• Chief Actuary signals caution in annual trustee report
• HHS provides relief for incomplete applications to early retiree reinsurance program

• Health care reform could cost health insurers far more than expected
• 90% of companies anticipate losing grandfathered status under health reform

Chief Actuary signals caution in annual trustee report

The 2010 Annual Report of the Medicare Board of Trustees shows substantial improvement in the financial status of the Hospital Insurance (HI) and Supplemental Medical Insurance (SMI) Trust Funds as a result of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148). The Chief Actuary of CMS, however, included a cautionary note in the report regarding the Board’s long-term growth assumptions, and suggests that the Board consider these matters when they convene an independent panel of expert actuaries and economists to determine assumptions for their 2011 report.

The 2010 report indicates the HI Trust Fund (Part A) is now projected to remain solvent until 2029, 12 years longer than reported last year. The HI long-range actuarial deficit has been reduced to 0.66 percent of taxable payroll. HI Trust Fund surpluses are expected to begin during 2014-2022. Projected costs for the Medicare Part B account in the SMI Trust Fund are also much lower. Part B spending is now projected to reach only 2.5 percent of gross domestic product by the end of the 75-year projection period.

Actual Part B costs are expected to exceed the current projections because Congress is expected to continue to override the substantial reductions in Medicare payments for physicians over the next three years. As a result of annual updating of enrollee premiums and payment rates, Medicare Part D is also in financial balance. Other legislative provisions also reduce costs through lower payments to private Medicare Advantage health plans.

The largest amount of projected savings comes from lower annual payment increases to hospitals, skilled nursing facilities, home health agencies, and other providers. The 0.9 percent payroll tax increase on earnings above $200,000 for single taxpayers or $250,000 for married couples filing joint returns also directly benefits the HI Trust Fund. And because the earnings thresholds are not indexed, more workers will be affected by the additional HI payroll tax over time.

While the Trustees believe that the legislative changes will bring the HI Trust Fund closer to financial balance, additional policy initiatives are needed for short-range financial adequacy and long-range actuarial balance. The time gained by postponing the depletion of the HI Trust Fund should be used to determine effective solutions to the remaining long-range HI financial imbalance.

While the CMS Chief Actuary agreed that the techniques and methodology used by the Board of Trustees to evaluate the financial status of the HI and SMI Trust Funds are based upon sound principles, and the principal assumptions used and the resulting actuarial estimates are reasonable, he expressed caution. For example, he noted that the Part B projections of the trustees, which reasonably portray future costs under current law, are not reasonable as an indication of actual future costs.

For example, current law would require physician fee reductions totaling an estimated 30 percent over the next three years, an “unlikely result,: according to the Chief Actuary. Further, there is a strong likelihood that certain PPACA changes will not be sustainable in the long range. For example, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. As a result of the labor-intensive nature of these services, most health care providers cannot improve their productivity to this degree without major changes in health care delivery systems.

Without changes in these delivery systems, by the end of the long-range projection period, Medicare prices would be less than half of their level under the prior law, according to the Chief Actuary. Congress would be required to intervene to prevent the withdrawal of Medicare providers and the beneficiary access problem that would result. Overriding the productivity adjustments would lead to far higher costs for Medicare in the long range than those currently projected.

Consequently, the Chief Actuary believes that the financial projections shown in the Trustees report are not reasonable expectations: (1) in either the short range (due to the unsustainable reductions in physician payment rates) or (2) in the long range (due to the likelihood that the statutory price reductions in most categories of Medicare provider services will not be viable).

2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, August 5, 2010.

HHS provides relief for incomplete applications to early retiree reinsurance program

The Department of Health and Human Services (HHS) has provided additional guidance regarding the application the Early Retiree Reinsurance Program (ERRP) to help the sponsors who submitted incorrect or incomplete applications. HHS has provided three methods of correcting problems:

First, HHS notes in an update to its ERRP information that some plan sponsors may have submitted their ERRP applications on the official form, but before having had the chance to review the version of the frequently asked questions (FAQs) document that was published on June 29.

Such sponsors should not submit another application. HHS is developing a process to identify applications that may include an incorrect or incomplete response as a result of the sponsor not having access to the additional FAQs that were posted on June 29. When such responses are identified, HHS will give sponsors a chance to submit additional information as an attachment to support the original application. The sponsor’s account manager will be contacted via telephone or email in these situations. Sponsors that may have already submitted a second application, after the June 29 FAQs were published, should not contact HHS. HHS is developing a process to respond to those situations.

Second, certain applicants were having difficulty with the on-line application that was posted early on June 29. A revised copy of the application has been posted that accommodates the entering of numeric sequences that start with zeros in fields requiring numbers (e.g., EIN, phone numbers, etc.). If an applicant had this problem with the early version of the application, HHS will accept what was submitted and contact the sponsor if necessary to ascertain the correct data before making an application determination. Applicants who had completed and submitted the early version of the application but who did not experience a problem entering zeros, do not need to re-complete their application form.

