Health Care Reform: The Journey Continues

Exchanges (26:38)


Paul Wingle:  Good afternoon everyone and thank you, Colleen. Thanks for the participation today. It's good to hear from everybody, and we hope that we can answer your questions and we hope this presentation anticipated some of what you wanted and were looking to know today.

I'll call out on slide 12, a few of the highlights that Colleen hasn't already mentioned, starting at 12:00 on this circle, you'll see on slide 12, looking at guaranteed issue and rating changes. This is a provision - these provisions are taking effect with the effective dates of 1/1/2014, of course. And it means, essentially, medical underwriting, as we’ve known it, goes away. It also means that nationally there are 3-to-1 age bands which limit the difference between what the oldest and youngest person can be charged in a base rate for health insurance.

So some significant age band compression compared to what some markets are accustomed to or used to. Certainly these provisions will have -- in addition to the taxes and fees that Colleen just mentioned -- a rate impact. We can get into that a little bit more as we proceed.

Moving down to about 2:00 on the circle, there's a mention of the risk management mechanisms. These are also the so-called three R's -- risk corridors, risk adjustment, and reinsurance programs, which are meant to mitigate or lessen some of the unknowns, some of the exposure, because the market's changing so dramatically. Because medical underwriting is going away, for the most part, it means that, you know, we are pricing in a “brave new world” and this is meant to protect insurers that really get it, you know, wrong, to the point where they didn't quite understand the risk they were taking on.

And it does require, or will cause some transfer between winners and losers on those bets about what the new population and what the new pool will look like. The individual mandate was something that Colleen described in detail on slide 8, so I won't go over that again.

But I will talk here at 5:00 on the circle about taxes - tax credits and subsidies, which we think are a very significant driver in year one for the exchanges. The exchanges are the place where citizens have to go to get - access these tax credits and subsidies. There are a couple of forms of tax credits and subsidies, of course. If you're up to 400 percent of federal poverty level, you can get premium assistance - an advancable tax credit. 400 percent of federal poverty for a family of four in the United States is somewhere between $92,000 and $93,000 a year, which is, you know, what most people would consider solidly middle class.

So the nature of who is eligible for some sort of government subsidized program for health care  - that profile is going to change significantly under health reform and raise the level of eligibility for some form of government assistance up the socio-economic ladder quite a bit. Of course, those premium tax credits are on a sliding scale basis, meaning the folks who are at the lower end of that spectrum, you know, who are, you know, closer to, you know, the lower end – 100 percent -- are going to get more subsidy assistance, more premium tax credit assistance than those folks who are closer to 400 percent. So that sliding scale is meaningful.

The other thing to note about the tax credits and subsidies is that there's something called cost-sharing reduction, which applies to silver level plans in the exchanges. The exchanges, as most people on the phone know, will have plans categorized in bronze, silver, gold, platinum - all aligning to actuarial values with bronze being a 60 percent plus or minus 2 percent plan, silver being 70 percent, gold 80, and then platinum 90 - again, with a plus or minus 2 percent swing allowed for plans on that.

So the cost sharing subsidies are essentially applied to silver level plans. And what that does is it provides up through some back-end reimbursements to carriers the ability to essentially provide an AV buy-up to reduce the cost sharing exposure that somebody might normally expect to receive under the silver plan design. So there are two types of credits and subsidies.

Those cost sharing subsidies are limited to folks who are at 250 percent of FPL or below, so slightly different eligibility standard on income for those cost sharing reductions.

Colleen mentioned on slide 10, taxes and fees. Employer mandate on slide 8, of course. And I'm primarily going to focus in the time I have left on health insurance exchanges, which are expected -- and I'll emphasize expected -- to go live on October 1st of this year. A number of states are building their own, of course. Other states are defaulting to the federal solution and we'll show that shortly. But I just want to note that again, the tax credits and subsidies are -- under the law -- exclusively available through a public exchange solution.

So moving on to slide 13, I'm going to kind of step back from those particulars and talk a little bit more thematically before we delve into some more detail here. But it's very clear that an industry that is already very highly regulated is going to become very much more regulated with a lot more federal authority inserted into the process. There have been -- at no exaggeration -- quite literally thousands of pages of new regulation that we've had to respond to and adapt to and remediate our systems, our products, to comply with and that work continues here at Aetna.

