January 2011

Greetings!

This edition of Insurance Perspectives discusses different aspects of the impact of healthcare reform, including high-risk pools and potential rebates associated with medical loss ratios, in addition to updates on implementing SSAP No. 100 - Fair Value Measurements.

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Tom Finnell, Jim Stangroom and Les Schott
Managing Directors, Insurance Services

In this Issue

1. NAIC Staff Releases Disclosure Assistance Document for Implementing SSAP No. 100 – Fair Value Measurements
2. HHS Medical Loss Ratio Impact Analysis Estimates Potential for Substantial Rebates
3. Health Reform’s High-Risk Pools Still Have Plenty of Room

NAIC Staff Releases Disclosure Assistance Document for Implementing SSAP No. 100 – Fair Value Measurements
by Jim Stangroom

In 2009, the NAIC’s Statutory Accounting Principles Working Group (SAPWG) adopted SSAP No. 100 – Fair Value Measurements. During 2010, the SAPWG twice revised SSAP No. 100. This statutory accounting standard defines fair value, establishes a framework for measuring fair value and expands disclosures about such fair value measurements. In December 2010, the NAIC staff released a disclosure assistance document which summarizes the nature of the SSAP No. 100 revisions adopted by the SAPWG, clarifies certain disclosure requirements and includes revised Annual and Quarterly Statement Instructions. The NAIC staff’s disclosure assistance document provides a clear and concise summary of the recent sequence of revisions to SSAP No. 100 and should be useful guidance for financial statement preparers during this hectic year-end financial reporting cycle.

The SSAP No. 100 framework is generally consistent with FAS 157 by establishing a three-tier fair value hierarchy as follows:

1. Fair value based on inputs that use quoted prices in active markets;
2. Fair value based on inputs that use observable factors such as quoted prices on similar financial instruments or readily observable interest rates and yield curves; and
3. Fair value based on inputs that are unobservable and are based on the reporting entity’s own assumptions.  

Perhaps the most significant difference between SSAP No. 100 and FAS 157 is that the statutory standard rejects the concept of considering a company’s own credit risk in determining the fair value of liabilities. Statutory accounting standard setters concluded that “consideration of [a company’s] own credit risk in valuing liabilities is inconsistent with the statutory accounting concept of conservatism and the assessment of financial solvency for insurers.”(1)

In 2009, SSAP No. 100 adopted with modification FAS 157, Fair Value Measurements (FASB Codification Topic 820). The SAPWG adopted the SSAP No. 100 revisions in August 2010 based on the FASB update to its fair value measurement and disclosure standards (FASB Accounting Standards Update 2010-06). Then in November 2010, as a result of questions it received, the SAPWG adopted further revisions to SSAP No. 100, including the following:

1. Elimination of the requirement to differentiate between assets measured at fair value on a recurring basis and assets measured at fair value on a nonrecurring basis. For statutory reporting, disclosure schedules will continue to differentiate by asset class;
2. Clarification that the general disclosure requirements apply to only those items that are measured and reported at fair value in the statement of financial position. For example, bonds that are carried at either lower of cost or fair value would not be included in the disclosure unless they are reported at fair value in the current statement of financial position; and
3. Amendment of the disclosure of transfers in/out of Level 3 measurements to require a net (rather than gross) presentation of sales, purchases and settlements. The SAPWG will be reconsidering a gross presentation in 2011.

It is interesting to note that this is a somewhat unique situation where statutory accounting changes are being implemented ahead of GAAP. The FASB issued a proposed Accounting Standards Update on fair value measurements in June 2010, which includes some of the SSAP No. 100 revisions described above; however, the FASB updates are not yet final because the FASB is continuing its deliberations with the IASB as part of the standards convergence process. The SAPWG was aware of the FASB proposed changes and decided to adopt the relevant changes in the revisions to SSAP No. 100 in advance of a final FASB update, which is still pending. 

For more information, contact Jim Stangroom.

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(1) SSAP No. 100, paragraph 47c.

