CMS issued a temporary policy last week that allows insurers offering health plans in the individual and small group markets to prospectively reduce premiums by a fixed percentage. The fixed percentage reduction must be applied to all Affordable Care Act (ACA)-compliant individual or small group plans, regardless of premium subsidies from the federal government or whether the plan was sold through or outside of the health insurance exchange.
Premium reductions must be applied prospectively to the entire month of coverage, starting on the first day of the month beginning as early as Sept. 1. Premium reductions are limited to the 2020 calendar year.
Health insurers must receive permission from the regulator of these plans before reducing premiums. For most states, this is a state regulator, such as the state’s division of insurance or insurance commissioner. For Missouri, Oklahoma, Texas and Wyoming, CMS is the primary regulator.
Health insurers also must receive permission from the exchange on which the plans are offered before reducing premiums. Insurers in states using Healthcare.gov (federally-facilitated exchanges and state-based exchanges using the federal platform) will have to complete and submit to CMS a yet-to-be-released template. Health insurers in the 37 states that offer health plans through Healthcare.gov have until Oct. 1 to do this.
The 12 states and District of Columbia that operate state-based exchanges on state-based platforms will require insurers to gain permission from the state-based exchange. State-based exchanges could impose similar or further reporting requirements compared to those required by CMS for states using Healthcare.gov.
Healthcare.gov will continue to display the full premium amount before any premium reductions, even if a plan opts to reduce premiums. Premium reductions will not impact the calculation of premium subsidies provided to individuals by the federal government as CMS will use the full premiums of the second lowest cost silver plan in a market to determine the level of federal premium subsidy available, in addition to household income.
The guidance from CMS gives health insurers more flexibility to help consumers and small employers maintain their coverage as the economic crisis continues. It builds upon flexibility granted by CMS allowing health insurers to extend payment deadlines and delay the beginning of grace periods as well pay out 2019 medical loss ratio (MLR) rebates earlier than usual, via a lump sum payment to consumers/small employers or via a premium credit against 2020 premiums.
Premium reductions could be a way for payers to avoid significant MLR rebates in 2021. Determined based on the average MLR, which is roughly claims paid divided by premiums collected, MLR rebates have been on the rise in recent years. In April, the Kaiser Family Foundation estimated that, based on 2017-2019 claims and premium data, 2020 rebates could reach $2 billion for the individual market and $350 million for the small group market, with the individual market rebates up significantly over 2019 and prior years.
Without a reduction to 2020 premiums, health insurers could see even higher rebates in 2021, based on 2018-2020 claims and premium data, due in large part to care being deferred during the pandemic.
Most health insurers will have to act quickly, deciding by Oct. 1 whether to reduce premiums, the amount to reduce them by and how many months to allow the reduction. Health insurers will have to evaluate how much care deferred-to-date in 2020 is likely to come back through the end of the year in order to determine the appropriate level of premium reductions for 2020. This could be challenging to predict.
Many factors could complicate this decision, including: Continued regional variation in COVID-19 cases; a likely spike in cases as schools resume in-person in certain areas of the country and cold and flu season sets in; the seasonal nature of the plan year, which leads consumers to typically use more medical services and pharmaceuticals towards the end of the year when consumers’ deductibles and out-of-pocket spending requirements have been met; and the potential for utilization to increase over expected, pre-COVID-19 levels for the second half of 2020 as the pent-up demand for care from the first half of the year comes back.
CMS will provide further guidance on how reduced premiums should be reported for MLR and risk adjustment purposes but indicated that health insurers will report premiums actually billed, taking any premium reductions into account, for MLR and risk adjustment. This could lower the state average premium used in the risk adjustment calculation and in turn, decrease risk adjustment payments to and from insurers for 2020.
Health insurers that have historically paid in to risk adjustment could see reduced payments due from them for 2020 while those that have historically received risk adjustment payments could see reduced risk adjustment revenue in 2020.