Third, there has been some confusion about how applications should be submitted. Applications should be submitted through the U.S. Postal Service. However, if a sponsor submitted its application in another manner, the application will be accepted for processing, provided the application is otherwise acceptable for processing. However, for operational reasons, HHS prefers sponsors to use the Postal Service. If an applicant submitted an application via a carrier other than the Postal Service, and it was accepted at the address listed on the official application, do not re-submit the application. Sponsors that may have already submitted a second application, should not contact HHS. HHS is developing a process to respond to such situations.

For more information, visit http://www.hhs.gov/ociio/regulations/errp/index.html.

Health care reform could cost health insurers far more than expected

Compliance with the minimum loss-ratio requirement of the new health reform law could cost the nation’s health insurers far more than most analysts expected, according to a recent study by Weiss Ratings, a provider of insurance company ratings. Starting in 2011, the Patient Protection and Affordable Care Act requires individual and small group insurers to spend at least 80%—and large group insurers to spend at least 85%—of their premium dollars on medical care and on efforts to improve the quality of care (PHSA Sec. 2718). In addition, other provisions of the law, including requirements to cover certain groups with preexisting conditions, are expected to boost medical expenses.

Weiss found that insurers already complying with the loss-ratio requirement in 2009 had average net profit margins of only 0.7%, compared with 6.3% for non-compliant companies.

“As long as their investment incomes hold up, most large insurers should be able to handle the increased medical expenses expected under the new health care reform,” commented Martin D. Weiss, president of Weiss Ratings. “If investment income declines significantly, however, few insurers will be able to comply without debilitating impacts to their bottom line, and ultimately, their financial stability as well.”

To assess the effect of the reform on the health insurance industry’s earnings, the Weiss study covered 543 health insurers, distinguishing insurers that were and were not in compliance in 2009 with the new minimum loss ratio requirements:

• 226 companies spent less than 85% of their premiums on medical expenses; and
• 317 companies already spent 85% or more of their premiums on medical expenses.

Weiss found the following:

1. Including income from both their insurance underwriting operations and from their investments, the compliant companies earned a total of $1.74 billion, or an average of $5.5 million each. The non-compliant companies earned $7.68 billion, or an average of $34 million each.

2. Underwriting income, the difference between premiums collected and medical claims paid, is the income category primarily responsible for the sharp differences, Weiss noted. Consequently, Weiss concluded that as a group, the compliant companies lost $372 million on their insurance operations, with an average underwriting margin of a negative 0.2%. The non-compliant companies, on the other hand, earned $6.11 billion with an average underwriting margin of 5%.

3. The overall size of the insurer also was a factor because larger companies tend to have more investment income, making it possible for them to afford higher medical expenses per premium dollar, Weiss observed. However, despite size differences the contrast between the compliant and non-compliant groups was still great, as follows:

• Among smaller health insurers (those with less than $1 billion in assets), compliant companies had an average net profit margin of only 0.6%, compared with an average of 4.5%, or 7.5 times more, for non-compliant companies.
• Among larger health insurers (those with assets of $1 billion or more), the compliant group had net margins of 0.9%, and the non-compliant had a net margin of 9.9%, or 11 times more.

For more information, visit http://www.weissratings.com/healthlists.

90% of companies anticipate losing grandfathered status under health reform

While many U.S. companies initially hoped they could preserve much of their existing group health plans under the new grandfathered provision, a new survey by Hewitt Associates shows that almost all now believe they will not. Ninety percent of companies surveyed said they anticipate losing grandfathered status by 2014, with the majority expecting to lose this status in the next two years.

Under the “grandfathered” provision of the Patient Protection and Affordable Care Act (P.L. 111-148), companies that qualify can maintain many of their current health care coverage provisions and are required to make fewer changes to plan documents and administrative procedures in order to comply with the new law. Companies can lose their grandfathered status if they take certain steps such as reducing benefits, significantly raising copayment charges, significantly raising deductibles, or changing insurance carriers.

According to Hewitt’s survey of 466 companies, representing 6.9 million employees, most companies expect to lose grandfather status because of health plan design changes (72%), and/or changes to company subsidy levels (39%). Employers also cited consolidation of health plans (16%), changes to insurance carriers (16%), and union negotiations (15%) as additional reasons. More than three-quarters of companies (77%) said that recently released guidance on preventive care did not impact their decision to maintain grandfathered status.

Hewitt found that of those companies with self-insured plans, most (51%) expect to lose grandfathered status in 2011 and another 21% expect to lose such status in 2012. This timing is similar for companies with fully insured medical plans, with the vast majority expecting to lose grandfathered status in 2011 (46%) or 2012 (18%).

“Employers reviewing their existing health care strategies in light of reform are focused on answering two questions: what changes do I need or want to make to my health care plans; and how can I make them without significantly increasing costs?” said Ken Sperling, leader of Hewitt’s health management practice. “After assessing the grandfathered provision, large companies realize they already comply with many of the requirements of non-grandfathered plans, so the changes they’ll need to make aren’t likely to add a significant cost or administrative burden. Most large employers would rather have the flexibility to change their benefit programs than be tied down to the limited modifications allowed under the new law.”

For more information, visit http://www.hewittassociates.com.