December 2012, Vol 2
The Actuarial View
An Employee Benefits Newsletter with a Bottomline Focus

Message From An Actuary
Tim Luedtke, FSA, CFA

This edition of The Actuarial View examines the decisions made by the states as each considered its options for implementing an insurance exchange under the Affordable Care Act. With the initial Supreme Court challenges and the election behind us, it is clear that states, employers, and individuals will wish to understand the law and the options open to them to meet the Affordable Care Act's requirements. Additionally, Health and Human Services recently released an actuarial value calculator for comment which we can help you use should you wish to understand whether your company's plans comply with the law's requirements. Please contact us should you have any questions.


Tim Luedtke, FSA, MAAA, CFA
Principal & Consulting Actuary

Diane Luedtke, FSA, CLU
Principal & Consulting Actuary

Health Benefit Exchanges: The State Decisions
And the Likely Winners Are . . .
Tim Luedtke, FSA, CFA

State governors and legislators made their exchange decisions for 2014.1 These decisions are likely to have a direct effect on the business owners and residents of their state. Under the Affordable Care Act (ACA), employers are subject to tax penalties for failing to make available essential benefits and employees are also subject to penalties if they do not acquire minimum insurance coverage. As such, employers and individuals are asking what the exchange decisions will mean for their own health insurance decisions. Decisions which lower a state exchange's premiums will make the exchange more attractive to state residents and more likely subject their employers to tax penalties.

Navigator Benefit Solutions LLC analyzed national health care costs2 to assess how a particular state's health demographics might interact with the state's exchange decision. While the Act provides for geographic premium adjustments, it does not provide how such adjustments are to be implemented. Rather the Act authorizes the Secretary of Health and Human Services to approve and even establish rating areas and subsidiary exchanges. Such HHS authority provides a mechanism for managing premium costs across geographies. How these geographic adjustments are implemented will greatly impact how health care costs are shared across the country and which group(s) of lower cost insureds will subsidize which group(s) of higher cost insureds. In the interim, here is our take on:

The Likely Winners
Federal Exchange Decision:
  • Maine - Maine's health care costs are quite high with a heavily rural population that is the oldest in the country. Depending upon how geographic adjustments are implemented, Maine residents may benefit if a broader risk pool with a greater allotment of younger insureds is covered by the implemented exchange.

  • Pennsylvania - Like Maine, Pennsylvania has an older population and higher rates of smoking and obesity than the rest of the country.
State Exchange Decision:
  • Western States (California, Colorado, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington) - Of the eleven states west of the Rockies, eight made the decision to pursue a separate stand-alone state exchange. These states are characterized by lower overall health care costs, a younger population, less obesity, and fewer smokers. By retaining an independent state-run exchange, these states' younger populations will continue to be insured separate from other perhaps more costly populations.

Ultimately, each of the decisions made by the country's fifty states directly affects the insurance risk pool its citizens may join. And until insurance purchasers are permitted to purchase insurance across state lines, the characteristics of any state exchange risk pool impacts the health insurance costs for businesses and residents in the state. Key factors influencing the level and stability of these costs include:

  • Geography - Health care costs vary significantly across the country. While not based upon specific medical procedures, the 2009 national health expenditure data for Medicare enrollees shows the variation for overall health expenditures can be as much as 60% from the lowest state (Montana) to the highest state (New Jersey). Similarly, even within a given state, insurance departments permit premium disparities of as much as 2:1 to account for differences in health care costs.3
  • Age Distribution -The Affordable Care Act holds age-related premiums to a 3:1 ratio between the oldest and youngest insureds. Actuarially, the differential should be greater (approximately 4:1 for ages 60-64 : ages 18-244 and up to 6:1 for the oldest to the youngest) and creates a subsidy received by older policyholders that is paid for by younger ones. As such, in general the younger the insurance pool, the lower overall costs will be for all exchange participants.
  • Tobacco Use -The Affordable Care Act allows premiums to vary 1.5 to 1 for smokers to non-smokers with non-smokers likely subsidizing somewhat smokers.5 As such, the fewer smokers insured, the lower overall costs will be for all exchange participants.
  • Gender Distribution -The Affordable Care Act does not permit different premiums for men and women. "Prior to about age 50, women generally incur higher medical spending than men, even excluding the costs of normal maternity care. This difference in spending translates to higher health insurance premiums on average for women. Insured health spending differences by gender typically peak during their 30s, then narrow, and eventually, men incur higher average health spending than women."6 "The elimination of gender rating would generally reduce premiums for women under age 50 and men over age 50, and increase premiums for women over age 50 and men under age 50."7
  • Health Status -Like gender, the Affordable Care Act does not permit premiums to vary for other typical underwriting factors such as existing health conditions, blood work, and obesity. States having residents practicing healthier lifestyles should benefit from having their own independently run insurance exchange.
  • Business Size Distribution -Larger businesses are more likely to already offer benefits meeting the Affordable Care Act's minimum coverage requirements, be self-insured with a separate risk pool, and generally have a younger workforce (especially non-unionized employers). Smaller employers are less likely to offer benefits or to be self-insured, and more likely to have employees who may consider the local exchange's insurance options.
  • State vs. Federal -A state choosing to run its own exchange will experience the full effect of the health status of its participants, while a state choosing to participate in the federal program should experience less year-to-year variation.

Based upon these criteria, the biggest winner of all is likely to be Utah. With the country's youngest residents, fewest smokers, low obesity rates, and more men than women, Utah businesses are likely to continue to see low health care costs versus the rest of the country.

Contact us if you'd like to learn more about how we can help you analyze your options.

1State Insurance Exchange Decisions
2National Health Expenditures
3The Rural Implications of Geographic Rating of Health Insurance Premiums
4The Affordable Care Act: What Every Actuary Should Know: Slide 11
5". . . smoker to non-smoker ratio is 1.9 which compares reasonably well to the data reported in the Surgeon General's Report"
6Gender Considerations in a Voluntary Individual Health Insurance Market
7State-Level Impacts

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