Rapid shift to “bare bones” coverage among Massachusetts small employers: preview of Federal reform impact?

Summary

• Massachusetts small group went from an average actuarial value (share of expected medical costs covered by the benefit) of 85% in Q1-07 to 73% in Q4-09. In the same timeframe, actuarial benefit levels in another state for which we could find data (Wisconsin) held steady.
• Given that this trend was well underway in 2007/08, only a portion of the change can be attributed to the economy. The rest may well be a result of 2006 Massachusetts healthcare reform.
• If true, back-of-the-envelope analysis suggests 50-70% of the decline in actuarial value was reform driven, the rest recession driven.
  Payers should prepare to see the same kind of reform-driven reduction in small group benefits in other markets as Federal reform rolls out in the coming years

A report issued last week by the Massachusetts government illuminates a key trend in the quality of small group plans (as measured by actuarial value — the anticipated share of prospective health care expenses occurring in a group that the insurance can be expected to pay). The graph below (based on data in Table 10 in the report) shows the allocation of small group lives across plans by their actuarial value between 2007-2009:

The weighted average actuarial value of small group plans went from 85% in Q1/07 to 73% in Q4/09. The proportion of people in the lowest tier (65%-70% actuarial value plans) went from 5% in Q1 ’07 to 50% in Q4 ’09.

What’s going on? Multiple hypotheses immediately come to mind:

1. Recession: The weak economy forced small employers to cut back on coverage.
2. No opt-out: The Massachusetts coverage mandate ensured that more small employers – which might otherwise opt-out – continued offering coverage but at a minimal level, thereby skewing the average.
3. Merged market: The merger of individual and small group markets put pressure on small group employers and they are responding with buy-downs. Generally the individual market, subject to greater adverse selection, has higher pricing than small group. By merging these two markets, Massachusetts reform essentially required small group employers to subsidize the individual market.
4. A new “normal”: Employers took advantage of state definitions of “good enough” to migrate to lower levels of coverage or assumed that employees dissatisfied with bare bones could look on the subsidized individual market.

No doubt, all these drivers play some role. Broadly the first two (“recession” and “no opt-out”) are temporary effects of the economy (though may linger given the slow recovery). The second two (“merged market” and “new normal”) are more permanent results of Massachusetts healthcare reform and, therefore, likely to last beyond the turnaround. Further, they may harbinger what will happen in other markets after the Federal healthcare reform “big bang” in 2014.

Similar data for other states could be help sort out the relative role of these drivers, but hard to come by. In California, the small group average actuarial value in 2009 was 81% (per California Healthcare Foundation). Most interesting, perhaps is that in Wisconsin, the average actuarial value of plans in small group held steady (2007: 69% 2009: 76% per Gorman Actuarial in reports here and here) at the same time post reform Massachusetts small group sharply declined.

One quick and dirty way to estimate the relative importance of recession vs. Massachusetts reform drivers is looking at the trend lines. The economy fell apart in the course of 2008 and, one could argue, really affect benefit decisions for 2009. Changes in small group before the end of 2008 were therefore largely due to Massachusetts specific drivers.

Two scenarios for how to think about this:

1. Q4 2008 baseline scenario: reform drove the change in the market up until the end of 2008; the economy drove changes in 2009.
2. Trend scenario: The trends in 2007-2008 were driven by reform and would have continued into 2009. Therefore, the reform impact is measured by extrapolating where those trend lines would have gone in 2009; the receission impact is the different between where those extrapolated outcomes and 2009 actuals. Take a look at the chart again: a trend for the share of 65%-70% actuarial value plans seems clear in 2007-2008, though the step change in 2009 in the 65-70% band suggests a big recession effect; the trend for all plans with <80% actuarial value seems consistent all the way through 2009.

The table below shows the results of some preliminary calculations for these scenarios (note: I used the mid points of the actuarial value bands to estimate the overall weighted average actuarial value): These estimates imply that reform was responsible for 50-70% of the decay in small group actuarial value. It is not clear how much of this is a result of the merged market or the “new normal” on employer benefit strategy (an important caveat since it is not clear how many states will merge individual and small group markets under Federal reform). However, the analytics do suggest that as economy recovers, employer generosity may not recover because of the looming implementation of Federal reform (2014).

Implications

• National reform – which shares many of Massachusetts reform features — may create the same rapid reduction in small group benefits seen in Massachusetts between 2007-2008.
• Segment product strategies will need to factor in this potential for employer benefit strategy to shift to a “new normal.”
• As employers are pressed to meet Federal actuarial minimums, payers should have ready at hand strategies to meet those benchmarks while still holding down cost (things like narrow networks, more intensive medical management).