Merging the Massachusetts Non- Group and Small Group Health Insurance Markets SCI Winter Meeting

2 Background on previous MA reforms Overview of MA small group and non-group markets Key changes made to the markets The uninsured  Uptake assumptions Expected rate impacts of merger Identified issues

MAHCR - built upon earlier reforms Employer Tax and Mandate Funds UCP – expanded to CHCs, Hospital Deregulation Reform Private Insurance Market Small Group, Non-Group Expand Public Programs MMC waiver, SCHIP, IP, Sr. Pharmacy Individual Mandate, Employer Fair Share, Connector 2006

MA nongroup market vs. national nongroup market National MA PPO83.4%10.0% HMO/POS14.9%90.0% Indemnity 1.7% 0.0% < %20.0% %15.0% %17.0% %17.0% %18.0% %14.0%

MA non group market 2 products are allowed to be sold  Standard - very comprehensive with minimal cost sharing  Alternative – increased cost sharing and no rx Guaranteed issue/renewal with continuous open enrollment  6 mo. waiting period or pre-ex condition exclusion period, but offset by prior continuous coverage 63 days prior to enrollment  No waiting period for “buy up” Overall MLR is 91%  94% for individuals and 83% for other rate basis types  Deterioration from 83% in 2003  5% higher than for small group

MA non group market 42,500 subscribers  Will comprise 11% of the merged market 90% of the market is with BCBS Non group membership decreased by 10% Average premium is $650 for standard and $450 for alternative  Declining plan value 35% purchased alternative in % purchased alternative in 2005

MA non group market Average pmpm claim costs was approximately 40% higher than for small group in 2005 due to the following:  Older than average subscriber age (1.13)  Much lower number of children covered  77% of those that purchase buy Individual-only Non group pmpm claims  Average is $375  15% have pmpm claims greater than $650  15% have pmpm claims under $50  50% have PMPM claims under $200

MA Small group market 700,000 members in 2005, 92% of which are written by 7 not-for-profit HMOs Includes groups of 1-50 FTEs Overall small group claims pmpm is $262  11% of groups (which are 3% of members) have pmpm claims under $50  9% of groups (which are 5% of members) have pmpm claims of more than $650  50% of groups have pmpm claims under $200  16% of groups have PMPM claims greater than $350 2:1 rating band  Age, geography, industry, size, 4 rate basis types – all inside the band

MA Small group market Purchasing patterns  87.7% are HMO/POS  11.75% are PPO  0.54% are indemnity Plan value  70% of small group members have “medium” plan values between 0.85 and 0.92 $15-$20 office visit co-pays $ in patient and out patient co-pays drug co-pays of $10/25/40  12% of small group membership has “low” plan values between 0.65 and 0.85  3% of small group membership has plan values between 0.65 and 0.75 (high deductible plans)

10 Summary of 2005 data Note: Summary based on data received from the carriers. It has not been normalized to reflect the size of the entire market.

11 Overview of Small Group by group size

12 Key changes to small group and non-group markets Small Group and non-group risk pools to merge Connector empowered to arrange for sale of products to individuals and small groups  Commonwealth Care available for those at 300% FPL or below  “Seal of Approval” products to small groups or individuals above 300% FPL  Young Adult Plan available for purchase to those 19 to 26 Individuals considered groups of one Merged pool rating based on current small group  Group size adjustment for smallest groups increased from 1.05 to 1.10  Group size adjustment moved OUTSIDE the 2:1 band

13 Uninsured uptake assumptions Four Different Uptake Estimates  Elasticity of Demand  Low  Medium  High Elasticity – based on changes in the price of insurance and the relative cost compared to a subscriber’s income  Income level  Age  Penalty for not meeting Individual Mandate Low, Medium, and High – based on a review of data, impacts of Chapter 58, and key informant interviews  Individual mandate  Income level  Increasing cost of coverage  Affordability & eligibility waivers  Health Status  Age

14 Other key projection assumptions Medical Trend  11% annually Benefit Buy-down  1.5% annually  One time adjustment for those groups that receive high premium increase due to merger 1.5% buy-down if increase is between 2.5 and 5% 3.0% buy-down if increase is greater than 5%

15 Rate impacts With Market merger only  Change in non-group due only to claims and conversion factor alone: %  Change in small group due only to claims and conversion factor: +2.0% With Market merger + new rating rules  For Non-group this corresponds to a decrease of approximately 15%  For Small group this corresponds to an increase of approximately 1 to 1.5% With assumptions of individual mandate  Merged market rates anywhere between -3% to +6%