With that increased regulation, there's obviously new costs that we're absorbing to comply. So, you know, the system is experiencing some burden -- some lift -- to meet all the obligations under the law. But the good news -- from an Aetna perspective -- is we've got a very solid set of delivery teams working across our entire enterprise -- you know, through the evenings, nights, and weekends -- making sure our systems are ready and compliant. And we're fairly confident about our ability to meet the regulatory lift here.

But from a consumer standpoint, you know, the more important theme here is the demand for a simpler consumer experience. Many of the people who'll be entering the exchanges are previously uninsured. They have very low category or health insurance knowledge or literacy. And, you know, even people who are buying insurance today and are familiar with making a health insurance purchase aren't always all that familiar or versed in the different trade-offs between benefits and costs and how to pick the right plan on a value basis for their needs.

This is a very important imperative in all of this. While exchanges in the private side are nothing new -- after all, there are private exchanges like eHealth that have been doing business since the late '90s -- the amount of people coming in, looking for a Travelocity- or an Amazon-style experience to help them buy insurance is going to increase very significantly, motivated by the subsidy incentive, obviously and -- to a lesser degree, at least initially -- motivated by the individual mandate penalties, which are -- as we noted -- are somewhat light in year one but will increase over time.

And Colleen's already discussed the missing element, I think, in all of the health reform and that is the sort of underemphasized focus on costs. But it's very clear that once this new transparency -- once this consumerism -- comes into force, consumers are going to have a lot more “skin in the game” and a lot more visibility on the whole question of cost and what their cost sharing is and what their premium costs are.

So moving to slide 14, to elaborate a little bit further on the exchange opportunity. It's very clear -- looking at slide 14 -- that the biggest opportunity is in the individual market. That's where the subsidy incentive is strongest. That's where the penalties are a fairly significant motivator. And, you know, our projection is that -- between now and 2016 -- that the individual market will grow by about 19 million lives between now and 2016.

We do think -- and this has been validated by others, including very recently Kaiser Family Foundation -- that small group will continue to face some constriction, mainly because that's been part of the response to medical trend in recent years anyway. But there's also kind of a watch that we have to all be committed to in all of this -- something that we have to be very mindful of -- and that is for the groups under 50, there is no exposure to employer penalties under the law.

There's also some potential that simply by offering their employees health insurance employers will realize that they're locking those employees out of the opportunity to access public subsidies through the exchange. And they may see that the plan opportunities in the exchange and the subsidy levels in the exchange might be more beneficial to their employees than what that employer could possibly manage on their own. So there's something of a moral hazard in this design in terms of the way the incentives and penalties affect the smallest groups. So there's some potential that there could be additional erosion above the medical trend erosion that's been going on for years. But we'll watch it.

It's our view -- and we'll be interested to hear your view when we go to questions and answers on this call -- that employers won't do this wholesale, at least in year one. And we think, as a company -- that, you know, based on our conversations with employers -- that there's sort of a wait and see mentality out there. You know, for those employers, particularly those who are very paternalistic and concerned about the welfare of their employees, they're not going to simply shift those employees into an unproved system, at least not in the early years of everything.

One other thing of note on this slide about where things are going to move. Medicaid is project in this view to increase - Medicaid enrollment is projected to increase by 11 million lives between now and 2016. To date, only 18 states have affirmatively said they're going to expand Medicaid since the Supreme Court ruling made that more of an optional decision for the states.

So, you know, there's some concern, even in the employer community, in those states that haven't expanded Medicaid, that  because those folks would become subsidy eligible for the exchanges because the new Medicaid expansion opportunity isn't available that there could be some increased penalty exposure, should those employees end up on the exchange and get a subsidy. So that's another watch item to think about as you're talking to your plan sponsors.

Moving on to slide 15, we want to discuss the different types of exchanges that are out there and prospects for those exchanges. The individual exchanges are, of course, government run. To date, about 17 states are actively building or likely to have exchange solutions in - by October 1. The rest of the states are likely to default or will default under the ACA to a federal solution of some form.

