Will small business owners stay in Wellmark’s boat or jump ship to other carriers?
Thursday, November 21, 2013 7:00 AM
Small business owners may feel like they’re still floating in uncharted waters as the provisions of the federal health care overhaul take effect.
What level of reserves is too much?
Wellmark Blue Cross and Blue Shield has increased its reserve levels for the past several years, to a great extent in response to the riskier environment created by the Patient Protection and Affordable Care Act, said the company’s chief financial officer, David Brown.
Earlier this month, Iowa Insurance Commissioner Nick Gerhart ordered an independent actuarial review of Wellmark’s reserve levels, the third such review in 10 years. The last review, conducted in 2011, concluded that the company’s reserves were adequate.
Wellmark, whose reserves currently total an estimated $1.3 billion, aims for an operating margin of between zero and 3 percent each year, adjusting that figure for how much it figures it needs to add to maintain an adequate level of reserves.
The insurer incurred a significant operating loss in 2009 when investment markets plummeted and the company’s actual medical losses were higher than expected, Brown said, which led the insurer to target a 3 percent operating margin for the past few years to rebuild reserves.
The company is currently targeting a 2.5 percent operating margin to continue to raise reserves.
“I feel like we are adequately reserved; I don’t think we have excessive reserves, nor do I feel like we’re short,” Brown said. “Customers should feel safe that we can cover claims. We know that we need to have enough that if a real crisis hits, we can pay the claims.”
In 2011 Wellmark commissioned an independent review of its reserve levels, which concluded that reserves were adequate, but could be adjusted higher due to health care law changes.
“Health care reform increases your need to hold reserves,” Brown said. “If you have a bad year, with health care reform it’s harder for a company to make it back.”
One of the reasons higher reserves are needed, Brown said, is the new medical loss ratio requirement, which penalizes insurers if they don’t spent the majority of each premium dollar on claims as opposed to administrative costs.
“If we under-predict (the medical cost) trend and the medical loss ratio is 95 percent, we can’t cover our operating costs within the price and we would probably take a loss,” he said. “Let’s say the next year we got it wrong the other direction and the medical loss ratio was 70 percent. Before the Affordable Care Act, I could balance those two years and they’d net out. With the ACA, I would have to pay extra money to the groups the second year (for not meeting the medical loss ratio requirement).”
Brown said a second factor requiring more reserves are more stringent rate reviews by regulators. “If (the medical cost) trend is very, very high one year – it might be 16 percent, but the state says we’re not going to give you 16 percent – then we’re going to have a loss.”
Iowa’s dominant medical insurer – Wellmark Blue Cross and Blue Shield – says it’s in the same boat, and that it’s taking extra measures to try to mitigate costs for its small business customers.
Although Wellmark has not increased the nominal “base rate” that represents the overall change in health care costs, some small employers nevertheless have been hit with significant rate increases for 2014, particularly businesses whose coverage conforms to the new requirements of the Patient Protection and Affordable Care Act.
Many small business owners are facing sticker shock and tough decisions, even as the majority are opting to retain their coverage with Wellmark, which has offered to extend businesses’ current coverage through 2014. Those small groups are defined as businesses with 50 or fewer employees.
Wellmark says about 85 percent of the small groups it covers have accepted that offer and have stayed on their current plans.
Meanwhile, Wellmark’s newest competitor, CoOportunity Health, contends that Wellmark’s policy extension is simply a tactic to discourage its customers from shopping for potentially lower rates.
As Jan. 1, 2014, nears, however, even those businesses that accepted Wellmark’s offer still have a choice, and it’s likely that many are still shopping for a better deal. Because small businesses can switch carriers with just 30 days’ notice and are guaranteed issue by a new carrier, the question remains: Will small business owners stay in Wellmark’s boat or jump ship to another carrier?
Given Wellmark’s announcement earlier this year that it would not raise its base rates, some small businesses may have been surprised this fall to receive rate increase notices, said Steve Flood, senior vice president of employee benefits with insurance broker Holmes Murphy & Associates Inc. Wellmark had announced in June that it would not seek an increase in the base rate, other than to cover additional government fees and taxes imposed by the Patient Protection and Affordable Care Act, also known as Obamacare.
“The base rate is just one factor of four or five factors that go into determining the premium,” said Flood, noting that his company warned its clients of that fact shortly after Wellmark’s announcement in June.
