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“Mother-May-I” is a classic kids’ game that teaches little ones to honor their mother by having players request to take steps towards their mother but only taking steps if their mother allows it! While it would be strange to do so, it is within the rules to be allowed to take steps but not actually take those steps. Why might a child not take steps? I don’t know, ask your father. Based on a review of pricing relationships between metal levels in the Affordable Care Act (ACA) individual markets[1], one might conclude that many actuaries and regulators did not grow up playing this game or at least struggle to follow the premise of the rules. The ACA developed pricing rules in protection of the single risk pool and did so using a “Mother-May-I” framework of specified pricing allowances. In developing and reviewing rates, pricing actuaries and regulators must be able to distinguish between what actuaries “must do”, “may do” and “must not do”. Getting these three categories correct is fundamental to the proper implementation of the ACA. There is some confusion surrounding the appropriateness of current market prices and proposed state actions[2] but little discussion about the regulatory principles that should guide the analysis of both. This article was written to discuss these three categories and reset discussions surrounding premium alignment so that the actuarial community can better interpret current market dynamics and devise solutions to potential pricing violations.

The Purpose of ACA Pricing Rules

It’s important to start with why the pricing rules were established to begin with. The purpose of ACA pricing rules is to safeguard single risk pool protections, eliminate risk segmentation that hurts consumers and prohibit health status rating. Under the single risk pool requirement, plans must be priced based on expected utilization by the entire risk pool and not the expected enrollees in a particular plan. CCIIO’s proposed rule for the ACA-regulated individual health insurance market described the single-risk-pool requirement as vital to that market’s effective and non-discriminatory operation[3] (Emphasis added):

“Section 1312(c) of the Affordable Care Act represents a change from current market practice. Today, issuers often maintain several separate risk pools within their individual and small group market business, often as a way to segment risk and further underwrite premiums…. Beginning in 2014, issuers are no longer able to deny coverage based on applicants’ health status and are limited in the types of rating factors they can apply in setting premiums in the individual and small group markets. Without a single risk pool rule, these prohibitions against traditional underwriting could incentivize issuers to find ways to segment the market into separate risk pools and charge differential premiums based on segmented risk, a de facto mechanism for underwriting…. While risk adjustment will address some risk segmentation, the single risk pool requirement provides another layer of protection against adverse selection among plans and protects consumers by requiring issuers to consider the risk of all enrollees when developing and pricing unique plans.  To implement the single risk pool protection, we propose that the claims experience of the enrollees in all nongrandfathered plans of an health insurance issuer … be combined so that the premium rate of a particular plan is not adversely impacted by the health status or claims experience of its enrollees.”

The final rule confirmed that decision. When commenters “requested clarification on whether adjustments to the index rate could reflect differences in health status,” CMS responded as follows[4]:

“As indicated in the preamble of the November 26, 2012 proposed rule, we believe that the purpose of the single risk pool is to prevent issuers from segregating enrollees into separate rating pools based on health status. In this final rule, we confirm that plan-specific adjustments to the market-wide index rate must not reflect differences in health status or risk selection.”

 What Must You Do?

The Single Risk Pool requirements laid out in 45 CFR § 156.80[5] establish multiple “must-do’s” for pricing ACA products. The “must-do’s” surround the development of the index rate, the market adjusted index rate and calibration of the plan-adjusted index rates.

  • The first must-do requires actuaries to combine the claims experience of all non-grandfathered individual market products to establish an index rate for the single risk pool.

“A health insurance issuer must consider the claims experience of all enrollees in all health plans…offered by such issuer in the individual market in a state…to be members of a single risk pool.”

  • The second must-do requires that actuaries adjust their index rate by expected risk adjustment payments or charges and that premium rates for all plans must be based on this market-wide adjusted index rate. This establishes that expected risk adjustment payments must be accounted for at the market level.

“(ii) The index rate must be adjusted on a market-wide basis for the State based on the total expected market-wide payments and charges under the risk adjustment program and Exchange user fees…

(iii) The premium rate for all of the health insurance issuer’s plans in the relevant State market must use the applicable market-wide adjusted index rate, subject only to the plan-level adjustments permitted in paragraph (d)(2) of this section.”

  • The third must-do can be found in 45 CFR § 156.80(d)(3) and impacts how the plan-adjusted index rate must be calibrated.

What May You Do?

The single risk pool requirements under the law established multiple items that actuaries “may” do after the “must-do’s” are adhered to.

  • Actuaries have a defined list of plan level adjustments that they may adjust premium rates for. It is presumed that this is an exhaustive list of permissions to which actuaries cannot go beyond.

“(2) Permitted plan-level adjustments to the index rate…a health insurance issuer may vary premium rates for a particular plan from its market-wide index rate for a relevant state market based only on the following actuarially justified plan-specific factors:

(i) The actuarial value and cost-sharing design of the plan.

(ii) The plan’s provider network, delivery system characteristics, and utilization management practices.

(iii) The benefits provided under the plan that are in addition to the essential health benefits. These additional benefits must be pooled with similar benefits within the single risk pool and the claims experience from those benefits must be utilized to determine rate variations for plans that offer those benefits in addition to essential health benefits.

