Member Level Rating, Challenge #1: Quoting New Group Business

Last week, I drilled a little into the workings of the ACA-mandated member-level rating methodology to set the stage for discussing the rather large downstream impacts this change will likely have on an insurance carrier's internal operations. Since I wrote that post, HHS published the final rule on Health Insurance Market Rules, and there are not substantive changes in the rating methodology put forth in the original proposal rule. So, it looks like this new rating method is going to stand. And, it's going to create quite a number of big challenges for carriers to implement.

We'll dig into each one step by step, and today we'll look at . . .

Challenge #1: Quoting New Group Business

One of the first and most obvious impacts of the rating change is that the systems carriers use to sell new business (that is, to quote rates to prospective insurance buyers) will have to be modified to calculate rates following the new rating rules.

This sounds simple on the surface, since there are really just four pieces of information you need to know to calculate the rate for each member: the product(s) they want to see quotes for, their age, their tobacco-use status, and their family's zip code. Add them up, and you have the family's rates. If you're quoting business for a small group, add up the family rates for all the employees being covered, and you have the total cost for the business to cover its employees.

Ah, but the challenges are actually quite complex, and there aren't good answers for all of them.


Challenge #1A: Hardwired Sales & Quoting Systems

It would be nice if all carriers were using sophisticated, cutting-edge quoting technology where the information to be gathered from prospective groups and their employees and the calculations used to generate quotes could be updated through a simple, intuitive graphical-user interface.

Unfortunately, most carriers' quoting systems were built years ago, and many (if not most) of them are hardwired specifically to that carrier's particular quoting methods and market practices. Tobacco-use has not typically been captured except in the health questionnaire, which now has to go away since rating based upon pre-existing conditions is no longer allowed. The logic to generate rates has typically been at the subscriber/family level, not at the member level--and that logic tends to be encapsulated in a lot of complex procedural computer code that has to be totally rewritten, and hardwired into reports that have to be written, and stored in rigidly-structure database tables that have to be rewritten. In the small group market, most of the systems were designed to support insurance agents requesting quotes for their small business customers, not the small business owners themselves, so they vary greatly depending upon each carrier's relationship with their broker network.

Here it is almost the end of February, and all this custom code has to be analyze, redesigned, rewritten, tested, and put into production by October 1st. Not an easy task.


Challenge #1B: What Do You Do With the Street Quote?

For most carriers, the small group sales process has two distinct steps, with two different types of information being gathered and quotes being produced. In both cases, these steps were being driven by insurance agents/brokers quoting business of behalf of their small business clients:

1. The "Street Quote": This is a quick and dirty quote intended to give the agent a quick look at the different rates his or her client might be able to get for various types of small group plans and to compare rates across multiple carriers. They are simply ballpark numbers, based upon some very limited information about the company such as number of employees and their average ages. It's a way for the agent to "run the numbers" and lay out some options to pursue without knowing all the specific details about each employee. 
2. The Final Quote: Because a group's final rates have (up until 2014, at least) depended upon the health status of the group's employees, a detailed group application has typically been required before an insurer could create a final quote and formally offer coverage to a prospective group. That means submitting detailed information--birthdate, SSNs, and answers to lots of health questions--about each employee. Agents would use the street quote to narrow down the options to just one or two plans, and only then go through the work of applying for a final quote, and usually then with just a single carrier that the prospect had decided to go with.

The new rating methodology actually has a good bit more precision than the old, allowing differences in age and tobacco use be reflect more directly in the premium each member is charges than in the past, when they were sort of lumped together and the differences averaged away in the rating algorithms. The downside to this precision, though, is that the rates are going to vary much more sharply from one group of employees to the next, increasing the likelihood that any sort of street quote isn't going to be terribly accurate compared to the final quote.

But, the sales process isn't likely to change just because the rating rules have changed. Small business owners will still want to compare their options across multiple carriers without having to gather tons of information from their employees , and agents will still want to be able to run quick quotes, too, without having to fill out a lot of forms (be they paper or online). Will the street quote remain? If so, how will it need to change in order to be more accurate, since the member-by-member rating might greatly skew the actual rates available from one business to another?

Challenge #1C: Integrating Vendors, Brokers, and Partners

As if the first two challenges we're pressing enough, many carriers rely up vendors for delivering their sales systems, and they have networks of large brokers and other partners who may have their own quoting and sales systems that let agents run quotes on their own and submit the final applications to the carrier electronically. It's one thing for carriers to get their own house in order; to keep business going in the future, they will also have to work with vendors, brokers, and other partners to make sure those external systems are updated properly, too. And all by October.

The Silver Lining

Some carriers have been aggressively looking ahead and have already thought through all these challenges, and a few have already begun implementing the changes that the regulations require. The majority, however, are really just getting started, and for good reason: the rating rules themselves weren't finalized until last Friday. It's hard to blame anyone for not having already ripped out and started rewriting a bunch of complex but well-tested and functioning system code.

But, one silver lining to the cloud is that these changes are affecting insurance carriers all across the country, so no one company is on its own in figuring out what needs to happen. The short timelines make best practices and information sharing all the more important, and we'll look at some of the best practices for solving these challenges in upcoming posts.

In the long run, the outlook is not as bleak as it appears. These changes are all pushing carriers to standardize their operations so that each does business more like their peers in the industry. While this might at first seem like a bad thing--those peers are competitors, after all--the long term effect is likely to be increased efficiency and overall smoother sales and quoting operations. It's just going to take some elbow grease to get there.

