Issue Brief: Drivers of 2019 Health Insurance Premium Changes
American Academy of Actuaries
The 2019 health insurance premium rate filing process is underway. Outlined in this issue brief are the factors actuaries consider in setting premium rates, and an overview of the major drivers behind why 2019 premiums could differ from those in 2018. The brief focuses primarily on the individual market, yet many of the factors discussed are also relevant to the small group market.
Premiums reflect many factors actuaries develop proposed premiums based on their projections of medical claims and administrative costs for pools of individuals with insurance. Factors that affect premiums include:
PROJECTED MEDICAL COSTS. Most premium dollars are used to pay for medical claims, including those for medical services and prescription drugs. Claims reflect unit costs (e.g., the price for a given health care service or medication), utilization, the mix and intensity of services, and plan design. Spending for health care services can vary by geographic area and from one health plan to another within an area due to varying regional medical practice patterns and the degree to which insurers in a region have leverage to negotiate fees and care management protocols with health care providers.
LAWS AND REGULATIONS. Laws and regulations, including the presence of risk-sharing programs, can affect the composition of risk pools, projected medical spending, and the amount of taxes, assessments, and fees that need to be included in premiums. Recent and pending policy changes must also be considered in premium development.
WHO IS COVERED—THE COMPOSITION OF THE RISK POOL. Pooling risks allows the costs of less-healthy individuals to be subsidized by healthy individuals. In general, the larger the risk pool, the more predictable and stable claim costs can be. But the composition of the risk pool is also important. Although the Affordable Care Act (ACA) prohibits insurers from charging different premiums to individuals based on their health status, premium levels reflect the health status of the risk pool as a whole. If a risk pool disproportionately attracts those with higher expected claims, premiums will be commensurately higher, all other factors remaining equal.
OTHER PREMIUM COMPONENTS. Premiums must cover administrative costs, including those related to insurance product development, sales and enrollment, claims processing, customer service, and regulatory compliance. They also must cover taxes, assessments, and fees, as well as risk charges and profit.