HHS Medical Loss Ratio Impact Analysis Estimates Potential for Substantial Rebates
by Les Schott

An analysis published by the U.S. Department of Health and Human Services estimates that over the next few years health insurers may be required to pay $3 billion in rebates to some 15 million enrollees to comply with new Minimum Loss Ratio (MLR) Requirements. These estimates are, by necessity, based on available data and various assumptions, and the ultimate outcome will likely differ. Nonetheless, the analysis presents a thoughtful view as to how much may be at stake for health insurers. Faced with this possibility, it will be interesting to see how insurers react as they move from a pre-MLR to a post-MLR environment and what impact that may have on premium increases, healthcare expenditures,  allocated costs, quality improvement expenditures and, ultimately, reported MLRs and rebates.

In last month’s edition of Insurance Perspectives, we discussed certain provisions of the U.S. Department of Health and Human Services’ (Department) recently issued Interim Final Regulation for Health Insurance Issuers Implementing Medical Loss Ratio Requirements under the Patient Protection and Affordable Care Act.  The Regulation sets forth requirements for reporting MLR-related data to the Department by health insurers offering individual and group health insurance coverage, for calculating and paying rebates to policyholders in the event the insurer fails to meet the required MLR, as well as for enforcement of the reporting and rebate requirements.

Included in the 230-page Preamble to the Regulation is the Department’s Regulatory Impact Analysis (RIA) of the financial impact of the MLR rebate and reporting provisions set forth in the final Regulation. The RIA provides a peek into the Department’s estimate of the magnitude of rebates to policyholders. The RIA only considers years 2011 to 2013, as there will be significant changes to the marketplace starting in 2014 relating to the offering of new individual and small group plans through exchanges as well as other changes to the MLR formula that will become effective in 2014.

Regulation Benefits:
In the RIA, the Department noted that due to limitations in data currently reported by insurers it was not possible to effectively quantify the benefits of the Regulation. However, the Department was able to identify a number of potential benefits, such as:

• Greater market transparency that may foster competition and provide for improved ability of consumers to make informed insurance choices;
• Increased spending on quality-promoting activities, such as case management, care coordination, chronic disease management and medication compliance, which has the potential to improve treatment outcomes and reduce claims over the long term; and
• Improved health as a result of increased spending on medical care by insurers.

To the extent that these changes may result in increased consumption of effective health services, the Department contends that the Regulation could result in improved health outcomes, thereby creating a societal benefit.

Regulation Costs:
The Department estimates that insurers will incur approximately $33 million to $67 million in one-time administrative costs and from $11 million to $29 million in annual ongoing administrative costs to comply with the Regulation. These relate primarily to the costs to develop methods to capture data, annual costs to report data to the Department and for rebate notifications and related paperwork.

Projected Rebates:
However, the Department projects that annual rebate payments may be much more substantial. To the extent that insurers’ MLR experience falls short of the minimum thresholds, they must provide rebates to enrollees. The Department estimated that rebates could be in the range of $600 million to $1.4 billion annually.

The Department estimates that MLRs could be 7% higher in 2011 than in 2009 and that the average industry-wide MLRs will be above the 80% (for individual and  small group) and 85% (for large group) thresholds to avoid the rebate provisions. However, the Department estimates that many insurers will still be below those thresholds and would, therefore, be required to pay substantial rebates. The table below summarizes the Department’s mid-range estimates, by market, and displays the estimated number of insurers that may fail to meet the MLR requirements, their liability for rebates and to how many enrollees, and the average rebate size per enrollee.

Over the 2011–2013 period, the Department’s mid-range estimate is that rebates will total $1.8 billion to 9.9 million enrollees in the individual market; $770 million to 2.3 million enrollees in the small group market; and $440 million to 2.7 million enrollees in the large group market.

For more information, contact Les Schott.

