs) Total Members

RF j HP = Σ (Geoi x Plani x Disci x Riski) / (Total Members)

i = 1

[1] This capitation amount includes prescription drugs, but does not include any adjustment for Health Safety Net (Uncompensated Care) hospital assessment.

Where: Geo i,j = Geographic (region) factor for Health Plan j Member i. [2] Plan i,j = Plan Type factor for Member i in Health Plan j. Risk i,j = Risk factor for Member i in Health Plan j. Disci is a factor that represents a discount offered by the Health Plan. It does not apply in FY 2012.

[2] Note that in Massachusetts, health plans serve multiple geographic regions and offer different plan types. This calculation develops a plan-wide adjustment factor.

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Risk Adjustment

Example of calculation of overall adjustment factor

Member Plan Type Region Age Gender Plan Type Geographic Risk Total

001 I North 27 F 1.0619 0.9468 0.8694 0.8741

002 * I North 22 F 1.0619 0.9468 0.9970 1.0024

003 II North 35 M 0.9461 0.9468 0.9108 0.8159

004 * II Central 44 F 0.9461 1.1589 1.0350 1.1348

005 III Central 54 M 0.8909 1.1589 1.2533 1.2941

Avg 1.0242

* Members 002 and 004 had seven or more months of experience during the historic experience period.

Therefore, they receive a DxCG risk factor rather than an age/gender risk factor.

Rating Factors

Although the payment to this Health Plan in the first quarter of Fiscal Year 2011 was initially $431.58, the payment is retroactively adjusted for the increased Total Average Rating Factor and becomes: $393.67 x 1.0242 + $32.00 = $435.20

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Example (Member #2): RF i,2 = (1.0619)(0.9468)(0.9970) = 1.0024

Minimum Pricing

• Medicaid rules require that the Connector RFP provide bidders with an actuarially-sound rate range within which they must bid. This rule has the effect of building-in trend because the “actuarially-sound rate range” is determined based on prior year’s cost + trend.

• For Fiscal Year 2012, this approach would have resulted in increased cost for the Connector and the state. The Connector adopted a novel sound rate range approach that leveraged a development that had occurred 2 years earlier as a consequence of the termination of the Commonwealth Care Program for Aliens with Special Status.

• Aliens with Special Status are aliens legally admitted to reside in the US who are not eligible for benefits under 1996 Medicare reform legislation. They must achieve a minimum of 5 years of residence in addition to regular rules to be eligible for benefits. This population (numbering about 30,000 at its peak) is a unique subset of the Commonwealth Care program because, unlike the other 150,000 members for whom a 50% federal match is obtained, the 1996 legislation prohibits use of federal funds.

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Minimum Pricing

• When Massachusetts encountered budget difficulties this population was removed from Commonwealth Care and put into a slimmed-down, lower-cost program (The Bridge Program) underwritten by Celticare.

• Subsequent experience of the AWSS population was significantly lower than that of similarly-situated members in other MCOs. The Connector concluded that one MCO had demonstrated that a lower minimum rate was achievable and this became the minimum in the actuarially-sound range for the 2012 FY bids.

• Several MCOs bid around the minimum rate (some with more limited networks). Overall result was a flat budget from FY 2011 to FY 2012. This “steerage” of the market continued to FY 2013, where competition between plans resulted in reduction of about 5% in underlying capitation rates.

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3 Rs: Results (contd.)

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• Risk-adjustment (Q1 2012):

Net risk adjustment in Q3 2012 is 3.9%, amounting to a net transfer to the participating plans of $6.8 million.

The method of risk-adjustment chosen by the Connector does not result in budget neutrality; in 2012, there has been an influx of older and more risky members which has resulted in an increasing trend in the average risk factor (e.g. the + 3.9% in Q3 2012).

The concurrent, budget-neutral approach of the ACA does not allow for this change in the underlying risk profile of the covered population.

Plan 1 2 3 4 5

Rel. Risk Score +5.9% (8.8%) 15.3% 16.1% (2.1%)

3 Rs: Results

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• Reinsurance (Stop-loss) experience:

Cumulatively the pool has generated a surplus which has been experience-rated back to the plans.

• Risk Corridor: Gainsharing has operated according to different parameters in different years. Aggregate net payments/(receipts) over the last few years have been in the range 1%-2% of premiums.

Gainsharing results for individual plans have been larger, with several plans being reimbursed by the state between 3% and 5%, and on occasion plans reimbursing the state double-digit percentages.

FY 2007 2008 2009 2010 2011 Cum.

Loss-ratio 80.7% 137.4% 54.7% 67.1% 101.4% 81.8%

Closing Thoughts

• Massachusetts reform was passed in 2006 after many years of negotiation, trial-and-error, with bi-partisan (political) support and support of employers, advocates, providers and payers.

• Cost control continues to be a challenge, 7 years into reform.

• Massachusetts reform has been affordable (financially) to the state because of significant subsidies from the US Treasury and from diversion of uncompensated care funds from (direct) payment to hospitals to payment to insurers.

• After 7 years (and considerable success) we are still discovering ways to improve it.

• Massachusetts’ reform was less administratively complicated than ACA, but still requires a $50 million administrative budget.

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Ian Duncan FSA FIA FCIA MAAA Adj. Assoc. Professor Dept. of Statistics and Applied Probability University of California, Santa Barbara 93105

860-614-3295 duncan@pstat.ucsb.edu