The Exchange Landscape by State and Type

It's now looking clear how each state plans to tackle their Exchanges in 2014--either as a standalone State-Based Exchange (SBE), as an Exchange run in partnership with the Federal government, or as a full Federally-Facilitated Exchange (FFE), whether by choice or by default because they took no action to establish an exchange on their own.

I put together a map to give a visual snapshotof the landscape.

Per-Member Rating: The Long Cascade

From the perspective of an insurance carrier’s operations, one of the most significant provisions of the Affordable Care Act (ACA) is the new individual and small group rating methodology defined by the Department of Health and Human Services (HHS) under their proposed Health Insurance Market Rules. The change may seem simple—rating individual families and small group plans on the member- rather than subscriber-level—but it creates huge downstream ripples within a carrier’s operations.

We’ll take a look at a lot of those ripples in the future, but let’s start by reviewing the proposed change in rating methodology.

How It (Often) Works Today

Let’s start with rating for individual direct-to-consumer plans. Rating methodologies vary from carrier to carrier, and some states prescribe specific methods, but here’s a typical one.

Rate = (Base Rate * Age Factor * Tier Factor * Health Risk Factor)

In this model, you start with the base rate defined for the product (say, $238 per month) and then adjust it based upon the age of the subscriber, the type of coverage being purchased (e.g. individual coverage or family coverage) and then by a factor based upon the health history of the family—that painful list of dozens of questions beginning “Has anyone applying for coverage been treated for [insert long list of dreadful diseases and conditions here].”

So, suppose you have the following family of four:

            Bill (age 36)
            Sandra (35)
            Mark (10)
            Sarah (8)

           

Bill selects a PPO plan with a base rate of $238.25 per month and fills out an application, including completing the health questionnaire. Because he is 36, Bill is assigned a subscriber age factor of .79, and because he chooses family coverage his contract has a tier factor of 2.68. Based upon some health conditions Sandra and her son Mark have, the carrier’s underwriters assign a health risk factor of 1.1. 

So, Bill’s final rate for family coverage is:

$238.25 * .79 * 2.68 * 1.1

Which equals $554.87 per month.

Note that in this case Sandra's age and the fact that she and Bill have two children do not figure into the equation. The rate is based off the oldest adult (Bill) as well as the fact that they selected family coverage, and the rate would be the same whether they have one child or four. The rate also doesn’t change if they have another child and add coverage for the baby.

How It Will Work in 2014

Under the proposed HHS rule, the rates for Bill’s family will be calculated a little differently starting in 2014. One of the big ACA changes is that rates can no longer be based upon members’ health history, so that health risk factor will go away. Now, only age, tobacco use, and “geolocation” (basically, the county in which the family lives) can be taken into account.

Here’s the kicker. The family rate must now be determined by adding up the rate for each individual family member. The rule also stipulates that no more than three children under the age of 21 can be taken into account. (Any children after the first three can be added for no additional cost.)

So, let’s rate Bill’s family under the new methodology. Bill’s monthly premium will be the sum of the rates for each of the members in his family. Each member’s rate will be calculated as follows:

member rate = (base rate) * (age factor) * (tobacco factor) * (geo factor)

Instead of filling out a lengthy health questionnaire, Bill simply has to indicate whether each person he is covering uses tobacco. In his family’s case, only Bill does. So here’s the calculation:

Bill’s rate = $152.62 * 1.22 * 1.35 = $250.34
Sandra’s rate = $152.62 * 1.18 * 1 = $179.36
Mark’s rate = $152.62 * .635 * 1 = $96.52
Sarah’s rate = $152.62 * .635 * 1 = $96.52
Total Family Rate = $620.62

Now, suppose Bill and Sandra have a third child, Nellie. Under the original rating method, they just add Nellie to their family coverage and their premium stays the same. Under the new rating methodology, Nellie gets rated separately and Bill’s coverage goes up by $96.52.

If they have a fourth child, under the new method, the premium would not increase since only the first 3 family members under 21 are counted.

Small Group Rating

The impact on small group rating is very similar, for the proposed rule does away with former “composite rating” approaches commonly used with groups.

Under composite rating, every employee in the company who purchases a plan pays the same as his or her fellow employees, varying only by the coverage tier selected (e.g. employee only, employee + spouse, employee + children, or employee + family). The rates themselves are determined by the characteristics of the group as a whole, such as average employee age, average employee health risk, geography, and size of the group. The rates for the year are determined during the sales process at the start of the benefit year. If a new employee is hired mid-year, he or she can buy coverage for the same price that his or her new co-workers pay.

That is all going to change under the new proposed rules. Starting in 2014, a group’s total rate is going to be the sum of the rates determined for each employee, and the rate for each employee will be the sum of the rates for family members being covered, just as we saw for Bill in the individual example above. A small business, in other words, will be just a collection of individual families, with each member in the group rated separately.

In other words, if you have a small business with 12 employees, go through the same pricing exercise for each employee like we did for Bill’s family above. Sum those 12 employees together, and you have your total group rate. Hire a new employee mid-year, and that new employee will be rated separately and the total group price will go by whatever that new employee is priced to pay.

I’ll let others debate the merits of the “family unit” approach versus the “build up” approach in terms of fairness, accuracy, and efficiency. From an operational perspective, though, it greatly changes things. We'll take a look next at a few of the challenges it poses to various operational areas within an insurance carrier.