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(2) The Department’s complete regulatory impact analysis, including its discussion of the data limitations can be found in the preamble to the Interim Final Regulation at http://edocket.access.gpo.gov/2010/pdf/2010-29596.pdf

Health Reform’s High-Risk Pools Still Have Plenty of Room
by Kerby Baden

Insurance pools authorized under recent health care reform legislation to help temper premium costs for high-risk individuals are open for business. However, based on current enrollment statistics, business has not exactly been booming for the pools relative to earlier expectations. Changes are underway to make the high-risk pool options better known to the public and to tinker with underlying rates and deductibles so as to provide a more feasible but temporary option for high-risk coverage until health exchanges come on-line in 2014.

The Patient Protection and Affordable Care Act of 2010 (PPACA) provides for the implementation of high-risk insurance pools. More formally known as Pre-Existing Condition Insurance Plans (PCIPs), the high-risk pools are designed to provide subsidized coverage to those with pre-existing conditions who are currently uninsured and who have not been covered under creditable coverage during the six-month period prior to applying for coverage in the high-risk insurance pools.

Under the PPACA, funding was provided to pay claims and administrative costs of high-risk pools to the extent they exceed the amount of premiums collected from eligible individuals enrolled in a PCIP, up to $5 billion. Estimates by the Center for Medicare and Medicaid Services (“CMS”) predicted that approximately 375,000 individuals would enroll in 2010. States were given the option of running their own program or letting the federal government do so. To date, 26 states have opted to run their own pools.

The majority of the pools had coverage dates beginning in August or September 2010 and are, therefore, open for business. Based on enrollment figures provided by the federal government, as of November 1, 2010, slightly more than 8,000 individuals have been enrolled in the pools nationwide, far fewer than the 375,000 predicted earlier by CMS. One explanation is that the states with higher premium rates had lower enrollment results and vice versa. For example, Pennsylvania had the highest number of enrollees with 1,657; its pool charged the same average monthly premium rate of $283, regardless of age, with an annual deductible of $1,000.

Others have speculated that low enrollment is the result of a lack of direct marketing of pools to that portion of the population that would qualify, and a distrust, by some, of the federal government’s role in the healthcare business.

Nonetheless, the federal government is moving quickly to alter the pools, offering new plan choices and lower premiums in an effort to increase enrollment and reduce the uninsured population. In 2010, enrollees in the federal program were offered only one plan. Now, both current and future enrollees in the federally run pools will be able to choose among three plan options: the Standard Plan, the Extended Plan and the Health Savings Account (HSA) eligible plan. In addition, families will be able to enroll their eligible children at child-only rates.

The premium and deductible structures for 2011 have changed as well. For the Standard Plan, 2011 premiums will be approximately 20% lower than in the previous year; there will be two separate deductibles in 2011, a $2,000 medical deductible and a $500 drug deductible. Under the new Extended Plan, premiums will be slightly higher than 2010 levels with a $1,000 medical deductible and $250 drug deductible. For the HSA plan, premiums are approximately 16% lower than 2010 levels with a $2,500 deductible. The change from a single combined medical and pharmacy deductible to plans with two separate deductibles is expected to benefit enrollees who are on one or more maintenance medications.

In 2011, monthly premiums in the Standard Plan will range from an average of $161 for individuals through age 18 up to $515 for individuals 55 and over. Under the Extended Plan, the average premium range is from $217 for individuals through age 18 up to $693 for individuals 55 and over. Under the HSA Plan, the average premium range is from $168 for individuals through age 18 and $535 for individuals 55 and over.

If price is an important motivator, then reduced premiums along with more choices should lead to higher enrollment in the federal pools in 2011. However, any increase in enrollment needs to be analyzed by the age ranges of the enrollees. For individuals who are 55 and over, the total average annual premium in any of the three new options will exceed $6,000, which can still take a significant bite out of the fixed incomes that sustain many individuals in that age group.

Under the PPACA, health insurance exchanges will replace the high-risk pools in 2014. In the meantime, more tinkering of the high-risk pools will likely continue in an attempt to achieve the goal of reaching out to as many eligible individuals as possible to provide meaningful healthcare coverage at affordable prices.

For more information, contact Kerby Baden.

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