16 Summary of findings Merger will lead to a decrease in non-group rates of approximately 15% and an increase in small group rates of approximately 1 to 1.5% Average book of business rate impact will vary substantially by carrier  -2% to -50% for Non-group  +1 to +4% for Small Group Given assumptions, adding currently uninsured will lead to rate impacts of from approximately -3% to +6%, depending on:  Current number of uninsured  Number of uninsured purchasing coverage  Morbidity of the newly insured  Presence or absence of 10% group size load on groups of one $30 to $45 million in reinsurance dollars required to offset increase in Small Group rates due to merger

17 Issues remaining List billing and composite rating in the same marketplace Underwriting and product selection requirements for the Connector Decreasing plan values Administrative expenses Young Adult Plan and 2:1 compression Robustness of individual mandate: want healthy lives in

MA Health Market Pre-Reform Total Population6,400,000 Currently insured (93%)5,940,000  Employer, individual, Medicaid, Medicare Currently Uninsured(7%) 460,000 _________________ ≤ 100% FPL Medicaid eligible 106,000* % FPL Subsidy eligible 150,000* >300% FPL 204, 000 * FFP eligible under waiver Note: Based on August 2004 Division of Health Care Finance Data

Key Questions to designing any Health Care Reform Who are the 460,000 uninsured? Why don’t they purchase it?  Are they not offered by employer?  If offered, do they choose not to purchase? What is their health status? What is their employment status?

Characteristics of MA Uninsured 23% are income eligible for Medicaid 33% have incomes between % FPL and unless they have children are not eligible for traditional Medicaid 54% have incomes above 300% FPL 16% are employed part-time

Ch. 58 of Acts of 2006 Merge Non Group and Small Group Markets  15% decrease in Non Group Rate  1 to 1.5% increase in Small Group Rate (can be offset with purchase of $33-48 million reinsurance plan)  Represents $25-$38 million subsidy from small group to non group New distribution channel (Health Connector) Individual Mandate  Loss of tax deduction in 2007  Assessed 50% cost of MCC in Fair share employer assessment & Free rider surcharge, Commonwealth Care (subsidized coverage)

Role of the Health Connector Nexus between buyers and sellers  Premiums paid with pre-tax dollars (125 Cafeteria Plan)  Pay premium assistance for % FPL Mechanism for reaching non-traditional workers  Part-timers and seasonal workers  Contractors and sole-proprietors  Individuals with more than one job Alternative distribution system

Eligibility for Accessing Health Insurance via the Connector Uninsured resident (6 mo.) Not eligible for any MassHealth program, Medicare, or S-CHIP program. Employer has not provided health insurance in the last 6 mo. for which the employee is eligible and for which the employer covers at least 20% of annual family premium or 33% of individual premium. (Board Waiver) Individual has not accepted a financial incentive from his employer to decline employer’s plan.

Health Connector Commonwealth Care Subsidy Program  $300 target monthly premium Assumption is that 260,000 will be eligible for subsidy payment which will be between 80-85% of monthly premium $795.6 M/year subsidy (50% FFP - $398 M net cost) Premium Assistance Program  <100% $ 0 monthly enrollee contribution  >100% - 150%$ 18 monthly enrollee contribution  >150% - 200%$ 40 monthly enrollee contribution  >200% - 250%$ 70 monthly enrollee contribution  >250% - 300%$106 monthly enrollee contribution Provides “Seal of Approval” for commercial products

Challenges with Selection List billing vs. composite rating  Connector list bills charge each subscriber a rate specific to his demographic characteristics – age, industry, geography)  Other major sector rates using composite billing a group is charged a rate based on the average demographic characteristics of its membership as a whole.  This can create adverse selection. Continuous Open Enrollment  Ability for individuals to change products at any time creates an opportunity for adverse selection – groups are limited to open enrollment period.

Things that will impact “Take Up” Rate Individual Mandate and Waiver policies  Affordability waivers from requirements of individual mandate  Waivers for enrollment into Commonwealth Care for persons eligible for employer sponsored coverage, but employer covers only 33% Employer sponsored coverage Increasing costs of coverage over time Income and health status of currently uninsured Subscriber age

Access + Benefits = Cost Current monthly premium for Non Group is $650 ($450 w/o drugs) and $350 for Small Group.  Assuming 15% reduction is correct – average monthly premium drops to $553 ($383) – still $253 ($83) above target. Legislation requires all existing mandates to be included. Cost sharing is forbidden for certain income classes (≤100% FPL) and limited for others ( % FPL). Limited Access networks have not “sold” well in past.