At its heart, health insurance is a pretty simple business. Instead of running the risk of a medical situation that outstrips your ability to pay for it (and in the healthcare world, that’s a pretty common occurrence), you transfer some or most of that risk to another entity (like Blue Cross).
As I like to say, one of our primary functions is to make sure our members have access to healthcare they could never afford to pay for completely on their own. Ever.
So our mathematical challenge is, day in and day out, how to estimate how much money we need each month to cover those expenses. Most of the time, people have no idea when they are going to get sick, how severe the illness will be or how much it will cost to get well. The first step for us in knowing how much to charge everyone for their health insurance, is a solid estimate of how much medical costs are going to be next year.
The Big Driver: Medical Costs
Today, Blue Cross pays out roughly $300 million a month in medical costs for our members. That’s financial assistance they sorely need. Since roughly 85 percent of all the premiums we take in goes to pay directly for medical costs, once our folks get the medical costs estimate right, everything else gets a lot easier.
For the rest of your premium dollars, another 3-4 percent goes to taxes we have to pay. Commissions for the agents, brokers and consultants who help companies provide health insurance got about 4 percent of premium dollars last year. And our own workforce costs, including operating eight regional offices, paying salaries, employee benefits and the like all added up to 6.8 percent of premiums last year. As you can see, out of all the things each premium dollar covers, the medical costs are THE THING we need to get right.
If we don’t get medical costs right, we’re in big trouble. We could easily end up hundreds of millions of dollars short if we miss that estimate. Missing on other things, like commissions, payroll or taxes is less scary, since those are only single-digit percentages of how we spend premium dollars. But when you don’t estimate 85 percent of your costs correctly, bad things can happen.
Enter the Cost Sharing Reductions Debate
You may remember me writing extensively about this debate in the past. The issue of Cost Sharing Reductions (CSRs) has been in the news a lot these past few months, too.
What’s new today is that the current federal administration announced late last week that it would immediately stop funding these essential payments, which go directly to make healthcare affordable for lower-income customers.
That’s around $60 million that is supposed to be available to pass through Blue Cross from the federal government to pay for the essential deductibles, copays and coinsurance for our poorest members.
We anticipated this lack of commitment from the administration and Congress when we set our rates for 2018 plans. We had to assume this funding wouldn’t continue next year. This is the main reason we had to raise rates starting on Jan. 1, 2018, for customers on silver plans.
Rate Increase Differences by Plan Type
To make sure the impact is as narrow as possible, this special rate increase will not apply to employer group plans or metal-level plans other than silver plans. Bronze and gold plan holders will get a different rate increase, driven mostly by the actual cost of care in those pools. Silver plan holders are the ones who get the CSR payments in the first place, and, if they are eligible for a CSR, they are already getting lots of federal assistance to pay their premiums.
As rates go up on silver plans, the federal government pays more through tax credits (subsidies). So, these customers could have most of their rate increases covered through more government assistance.
This is the only way we’ve been able to come up with to make sure that these CSR funds are still available for our members. Remember, we at Blue Cross are required to provide these funds to help our eligible members pay their deductibles, copays and coinsurance, even though the president and Congress at this point are refusing to fund CSRs going forward.
What Can You Do About it?
If you are a silver plan holder and your income is too high to receive Advanced Tax Credits or CSRs, you should contact your broker/agent and discuss your plan options.
Also, it’s worth remembering that under federal law, our gross margins are very strictly regulated. If CSR payments do continue through 2018, and we spend too little on medical care because of this targeted rate increase, we are legally required to send that money back to our customers through rebates. There are no “excess profits” allowed under the law.
In summary, if you are an individual customer who is holding a silver plan for 2018, you will see rate increases directly tied to the CSRs going unfunded. These higher rates are specifically to provide the funding for CSRs, which pass through insurance companies and fund the deductibles, copays and coinsurance for our lowest-income members as required under federal law.
Straight Talk is tough sometimes. When uncertainty from above forces us to do things we’d rather not do, this is one of those times.