Marketplace Pulse: COVID-19 and the Individual Market

The Known Unknowns

The Marketplace Pulse series provides expert insights on timely policy topics related to the health insurance marketplaces. The series, authored by RWJF Senior Policy Adviser Katherine Hempstead, analyzes changes in the individual market; shifting carrier trends; nationwide insurance data; and more to help states, researchers, and policymakers better understand the pulse of the marketplace.

With its dramatic impacts on both population health and the economy, COVID-19 is disrupting every segment of health insurance.

The individual insurance market, recently more stable after a precarious beginning, will undoubtedly feel the impact of large changes which fall into three major buckets—the costs of the coronavirus, changes in use of other health care services, and the impact of the recession.

Coronavirus Costs

The cost of testing could grow

The seemingly simple issue of testing first engaged the public in thinking about the health insurance aspects of the response to coronavirus. An initial flurry of state, federal, and voluntary actions were followed by provisions in the Families First and CARES Act which greatly limited patient cost sharing in private insurance for COVID-19 testing and associated visits, regardless of where administered, for the duration of the public emergency. As a prior analysis showed, in most individual market plans, lab test costs are usually subject to a deductible. This is the case for approximately 90 percent of bronze plans and 70 percent of silver plans, making this a fairly large transfer of financial responsibility to plans.

The CARES Act attempts to preclude balance billing by requiring plans to reimburse test providers at their "cash price,” provided such prices are posted on a public website, or a negotiated rate with those providers. With many novel test providers, including some hospital systems that have recently developed their own tests, at least some out-of-network billing seems likely.

The volume of testing could grow considerably. Testing is still constrained by supply, even for those with symptoms. Much more widespread testing is considered key to any strategy to ease social distancing, particularly as testing for antibodies is further developed. At the high end of the range of their recently published cost estimates, Covered California estimated that about one third of commercial members would be tested. Yet it seems that the amount of testing could greatly exceed that, if widespread testing becomes normal and at least some enrollees may be tested multiple times. Recent CMS guidance indicates continued plan responsibility for the cost of new testing, including serological tests once developed. Yet at the same time, more widespread testing is designed to prevent infection, so the costs of increased testing should reduce treatment costs, at least at the population level.

Treatment costs may be lower than initially projected

Even if testing costs are significant, most believe they will pale in comparison to potential treatment costs. Many carriers offered to cover patient cost sharing for treatment, but even those that do not will have a significant degree of exposure. There are a few reasons to think the individual market may have higher per-member coronavirus treatment costs than the commercial market. The individual market has more enrollees with chronic conditions such as diabetes or cardiac risk factors, potentially increasing the likelihood of hospitalization and severe illness, relative to the rest of the commercial market. The impact of the novel coronavirus will also certainly vary by geography, and the individual market may have relatively more members in urban areas where infection rates have so far been higher. The narrow networks that are common in the individual market may also make carriers in this market more vulnerable to out-of-network or surprise billing. As a condition of receiving federal stimulus funding, hospitals must agree not to balance bill patients for testing or treatment, yet carriers may receive some out-of-network charges. Doctors can still bill out of network.

The Covered California analysis estimated a range of costs between $35 billion and $251 billion for both testing and treatment for the commercial market as a whole. More recent cost estimates from America’s Health Insurance Plans (AHIP) suggest a range within their baseline scenario of $70.8 billion to $126.1 billion for the commercial market in 2020 and 2021, of which 75 percent was assumed to be incurred in 2020. Applying the AHIP baseline scenario assumptions to a 10 million-member individual market results in an estimate of approximately 215,000 hospitalizations, of which about 47,000 would require treatment in an intensive care unit. The estimated cost of these hospitalizations would be approximately $4 billion dollars.

Yet there is some reason to think this estimate of hospitalization rates may be too high. As the most recent version of the IHME model has greatly reduced the projected number of deaths, the estimated hospitalization levels have also been revised downward. The current high end of the IHME estimate of hospital bed-days is approximately 6 million. Assuming a conservative length of stay of about six days, this implies about 1 million hospitalizations in total, or an adult population hospitalization rate of about 0.34 percent, about 15 percent as high as the rate assumed in the AHIP model. Assuming the same unit costs, this suggests 600,000 hospitalizations in the commercial market with an estimated cost of $11 billion, and 34,000 hospitalizations at a cost of $623 million in the individual market.  