So every state will have an exchange solution. And it's clear that the Feds, you know, are, you know, moving toward and appear to be ready for at least individual enrollment. The imperative there is to have a simplified shopping experience and even a simplified eligibility experience. One of the things we haven't necessarily emphasized in this presentation is that there are going to be new federal systems making eligibility for all kinds of subsidized programs – government-run subsidized programs -- you know, one-stop application. And that's through a new Medicaid adjusted gross income standard.

So these systems will in essence look at somebody's income records that are on file  through the IRS, for example, through that database and determine if someone is first eligible for Medicaid under the new simplified Medicaid eligibility standards and then determine whether -- if they're not eligible for Medicaid, if they might be eligible for an exchange subsidy. So it's intended to be a one-stop access on eligibility and also on shopping. And -- as I said earlier – the individual exchanges are the one place where you can go to get those public tax credits and subsidies to make the plans more affordable.

The small group or SHOP exchange is another element and there's been some back and forth about the configuration change SHOP will take. The federal exchanges -- the federally run exchanges -- have, you know, will not include an employee choice model in 2014. That's been clear, that functionality has been postponed. The federally run exchanges will instead have an employer choice model essentially one carrier, one plan, a very traditional way of approaching employee benefits where the employer is the primary consumer making the choice on behalf of the employees.

The employee choice model which is deferred in the federal exchanges, can take multiple configurations and the states that are going ahead and building their own exchanges, some of them are moving ahead with the employee choice model. For example, we're sitting here in Connecticut today, Connecticut is a state-based exchange. They have declared that they are going to move forward with an employee choice model for 2014 unlike the federal exchanges.

And their model is that a carrier - that a consumer - that a plan sponsor can choose one carrier and let their employees buy a plan in any tier -- bronze, silver, gold, platinum -- from that carrier or the plan sponsor can choose a medal level -- can say I want silver plans for my employees, and the employees would be just restricted to shopping in silver, but they could choose any carrier's plan available in silver.

So that's - those are just two potential configurations of how employee choice could work and one state's interpretation of how it wants to implement the choice model. But -- as I said before, for those state exchanges, for those federal exchanges, the choice model is deferred for a year.

The other thing to note here is that the small group or SHOP exchanges are going to be limited in nearly every instance to lives of 50 or fewer - groups with group sizes of 50 or less. And then in 2016, they mandatorily have to go up to 100 lives. By 2017 states have the option -- this is not a mandatory requirement -- of opening their small - their employer exchanges to groups of any size.

And then there are private exchanges, which are growing in popularity. There are a number of players in this space. You know, even in the national account level space, if you look at solutions like Aon Hewett. So, you know, those are third party. There's no tax credit opportunity through them, but they exist. They exist also, of course -- as I mentioned earlier -- in the individual space if you think of a player like eHealth, for example.

Moving ahead to 16, this is the map as we see it. The blue are the likely state exchanges and the green are so-called partnership exchanges. A partnership exchange is basically a federally run exchange,  The shopping experience,-- much of the experience -- will be based on the federal solution. What these states in green are really taking control over is a module called plan management.

Plan management is basically the module that certifies health plans for exchange readiness and deals with the carrier relations to get - on the products that are going to be on the exchange. So it makes sense that sates would want to adopt that because it's easier to align with their existing regulatory authority over plans. You think about Department of Insurance responsibilities and roles.

There's, you know, states want - states that want to assert and maintain a single place to go and to regulate what's available for sale in the state and want some continuity of approaches and regulation and the single point of contact for carriers and for product, you know, are adopting that particular module and are getting partnership.

Some of these sates will then transition in 2015 to a fully built-out state-run exchange, taking over all aspects of the exchange. But in year one, these states in green are basically dealing with the carrier relation pieces of exchange to simplify administration.

I'll note there are two states on this map that appear not as federally - as federal partnership exchanges - they're not in green, but they're acting like they're in green. That's Ohio and Virginia. Those states, probably more for optical reasons more than anything else, did not want to be seen as adopting a partnership with the federal government, but they certainly wanted autonomy over plan management. So the federal government has given them basically permission to act like federal partnership exchanges without the designation of being a federal partnership exchange.