Wellmark could have done a better job explaining how rates are calculated, he said, “Or maybe they just took for granted that everyone just knew what ‘base rate’ meant,” he said. “But everyone took it to mean there would be no increase.”
Wellmark Chief Financial Officer David Brown said that, if anything, his company has received fewer complaints this year about rate increases than last year, and he said on average this year’s premium hikes are smaller than last year’s renewal increases.
Tom Alger, a spokesman for the Iowa Insurance Division, said his agency has received only one complaint this year regarding Wellmark’s small group premium renewals. The division keeps the content of those complaints confidential, he said.
The Obamacare taxes and fees alone will add from 4 to 5 percent to premium costs in 2014, Flood said, which means a much higher starting point for any group’s renewal cost. Additional risk ratings based on demographic changes to the group and its claims costs in the past year are also factored in. The location of the group within a particular region of the state can also factor into a higher or lower rate.
In the past several weeks, Wellmark-covered small groups in Iowa received premium renewal notices for 2014 with increases ranging as high as 20 percent, but also rate decreases of as much as 30 percent for some groups, according to figures provided by Wellmark. Taken as a group, however, those fluctuations averaged to a zero percent change in premiums from the previous year, Brown said.
Cliff Gold, a former Wellmark executive who came out of retirement last year to help launch a competing nonprofit insurer, CoOportunity Health, said Wellmark and other large insurers are using every tactic they can to lock in their existing customers before 2014. Wellmark’s pledge of a zero percent rate increase was misleading, he said.
“There are no deals in health care,” Gold said. “If it sounds too good to be true, it is. Zero percent rate increases are either a means to protect blocks of business or to defer increases to the future.”
In response to that assertion, Brown said that CoOportunity will be subject to the same rating constraints as Wellmark when its initial policies are renewed. Carriers must rate groups and adjust their premiums according to state-approved guidelines that leave no room for adjustment by the insurer, he said. Additionally, insurers can’t subsidize between small employer and large employer pools; increases and decreases in groups must balance out within each of those two separate pools, he said.
“When CoOportunity does renewals next year, whatever their rate increase is next year, groups will have higher and lower increases than that (base rate) increase,” Brown said.
Brown pointed out that under Obamacare, small groups continue to have access to guaranteed issue of policies, meaning that Wellmark’s extension presents a no-risk option for its current policyholders.
“So there is no risk in dropping coverage; you can always get a new policy,” he said. “But there is a risk in that you don’t know what the rates are going to be. So then (a small group may) take the extension, look at the rates and then call us and cancel. It’s a risk-free trial, essentially.”
CoOportunity Health is selling policies both on the online Iowa Healthcare Marketplace, which is being operated on the federal Healthcare.gov exchange, as well as through the conventional health insurance market. Gold said he doesn’t have figures yet on how many small group policies his company has sold. Wellmark announced this summer that it would delay selling policies on the online exchange until the 2015 plan year.
What businesses are seeing
Regardless of whether businesses switch providers, some Greater Des Moines insurance experts say many Iowa small businesses are likely to continue to see big rate increases in the next several years as the market responds to increased coverage requirements under the law. Still others say they’re seeing some “very competitive” rates being offered by carriers.
Currently, nearly two out of three working adults in Iowa obtain health insurance coverage through employer-based plans.
“Right now I think most smaller employers are trying to keep the status quo and will be looking at the exchange programs which are just now coming online to see if they would provide employees with a reasonable substitute for their current employer plans,” said Wayne Reames, an attorney with Belin McCormick P.C.
Athena GTX, a Des Moines technology company that makes portable medical monitoring devices, is among the small businesses that have stayed the course with Wellmark.
Owners Mark and Lyn Darrah faced a potential 24 percent increase with their quoted premium renewal, but said they chose to extend their coverage with Wellmark because they were happy with the coverage for their employees.
“Unfortunately, last year we had two employees who had very high claims, so it doubled our claims amount,” said Lyn Darrah, vice president of Athena GTX. By increasing the deductible amount on the policy, however, the Darrahs were able to secure a smaller increase, 11 percent. Their company pays 97 percent of its employees’ premiums and 50 percent of their dependents’ premiums, she said.