(iv) Administrative costs, excluding Exchange user fees.

(v) With respect to catastrophic plans, the expected impact of the specific eligibility categories for those plans.”

The interesting thing to note is that technically speaking, actuaries do not have to adjust for any of these factors and could theoretically price all their plans equally despite plans having varying benefits. But if they decide to adjust the market-adjusted index rate for one or all of these permitted items, the plan-specific factor adjustment must be actuarially justified. I am going to focus in on the actuarial value and cost-sharing (AVCS) design of the plan as that factor has come under the most amount of scrutiny in recent years. The following is the rate guidance from CMS for this rating factor[6]:

“The AV and cost-sharing design of the plan may take into account the benefit differences and utilization differences due to differences in cost-sharing. The utilization difference may reflect the impact higher cost-sharing has on utilization, but cannot reflect differences due to health status. If the cost-sharing impact on utilization is reflected, describe in detail how the difference was estimated and how the methodology ensures that differences due to health status are not included in the adjustment

An important element of this plan-specific factor is that it is a relative factor. The market-adjusted index rate assumes an average level of utilization given the expected weighted average distribution between the plan designs while the AVCS accounts for utilization differences due to differences in cost-sharing. While there is room for actuarial judgement in terms of what the paid-to-allowed ratios are and what the variation of utilization (referred to also as induced demand adjustment) are, it is unquestionable that directionally speaking, if one plan design within a product has richer benefits than another plan design within the same product, it is a violation of ACA pricing rules and of actuarial standards of practice to develop AVCS adjustments where the richer benefit plan design has lower premiums than the less rich benefit plan design. Please keep this point in mind when I move on to discussing the “Silver-loading” issue.

What Must You Not Do?

The Uniform Rate Review (URR) Instructions make it clear that insurance carriers cannot create plan level factors (including metal level adjustments) that reflect the expected enrollment or the characteristics (health status or otherwise) of the population within each plan when developing premiums. This aspect of ACA pricing rules is the cornerstone protection against health status rating.

“The utilization difference may reflect the impact higher cost-sharing has on utilization, but cannot reflect differences due to health status.”

It is implied by a list of allowable plan level adjustments that adjustments for other items are not allowed. Yet carriers have used other items beyond the enumerated list. Chiefly among those are the risk adjustment charges or payments. As risk adjustment payments reflect the health status of enrollees within the plan, plan-specific risk adjustment payments must not be considered in developing plan level adjustments. That is further made clear since risk adjustment payments must be accounted for through the market-adjusted index rate. Secondly, carriers have accounted for the unique utilization patterns of low-income enrollees that select certain plan designs (Silver On-Exchange) when developing the AVCS and the corresponding Silver-Load factor discussed in the next section. This rating due to selection is also not allowed.

While it may be helpful for CMS to specifically call out these two items, we once again must affirm the “Mother-May-I” framework of the rules. When it comes to adjustments to the market-adjusted index rate (MAIR), it is clearly stated that the MAIR is “subject only to the plan-level adjustments permitted in paragraph (d)(2) of this section”. Mother has not permitted risk adjustment considerations or income-based utilization patterns. You don’t need a “must not” to know not to take those steps but if it would help, we should ask mother and mother should clarify that you may not take those steps.

What About Silver-Loading?

The defunding of the cost-sharing reduction (CSR) payments in 2018 introduced a twist into the “Mother-May-I” framework. Health plans and regulators asked mother if they may add a “Silver-load” to Silver premiums to account for the loss of CSR funding. In response, CMS released a memo[7] addressing what carriers can do. In that memo, CMS allows what is colloquially termed “Silver-loading” by stating the following (emphasis added):

“A plan-level variation for the actuarial value and cost-sharing design of a plan is permitted under 45 CFR §156.80(d)(2)(i). A health insurance issuer that offers a QHP may vary premium rates for the QHP based on the impact of the loss of anticipated federal funding for CSR payments”

Keeping within the “Mother-May-I” framework, carriers may adjust the permitted plan level adjustment of the AVCS design of a plan to account for the “loss of anticipated federal funding for CSR payments”. They may choose not to adjust their AVCS but if they do, the Silver-loading adjustment would now fall under the rules and rate guidance pertaining to the AVCS factor. This means that the Silver-loading factor cannot reflect the health status of the CSR-specific enrollment. This also means that the Silver-loading factor can (and must if applied) reflect the “benefit differences and utilization differences due to differences in cost-sharing” which in the case of Silver-loading would represent the actuarial value and induced demand differences between a Platinum (CSR 87 and CSR 94 plan variants) and a Silver (base Silver plan) plan[8]. Keep in mind that these factors remain “relative” factors. If an induced utilization factor has been developed for Bronze, Silver and Gold plans, it would be required that an induced utilization factor used in the Silver-load factor reflect Platinum benefits which must be higher than benefit plans of lower metal tiers. Strictly speaking, if the weighted average actuarial value of the Silver plan, reflective of the amount of the expected CSR enrollment, is higher than a Gold plan, it would be expected (arguably mandated) that the premiums should also be higher.