And that's just probably, at the risk of getting too political, a sign of politics and optics more than anything else. But whatever it takes to get the job done, I guess, in the view of the federal government right now and to lessen the burden on the federal solution for year one, which is considerable. They're going to be managing exchanges in most of the country, in year one at least.

So as we move to slide 17, want to talk a little bit about how Aetna views the exchange opportunity and, you know, what decisions we're making strategically about the states we're intending to play in.

Mark Bertolini-- our chairman, president, and CEO -- announced on an investor call earlier this week that we are currently planning to file to preserve our option to be on 14 exchanges. That process is happening actually as I speak. For the federally run exchanges the deadline to file to be a qualified health plan, in other words, to be certified - to have your product certified to be on the exchanges is tomorrow. That deadline is tomorrow. So we are working on those applications in the subset of the 14 that are going to be federally run.

We thought about the opportunity as part of that, what's the potential membership market by market or state by state where we could reasonably expect to get some growth or some scale? The other thing we considered is the overall existing regulatory environment before you factor in the exchange element. You know, looking at the rate review processes in states and wondering and thinking about whether we'd be able to get an appropriate premium or rate approved for those states.

And that's a very different and more - a heightened consideration, I would say, in 2014 -- as we roll into 2014 because of the backlash that we anticipate or the push back we anticipate as we go in with what we think are reasonable prices for the new buy-ups and guaranteed issue affects and rate compression effects that we're seeing in the law. But more on that a little bit later.

But that also speaks, I think, to number three on the slide, which is, you know, do we think the regulatory environment generally is favorable to us and do we think that the exchanges themselves are shaping up in a way that we can be competitive? And then, you know what's our network position? What's our competitive position? What's our brand position in a state and do we think we can move forward based on those conditions?

So it's - on slide 18 -- as we say, a new consumer market is evolving with 19 million new entrants. We believe that 65 percent of those new entrants will be previously uninsured. We think that a quarter of them will speak a language other than English at home. And if you think about the states that have the largest uninsured population -- you think about California, you think about Texas, you think about Florida -- that should come as no surprise. So that's a significant consideration as well.

We are -- moving to slide 19 -- working -- as I said earlier -- not only on compliance, which is something I called out in system remediation to deal with all of the changes that are coming, but we're also making sure that we're moving to address the new consumerism that is so central to all of this.

Knowing that price is king, knowing that the exchanges are to a large measure going to commoditize the products of - health insurance products - and that the premium,  when someone enters their zip code and family demographic information, the premium's going to be the most prominent or interesting number to the shopper. We need to be in the mix. If someone has to paginate or scroll to get to the Aetna results, then we're not going to be in the mix the way we want to be.

So we've been out there working with our providers -- provider partners -- to get new networks set up, narrower networks, working with providers to get exchange rates for those networks. Also, putting a strong emphasis on ease and convenience to make sure the Aetna systems are emphasizing simple language, ease of use. We're going to develop - we're developing new guided selling tools on our own site and we're also working in our product design to make things simpler around how the cost sharing elements work so that they're a little bit more intelligible to folks.

Emphasizing health optimization; with medical underwriting going away, we are largely -- in IVL and small group -- out of the business of risk selection and into the business of risk management. Very important. And then, also making sure that our carrying brand is known and recognized and reflected in everything we do.

Just a few notes before I move forward. You know, one of the things that we want to address is just the general concern there is out there about rate shock. We're in a week now and a season now where rates are starting to get filed and known. Maryland's rates became public very recently. A couple of other states are about to become public very soon. I know -- for example -- that, you know, Arizona, Connecticut should become known very soon.

We do expect that some significant number of members will see -- who are currently insured today -- will see some rate increases, you know, all things being equal. We are going to do what we can with our current blocks to offer them a renewal opportunity before the factors that drive this rate shock take effect. We view that as helping somebody who likes their plan to keep it, at least for part of 2014.

And, we do note that that is a strategy that is actually enabled in the law and in the regulations, which provide a special enrollment opportunity now for folks as they cycle off in 2014. That wasn't an opportunity that they were allowed before under HIPPA and COBRA. It's something that they're allowed now. So we think the law actually -- in a very intentional way -- supports that strategy of letting people avoid some of the rate shock impact who are currently insured into part of 2014.