“We’re pretty happy we were able to keep our overall rate increase down to 11 percent,” said Darrah, whose company absorbed a 30 percent premium increase before moving to Iowa from California in 2007. “Because when you have younger employees, they are probably never going to meet that yearly deductible.”
Another small business in Des Moines, Beckley Automotive Inc., also chose to maintain its current coverage. Rates for its plan, which is with UnitedHealthcare Plan of the River Valley, hadn’t changed much because there were minimal changes in their group, said office manager Sherry Brown. “We don’t have very much turnover,” she said.
In shopping around, they found the renewal rates on their still-grandfathered plan were “considerably less” than what they would have paid for a new Obamacare-compliant plan through Wellmark, she said.
Beckley Automotive pays all but $25 per month for each of its covered employees, most of whom have single coverage, Brown said. The company pays $187.50 per month for those employees’ policies, which have a $2,000 deductible and a $25 co-pay.
New options on the table for coverage
Paul Drey, an attorney with Brick Gentry P.C. in Des Moines, said most of his clients and colleagues believe premiums are likely to continue moving upward, with some saying the increases could be fairly dramatic. His own firm, which has fewer than 50 employees, has been told that its premiums are likely to increase significantly the next time it renews coverage.
“I have heard a variety of reasons for this likely increase, but it seems like the most likely is that insurance companies are covering their risks of the unknown,” he said. Among those unknown factors: the number of newly enrolled members, the issue of absorbing people with pre-existing conditions and newly required coverages.
“One of the more alarming issues I am hearing is that many small businesses with under 50 employees but close to that number are simply not going to hire so as to avoid moving into the large employer category,” Drey said. “The uncertainty surrounding health care needs to be removed so businesses, large or small, can move forward…”
As with many small businesses right now, Drey said, his firm is looking at several options to continue offering coverage to its employees.
From an employer’s perspective, the tax deductibility of health insurance premiums will continue to be an advantage of offering it as a benefit, Flood said. However, for nonprofit organizations that have lower-paid employees, that deductibility is not a compelling reason to offer insurance, he said.
“We have quite a few of those (nonprofit) groups taking a hard look at dropping their plans, because many of their employees could qualify for pretty good subsidies through the exchange,” he said.
Additionally, taking into account the added federal taxes and fees employers must pay for each covered person on a plan, there’s a big incentive for employers to go to covering only employees, not family members, Flood said. Many small businesses are considering offering more robust benefits in which they may pay, for instance, 95 percent of the cost for employees.
So, will businesses jump?
Wellmark’s plan-year extension, which was authorized by the Iowa Insurance Division, allowed Wellmark-covered small groups to opt for a renewal that extends from Dec. 1 to Nov. 30, 2014. Following that period, groups will have to sign up for a new plan that meets stricter Obamacare coverage requirements.
“It’s really just providing choice for the customer,” Wellmark’s Brown said. He likened the extensions to a “free look” for small businesses to shop other carriers’ rates. “It’s kind of a one-way commitment,” he said. “We are committed to holding you (in the same policy), or you could drop the policy and switch to someone else. We bore all the risk there, but we felt it was the right thing to do for the groups.”
Gold said he isn’t surprised that a majority of Wellmark’s small groups chose to extend their current policies. “It’s not hard to take that (offer), but still shop,” he said. “That’s what we’re hearing from a lot of brokers, that (groups are) taking the renewal, but they’re still shopping.” Additionally, Gold figures there are probably more than 1,000 groups that didn’t extend their policies, which provide plenty of potential business for CoOportunity.
Getting help from an agent or other insurance expert will be important, said Valerie Snyder-Rivera, Wellmark’s small group marketing director.
“We know that this is confusing for employers as they’re trying to navigate the new waters and understand what their new coverage options are,” she said. “We really encourage small businesses to consult an agent if they have one to talk with about their options. If they don’t have an agent, we at Wellmark are staffed, ready and trained to help them understand what the options are as we move into 2014. We made this extension so that our small business customers really did have the time they need to understand what these changes are and how it’s going to impact them.”
In the small-group market, many employers still may make their purchase decisions a little later in the year, and potentially even into midyear 2014, Flood said.
“We’re seeing very competitive pricing,” he said, noting that Holmes Murphy expects to receive 20 to 30 proposals from CoOportunity for new group plans this month. “Definitely they’re going to look, and many are very likely to move.”