Paying for Contraceptive Coverage: The Case of the Large, Religious Employers
This is the first detailed post in a series on contraceptive coverage. The introduction was here.
For large, fully-insured, religious employers, the Administration is proposing that health insurance companies be able to contact individual women employed by the religious organization. Specifically:
The issuer must … provide to the participants and beneficiaries covered under the plan separate health insurance coverage consisting solely of coverage for contraceptive services required to be covered under this section. The issuer must make such health insurance coverage for contraceptive services available without any charge to the organization, group health plan, or plan participants or beneficiaries. … The issuer must not impose any cost sharing requirements (such as a copayment, coinsurance, or a deductible) on such coverage for contraceptive services and must comply with all other requirements of this section with respect to coverage for contraceptive services.
So far, so good. Both the Catholic institutions and women’s groups are happy; health insurers are not. But then, the Advanced Notice of Proposed Rule-Making clarifies how this is to work in practice:
Issuers would pay for contraceptive coverage from the estimated savings from the elimination of the need to pay for services that would otherwise be used if contraceptives were not covered.
Such a simple sentence, but with huge ramifications.
At its simplest level, insurers develop premiums by predicting how much a group will cost in claims, add in administrative expenses and then load for profit / risk-charges. Let’s put some numbers on this, and let’s say that a religious institution is predicted to cost $200 per person, per month (frequently referred to as “PMPM” for per-member-per-month), inclusive of all costs. Therefore, this is the amount the group would be charged, assuming that they don’t cover contraceptives. This is sometimes called an “experience” rate, because the claims data for the group itself is used to generate projections for how expensive that group will be in the future.
Let’s also presume that the administration’s theory that contraceptive coverage effectively pays for itself is correct. Specifically, let’s assume that there are $10 pmpm direct costs associated with paying for contraceptives. Further, let’s estimate that there are exactly $10 pmpm savings associated with avoided, high-risk maternity cases and the like. I am not endorsing the idea that contraceptive coverage pays for itself, especially in the short-run. Rather, I am just taking the administration’s approach and thoughts at face value. Interestingly, within this market segment, whether contraceptives pay for themselves or not is entirely irrelevant to the pricing.
How would the religious institution’s pricing work?
As we saw above, prior to healthcare reform, they would be charged $200 pmpm, and we would be done.
After healthcare reform, the insurance company would go to the religious institution and say that the cost of their coverage, specifically, is $190 pmpm, which recognizes $10 pmpm in savings because some of their women employees are separately taking up contraceptive coverage and avoiding complicated maternity events.
However, the insurance company won’t be able to charge them $190 pmpm, which is the cost of their coverage. Instead, the insurance company will have to charge them $200 pmpm, which includes a reversal of the estimated $10 pmpm in savings. Insurance companies will have to do this in order to stay solvent, and, surprisingly, comply with this ANPRM as quoted above. This notice says that insurance companies *will* pay for contraceptive coverage from these “estimated savings”. The “estimated savings” therefore becomes an additional cost to the group plan.
This is also a stable equilibrium. Specifically, would any other insurance carrier undercut the $200 pmpm price, even if they knew the true cost of the employer’s coverage was just $190 pmpm? The answer is “no”, because the cost of coverage is really $200 in total, with $190 pmpm being the cost of the employer’s plan, and $10 pmpm being the cost of the separate contraceptive policies.
Worse than any of this is how this will happen in practice. In reality, you will have a pretty good estimate for how much the direct cost of contraceptive coverage is ($10 pmpm in this case). You will also have a pretty good idea of how much it truly costs to pay for the group’s plan, sans contraceptive coverage (perhaps $190 pmpm if the adminitration is perfectly correct). But there is no way to get a good estimate on the “savings” enjoyed by the group plan. Indeed, under the administration’s argument, the “savings” comes from the avoidance of relatively rare catastrophic cases. It is quite possible for a group without contraceptive coverage to go many years without a complicated maternity event; therefore, it will be impossible to demonstrate (with data strictly from the group) that their probability of having such an event is now different.
With no anchor for pricing, the next best approach is to follow the administration’s rule here. Essentially, insurance companies will simply have to *assume* that the religious institution is benefiting from the contraceptive coverage, and then insurance companies will have to bill the religious institutions an amount equal to the “estimated savings”. In other words, if the group’s experience-rating really showed $195 pmpm, then the insurance company will charge $195 pmpm plus $10 pmpm for the estimated savings / cost of contraceptive coverage.
The estimated savings that gets added to the group’s rating must be equal to the cost of contraceptive coverage due to market forces. If the “estimated savings” amount that is added to the group plan is higher than the cost of the contraceptive coverage, then this would raise the cost of the insurance to the religious institution and another insurance carrier could profitably swoop in and take over the group. Conversely, if the estimated savings is lower than the cost of the contraceptive coverage, then the insurance company will lose money. The only equilibrium that holds here is if the insurance company charges the group the estimated savings from the contraceptive coverage and that estimated savings amount must be equal to the cost of the contraceptive coverage itself.
What would happen if contraceptive coverage didn’t pay for itself and there was perhaps no offsetting savings at all? Then the group would get charged the same $200 pmpm they would have been charged otherwise … plus an estimated $10 pmpm charge for “estimated savings”! As per the discussion above, the estimated savings charge *must* be equal to the direct cost of contraceptives, whether it is a decent estimate or not. Any carrier that charged less would eventually go out of business (and wouldn’t be complying with the Administration). Any carrier that charged more could be profitably undercut.
All of this is just a complicated way of saying the common-sense intuition that there is no “free lunch”. In this market subsegment, the religious institution itself will pay for the contraceptive coverage, albeit through the addition of an “estimated savings” charge. I find it very interesting that in the same Notice that claims the religious institutions won’t be paying for contraceptives, they are providing detailed guidance that seems to require the institutions to pay for contraceptives.
The answer is different in other market segments, however, as will be discussed soon.