For some perspective, the individual market in 2019 reported about 650,000 total inpatient hospitalizations and total premium revenue of nearly $65 billion. The higher estimate derived from the AHIP assumptions yields a number of covid hospitalizations that is about one-third the size of all hospitalizations in 2019, and an associated cost that is about 6 percent of premium revenues. The lower estimate puts the number of hospitalizations at about 5 percent of 2019’s total and an associated cost of about 1 percent of premium revenues. Combining these lower hospitalization estimates with assumptions about more widespread testing, it is not impossible to imagine a scenario where testing ends up costing more than treatment. If each member of the individual market is tested once at an average cost of $200, for example, testing costs could reach $2 billion dollars.

Changes in Use of Other Health Care Services

Non-COVID-19-related health care costs are down, but the future is uncertain

The extra testing and treatment costs associated with the novel coronavirus are being offset by significant reductions in other health care services, since elective procedures have been postponed in most places. Non-COVID-19 emergency room visits are reportedly down by approximately 30 percent. There is a sharp drop in office visits, with some practices reporting a 70 percent decline in volume. The reduction in office visits reduces the volume of new prescriptions. Many office-based providers are experiencing significant cash flow problems. Some are closing their offices and laying off workers, while others are requesting early reimbursements and/or loans from carriers to keep their practices open. Some of these appointments and procedures will be rescheduled later in the year or in 2021, but many will not. Some of this delayed or foregone treatment will worsen patient outcomes, which could increase costs for some non-COVID-19 patients who did not receive needed care. If providers return to non-COVID-19 treatment in Fall of 2020, many insured individuals will be incentivized to get treatment this year since they may have met their deductibles and perhaps even their out-of-pocket annual maximum with COVID-19 treatment.

Impact of Recession

Recession is a wild card

The economic catastrophe wrought by the novel coronavirus could affect individual market carriers in multiple ways. Recession will be a first-time experience for the individual market, which even in good times is particularly prone to membership churn. The downturn has the potential to increase enrollment, as some new members may arrive from the group market. Yet there will also be an outflow, as self-employed members with eroding income may migrate to Medicaid. The specifics will vary by the characteristics of labor markets and state Medicaid expansion status, but a considerable amount of churn seems inevitable. The unsettled nature of the labor market will likely persist into 2021 and continue to impact open enrollment. Another feature of a recession is a greater potential for premium non-payment, and a number of states are considering the extension of grace periods. On the other hand, the combination of high deductibles and low incomes may continue to drag down demand for health care services even after the pandemic has subsided, a tendency which could be more evident in the individual market where deductibles are higher than those in the employer market.  

Outlook uncertain for carriers and premium costs

There are currently no widespread concerns about insurer solvency. In fact, current trends are probably favorable in the short run, as the benefits of reduced demand for care are being realized before most of the claims costs associated with coronavirus hit. The recent United Health Group earnings announcement for the first quarter of 2020 is consistent with this scenario. Some carriers have advanced payments or made loans to providers, suggesting a degree of financial comfort. Those that are diversified nationally and with other segments of the health industry will be in a stronger position. For those that are challenged, the nature of their reinsurance may make a difference. Novel coronavirus costs may involve many members, but lack the astronomical per-patient costs associated with some rare diseases. Carriers with reinsurance that has an aggregate stop-loss--one which is triggered by total cost--will be better served than those with stop-loss coverage based on the cost of individual claims.

In the next few months, individual market carriers must submit proposed rates for initial regulatory review. These rate submissions should reflect projected costs in 2021 rather than current costs, so expectations about the future are important. In that regard, there are many unknowns. There will be costs associated with COVID-19--hopefully a vaccine, but also potentially much more testing and treatment if there is another wave of infection before a vaccine is developed. The question of how much currently delayed care will take place next year is another key factor for consideration. Finally, the recession will continue to affect both members and providers. Deterioration in provider finances may lead to requests for increased rates or different payment terms. A recession will likely change the size and composition of enrollment and could continue to depress health care spending into next year, as members with high deductibles conserve their resources. The establishment of premiums for 2021 will reflect expectations about a newly uncertain future.