2014: “Big bang” for health product pricing

SOA board member Alice Rosenblatt discusses the Department of Health and Human Services proposed rules on Standards Related to Reinsurance, Risk Corridors and Risk Adjustment.

by Alice Rosenblatt, SOA Board Member

AliceRosenblatt In addition to proposed rules on the Establishment of Exchanges and Qualified Health Plans, the Department of Health and Human Services (HHS) released proposed rules on Standards Related to Reinsurance, Risk Corridors and Risk Adjustment on July 11.  Like the proposed rules on Exchanges, the proposed rules on the three risk mitigation methods contained in the Affordable Care Act (ACA)  give flexibility to the states.  The proposed rules solicit comments from interested parties in many areas.  As experts in risk, I hope that many health actuaries will respond to the questions posed by the proposed rules through their professional associations, employers and trade associations.

One of the most difficult challenges for health actuaries working for insurance companies will be to price products for the individual and small group markets in 2014.  I have called 2014 a "Big Bang" for pricing.  There will be tremendous change caused by new rating rules, new underwriting rules, new products, new mandates, subsidies for insurance and an expected large number of previously uninsured people entering the insurance market.  It is the job of actuaries to model the future, but this amount of change all at once will necessitate more sophisticated models than have been used by most health actuaries.  As stated in the proposed rules, the three risk mitigation programs are designed to protect insurers "against adverse selection" (risk adjustment), "inaccurate rate-setting" (risk corridors) and to "offset high cost outliers" (reinsurance).  The models used by health actuaries for pricing for 2014 will need to include the impact of these three programs, as well as all of the other changes mentioned.

The Society of Actuaries released a Request for Proposal (RFP) and is currently in the process of selecting a researcher for a project that will help health actuaries, policymakers and other interested parties to understand some of the "Big Bang" likely outcomes in terms of population movement between insurance companies, premium changes, profitability of insurance companies, and costs of these programs.  The Board of the Society of Actuaries has allocated funding for this research project that involves building models to test different assumptions and scenarios connected with the changes brought about by the ACA to the individual and small group markets.

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