One potential caveat to this is that the CSR adjustment is meant to reflect “the impact of the loss of anticipated federal funding for CSR payments”. The federal funding only compensated for the paid-to-allowed ratio differences between the CSR plans and the base Silver plans and did not compensate for the increase in induced demand which was and illogically still is accounted for in the risk adjustment payment formula. I would argue that you could interpret (though this is not for certain) the rating rules to allow for only an adjustment due to changes in the paid to allowed ratios when developing a Silver-load factor. That being said you are allowed to adjust for induced demand as well and for a discussion of why a state might promote that approach please see my article the “The Silver Bulletin”[9] for the implications to a market and the consumers.

This issue is confusing for a couple of reasons. The first reason is the violations of ACA pricing rules were widespread heading into the plan year 2018 which meant the “Mother-May-I” framework was already broken when Silver-loading was introduced. Secondly, CCIIO has given minimal guidance including not a single mention of Silver-loading in the URRT instructions. CCIIO has made statements[10] that they are monitoring how states are implementing the Silver-loading factors and that they give deference to state regulators if federal rules are being followed and factors are actuarially reasonable. Unfortunately, multiple states have implemented rules that would require carriers to consider factors such as the unique utilization of subsidized enrollees when developing the Silver-load factor, which is beyond what is allowed but since states have been given authority without oversight, actuaries are forced to also give deference to state interpretations. Based on state actions and carrier pricing, it is unlikely that CCIIO is closely monitoring the situation or perhaps they need to revisit the ACA pricing framework to be reminded of what actuaries “must do”, “may-do” and “must not do”.

Conclusion

We need to ask Mother and Mother needs to reaffirm the law. I have spent the last four years analyzing markets, writing articles and presenting at Society of Actuaries (SOA) meetings on this topic. In all that time, very little has been spoken about the actual principles built into the ACA law. So let us start there and let us start with an honest analysis of premium relationships that might illuminate the degree of the issue and how we might begin to solve the problem.

To conclude this article, I would like to leave a high-level analysis of current premium relationships to highlight the likelihood of the widespread issue of premium misalignment in ACA markets. The table below shows the percentage of Silver On-Exchange enrollment that has CSR 87/94 variant plans in each state[11]. These enrollees are assumed to have 90% actuarial value on average while the other consumers will have 70% actuarial value on average. The third column shows the average actuarial value given the CSR distribution. Based on this distribution, the expected Gold to Silver premium relationship is shown in column four assuming the Silver-load reflects both the paid to allowed differences and induced demand differences[12]. The fifth column shows the actual average lowest Gold to average lowest Silver premium[13] relationships of the average lowest cost gold and silver premiums in each state. The sixth column shows the actual to expected difference by subtracting column four from column five.

Back to the principles, in almost all of the states reviewed, the weighted average actuarial value for the Silver On-Exchange plans is higher than the average Gold actuarial value of 80%. Yet only 14 states have the average lowest Silver premiums below the average lowest Gold premiums. 34 states have an actual to expected greater than 10% (highlighted in red or yellow) and 16 states have an actual to expected greater than 20% (highlighted in red). These are high-level views that should point CCIIO and state regulators to do deep-dive reviews within those highlighted states to assess what is occurring. When I have done that analysis, the issues typically compound as carriers within a state have wildly different assumptions that go beyond justification if holding to the “Mother-May-I” framework.

Endnotes

[1] https://familiesusa.org/resources/misalignment-between-premiums-and-coverage-generosity-imposes-heavy-cost-burdens-on-consumers-in-health-insurance-exchanges/

[2] https://www.osi.state.nm.us/wp-content/uploads/2021/06/OSI-2022-Rate-Guidance-Final-05282021.pdf

[3] 2012-28428.pdf (govinfo.gov)

[4] 2013-04335.pdf (govinfo.gov)

[5] https://www.law.cornell.edu/cfr/text/45/156.80

[6] https://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/Downloads/2021-URR-Instructions.pdf

[7] https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/Offering-plans-not-QHPs-without-CSR-loading.pdf

[8] For simplicity, CSR benefits only consider the CSR 87 and CSR 94 plan variants since the CSR 73 plan variant is close to the benefits of the base Silver plans.

[9] https://axenehp.com/acas-silver-bulletin/

[10]Health Section: A Conversation with CCIIO: Jeff Wu: https://www.soa.org/resources/podcasts/

[11] https://www.cms.gov/research-statistics-data-systems/marketplace-products/2022-marketplace-open-enrollment-period-public-use-files

[12] Expected pricing differences reflect the CMS Risk Adjustment standard premium factors for each metal level. Actuarial Values are 60% for Bronze, 70% for Silver, 80% for Gold and 90% for Platinum, Induced Demand factors are 1.00 for Bronze, 1.03 for Silver, 1.08 for Gold and 1.15 for Platinum.

[13] https://www.kff.org/health-reform/state-indicator/average-marketplace-premiums-by-metal-tier/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

Daniel Cruz, ASA, MAAA is an Actuary at Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.