COVID-19 could prompt higher 2021 insurance premiums, benefit cuts

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The cost of COVID-19 testing and treatment is likely to squeeze U.S. health insurers' profits, which could lead to higher premiums in 2021. Pressure on state budgets may also prompt Medicaid benefit cuts, experts warn.

A new report from Covered California, the state's Affordable Care Act marketplace, projected that commercial insurers and employers could face a $34 billion to $251 billion bill for coronavirus testing and treatment this year. Their best estimate is $103 billion.

Absent any federal action, those costs could prompt commercial health insurers to increase premiums between 4% to 40% in 2021 to make up for increased medical claims and stay solvent, according to the report.

"Plans in 2021 will price not only to cover losses they did not plan for this year, but to cover anticipated costs next year," said Peter Lee, executive director of Covered California. "And what does that mean? Here we are in a recession where small businesses and large businesses are already on the ropes, and if they are faced with premium increases of these staggering proportions, sadly many are likely to drop coverage or even more will shift costs to their employees who are ill prepared to take on those costs in the face of other economic challenges."

The report by Covered California's chief actuary John Bertko focuses on costs for the commercially insured, which includes about 170 million Americans who receive coverage through their jobs and the individual market. It doesn't address the separate and likely significant costs to Medicare, Medicaid or other public programs, though Bertko said those costs would be "huge."

The wide range of cost and premium estimates reflects the many unknowns, including how many people will receive tests and how many will need to be hospitalized. The low-end estimates reflect the best-case scenario, in which social distancing and shelter-in-place orders help prevent the spread of the virus. High-end estimates reflect a higher-than-expected number of patients testing positive for COVID-19 and requiring hospitalization.

The report notes that the best estimate puts testing costs at $8.4 billion for 40 million commercially insured people tested, and treatment costs at about $95 billion for 8 million people who test positive for COVID-19.

The consequences of these staggering costs are far-reaching. Premium increases could make it difficult for people to afford care. Unsubsidized ACA exchange enrollees may become priced out of the market. Employers may shift costs to workers or even drop health coverage, and small insurers may shut down. State and federal governments could be on the hook for higher costs if more individuals enroll in Medicaid as a result of losing job-based coverage.

"You should probably expect there will be an increase in premiums unless there is some additional federal relief," said John Baackes, CEO of L.A. Care Health Plan, which serves more than 2 million Medicaid and ACA marketplace members in California.

More concerning, he said, is that the pandemic will likely lead to Medicaid cuts.

"I would expect as a fallout, even with additional federal aid, we can expect some curtailment from Medicaid. They could reduce reimbursement, they could reduce benefits, which is what they did 12 years ago, or they could reduce access," Baackes said.

Lee said the federal government must act now to mitigate the effects of the unplanned costs through programs like reinsurance.

"What's top of mind and should be top of mind now is to make sure hospitals have ventilators, make sure we are taking care of our frontline health professionals, but if policymakers aren't looking six months down the road, we are going to have an economy that never gets up again. This is about policy today so we aren't in six months facing a new crisis that could have been avoided."

Insurance industry lobbying groups America's Health Insurance Plans and the Blue Cross and Blue Shield Association have urged federal lawmakers to enact policies to maintain a stable marketplace for insurance. They are pushing for a temporary risk mitigation program to compensate insurers for extreme costs to keep premiums from spiking.

Among other recommendations, they have also asked Congress to provide funding to support coverage for employees who lose their jobs, and to allow those workers to enroll in individual market coverage through a special enrollment period, as several states have already done.

Insurers have been reluctant to estimate the potential financial impact of COVID-19 pandemic on their businesses, saying it's too soon to know. Analysts have pointed out that insurers could benefit as hospitals postpone expensive elective surgeries and other procedures, but it's unclear if that benefit will outweigh testing and treatment costs for COVID-19 claims costs.

"This clearly is an unpredicted event that has occurred that was not baked into any pricing or trend expectation," said Peter Manoogian, a Boston-based consultant at ZS Associates who advises national and regional health plans. "Even if members are told to stay away and put off treatment, those will still come back and ultimately there's going to be more utilization of the healthcare system than was predicted going into the year."

Last week, Fitch Ratings revised its outlook of the health insurance industry from stable to negative because it expects "a weakening of profitability" driven by higher claims from coronavirus testing and treatment. Plus, it expects that health insurers will take in less premium revenue as people lose their jobs and thus, their health benefits. An economic downturn could also reduce insurers' investment earnings, Fitch said.

S&P Global similarly said it expects insurers to lose money and have to "dig into their capital buffers to cover the increased costs." However, S&P analysts said health plan deductibles and copayments included in most insurance policies will ensure that patients bear the cost of medical care, particularly if they seek care in the first half of the year before they hit their deductibles.

S&P analyst Deep Banerjee said that while he expects premium increases related to COVID-19 in 2021, he did not expect a "meaningful" impact on the profitability of the health sector.

Covered California's Lee had other ideas.

"This is where there's no place for insurers to hide," Lee said. "(COVID-19) is touching every American, it's going to touch every insurer … These costs have to be paid; the question is how are they going to be paid."