The coronavirus’s unpredictable impact on next year’s health insurance rates, explained

Four factors will determine how much Covid-19 hikes premiums next year.

The coronavirus outbreak is going to cost the US health system a lot of money, and if it doesn’t get under control soon, that might mean dramatic increases in insurance premiums next year.

The cost to health insurers for covering Covid-19 testing and treatment, especially as many of them waive cost-sharing for patients, could be enormous. Analysts for California’s insurance marketplace recently projected insurers nationwide could end up spending as much as $251 billion to cover care for coronavirus patients.

Arguably the most important variable for 2021 insurance premiums is whether the Covid-19 pandemic extends into next year or is brought under control before then.

That’s because legally insurers can’t just hike their rates astronomically next year to make up for those costs. Their proposed rates should reflect their expected costs in 2021, not what they spent in 2020. State regulators can push back against proposed hikes that they don’t think they are justified by the anticipated costs for the upcoming year.

“When issuers develop rates for 2021, it must be based on 2021 expected costs. Issuers are not allowed to include past losses in prospective premium rates if those costs are not expected to persist,” Dave Dillon, a Dallas-based insurance actuary who is a member of the Society of Actuaries, told me. “Therefore, for the majority of health insurance issuers, premiums would not be expected to increase as a result of COVID-19-related costs if the pandemic is limited to 2020.”

The actuaries and experts I spoke with said some major questions need to be answered before they could begin to know what will happen to premiums in 2021:

• Is the pandemic over by 2021 or is it still going?
• Do insurers need to dip into their financial reserves to cover coronavirus costs?
• How many elective surgeries end up getting postponed into 2021?
• Does Congress do anything to help health insurers absorb their losses from the pandemic?

The range of possible outcomes is pretty big: The California analysis projected premiums could increase in 2021 by anywhere from 4 percent to 40 percent because of the Covid-19 outbreak. These variables will likely dictate how big the increase is. Let’s run through them.

Is the pandemic over by 2021 or is it still going?

This one is pretty straightforward. If we can end (or greatly contained) the pandemic soon, and most of the expected costs for the outbreak come in 2020, then there will be less justification for insurers to increase their rates in 2021 because they expect more Covid-19 patients. Right now, experts project the outbreak will peak in the spring and summer, but we don’t know if the virus could rebound in the cooler months later this year.

When insurers file their proposed 2021 rates, they will actually be looking at their 2019 data to calculate what next year’s expected costs should be and how high they should set their premiums, says Cynthia Cox, senior vice president at the Kaiser Family Foundation.

“Nowhere in those calculations they can say, ‘We’re gonna lose this much money in 2020,’” she says.

On the other hand, if the virus lingers and people continue to get sick, get tested, or end up in the hospital, then insurers could fairly assume they will continue to have new expenses related to the outbreak next year. Under that scenario, we could be looking at the upper bound of these early 2021 projections, with double-digit increases potentially being the norm.

The costs for covering Covid-19 patients aren’t fully understood yet. But for people who end up in the hospital, about 1 in 5 cases so far in the US, we’re talking thousands of dollars even for a patient with no complications. If there are major complications, the bill could reach up to $20,000 or more.

Peterson-Kaiser Health System Tracker

There could still be some Covid-19 associated expenses for insurers in 2021, even if the outbreak is under control. If a vaccine comes on the market, for example, insurers could account for those costs. The effect is unlikely to be zero, but the difference between a 4 percent Covid-19 hike and a 40 percent hike depends largely on our controlling the pandemic as soon as possible.

Do insurers need to dip into their financial reserves to cover coronavirus costs?

But Dillon, with the Society of Actuaries, did say there is an important exception to the general rule that insurers can’t cite 2020 losses to justify 2021 rate hikes: if they have to dip deep into their capital reserves — the unspent funds they’ve built up over the years in case of an emergency such as this — to cover coronavirus’s costs.

He listed a few factors that could contribute to such a financial emergency for health insurers:

• “A catastrophic increase in 2020 claims” because of the extent of the coronavirus outbreak, which means a lot of people getting very sick and racking up big bills for their medical care
• In the same vein, health insurers are paying even more of their customers’ health care costs than usual, which could drive up their costs and deplete their reserves
• Given the ongoing economic crisis, a significant number of people could be unable to afford their premiums, meaning insurers aren’t bringing in as much money to cover claims

Insurers must meet certain statutory requirements for their capital reserves, which is based on a “risk-based capital” framework, Dillon says (and I’ll leave it at that except to say the formula is based on their risk exposure). If they eat too much into their reserves because of Covid-19, they may actually have a legal obligation to increase rates so they can build those reserves back up for the next emergency.

This will be another consideration in the rate review process. As Cox told me, the issue usually is insurers will propose a rate hike and the state regulator will point to their ample reserves as one reason why the increase isn’t warranted. But we may see the reverse if this pandemic is really hard on insurers’ books.

How many elective surgeries end up getting postponed into 2021?

Many US hospitals have been postponing elective surgeries because of the coronavirus outbreak, hoping to free up more beds and staff to deal with the current crisis. Despite the name, these “elective” procedures cover a lot of things. Some of them are still quite urgent, say for cancer or heart conditions, while others, like joint replacements, are not as much of a medical priority.

Elective surgeries fall into at least three different buckets: those that can be easily postponed, those that are still very urgent, and the trickiest ones that fall somewhere in between, with the decision depending on the medical opinion of doctors, in consultation with their patients.

“Certain elective procedures could be postponed for a long time. A lot of hip and knee replacements, for example, could be delayed for a long time,” Cox said. “Next year, there could be a lot of pent up demand for those types of procedures.”

This cuts both ways. Insurers could price their 2021 rates expecting a surge in elective surgeries because people are delaying less urgent medical services for now. On the other hand, if a decrease in other claims helps them financially weather the coronavirus, their reserves will be stronger heading into 2021, which dampens the statutory justification for a big hike.

“Many issuers are receiving significantly lower call volumes which is considered a key predictor for future claims,” Dillon says. “Therefore, it appears that 2020 COVID-19 related losses may be offset by reduced spending in other areas in the short term.”

It’s a complicated formula and we simply can’t say right now what it comes out to. And that’s all before you account for the federal government.

Does Congress do anything to help health insurers absorb their losses from the pandemic?

The other thing that could offset insurers’ coronavirus-related losses and blunt the premium increases for 2021 is a lot of federal funding. Insurers were not among the industries to get a bailout in the first stimulus bills passed by Congress, but they are still pushing for help from Washington.

There is at least one big reason for lawmakers to act: If insurers get spooked by the exorbitant costs of coronavirus, they might simply decide to pull out of the individual insurance markets that cover about 20 million people. We could be back to where we were in 2017, when until the last minute it looked like some counties across the country would left with no insurance options because no health plan was willing to sell on their marketplace.

“They might decide not to participate if it’s too hard to predict what their costs are going to be,” Cox said.

In mid-March, the main health insurance industry trade groups sent a letter to Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi laying out their requests. Among them was a risk mitigation program that would be triggered only when an insurer suffered real financial losses because of the pandemic.

The trade associations said the new federal money would be “to ensure that health care premiums do not spike, and that benefits are stable in the future.” In their most recent stimulus proposal, House Democrats did include a program that would cover “extreme losses” for health insurers with the goal of mitigating premium increases. At this point, the House seems ready to charge ahead with another stimulus bill, though Senate Republicans have sounded more reticent.

So, as with so many questions about Covid-19 and the future, we’ll just have to wait and see.