Paying for Contraceptive Coverage: The Case of the Small, Fully-Insured Employers
The Adminitration’s Advanced Notice of Proposed Rulemaking (ANPRM) discusses in some detail how contraceptive coverage for women employed by religious organization should be paid for when the religious organization is participating in the small employer market (defined as 50 employees or fewer):
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. Typically, issuers build into their premiums projected costs and savings from a set of services. Premiums from multiple organizations are pooled in a ‘‘book of business’’ from which the issuer pays for services. To the extent that contraceptive coverage lowers the draw-down for other health care services from the pool, funds would be available to pay for contraceptive services without an additional premium charged to the religious organization or plan participants or beneficiaries.
This is vague, so we’ll have to decompose the quote. First, we’ll discuss how small employer (small group) “books of business” are pooled. Second, we’ll work an example where we presume that one small group (out of ten total) is a religiously affiliated organization and exempt from the contraceptive mandate. Third, we’ll then hypothesize how the Administration’s rule could make coherent sense as applied through small group rate review laws. The conclusion will be that they are generally proposing that the non-religiously affiliated employers will pick up the direct cost of contraceptive coverage on behalf of the religiously affiliated ones, but it is possible that they are proposing that the religiously-affiliated employer will pick up the entire cost of contraceptive coverage.
Small Employer Books of Business
Small employer rating generally works the way the administration describes in the aforementioned paragraph. To understand this in more detail, assume that an insurer has 10 different small employers that they offer insurance to. Assume that they all have the same benefits and other characteristics. The insurer will basically add up all of their claim costs, project that into the future, and build a “blockwide” premium base.
For example, assume that there are 10 small employers, each of whom costs $200 per-member-per-month (PMPM), and each small employer has 10 members (members include the employee and any spouses or dependents). This means that the insurer would expect costs to average $20,000 per month for the entire block (10 employers X 10 members X $200 per member per month). Each small group then gets charged $200 pmpm, and the case is closed.
Introducing a Religiously-Affiliated Small Employer
Assume now that one out of the 10 employers is a religiously-affiliated small employer. This employer alone doesn’t offer contraceptive coverage; all others do. Also, presume that the administration is exactly correct when it says that the cost of contraceptive coverage is offset by foregone medical services. This means that the average cost of the religiously-affiliated small employers is the same as the average cost of the non-religiously affiliated employers.
Prior to healthcare reform, actuaries would have gone through the following exercise to build the pool. There are 9 employers with contraceptive coverage that average $200 pmpm. There is one employer without contraceptive coverage that also averages $200 pmpm. The “experience” (i.e., claim costs) of all 10 groups would get thrown into a single pot. There would be a total of $20,000 of claim costs. Further, there is no expected difference in the cost of the underlying benefits (i.e., the benefits with versus without contraceptives) so each plan would get charged $200 pmpm and everyone would go home.
The administration appears to be proposing a similar arrangement under reform. Suppose that the benefit plan with contraceptives has average costs that breakdown into $10 pmpm for contraceptives and $190 for everything else. The administration then proposes that an insurer in this market would give a contraceptive benefit to women employed by the religious employer, on a stand-alone basis. This means that, all else equal, the cost to insure the religious employer’s plan itself would drop to $190 pmpm (because of a reduced incidence for high-cost maternities, for example). The residual $10 pmpm is the cost to provide the stand-alone contraceptive coverage (assuming the cost of providing the coverage is exactly equal to the offsetting medical savings).
The small group block of business would then have a total cost of coverage of $19,900 per month, $100 less than before. This $100 reduction is caused by the fact that the 10 members of the religious plan now have separate stand-alone contraceptive coverage and are otherwise cheaper to insure. Under current rating practices, any reduction in projected claim costs would go to the benefit of the insured groups. In this case, there are two further possibilities. First, rate laws could restrict the price of the with-contraceptive-coverage benefit to be the same as the price of the without-contraceptive-coverage benefit. In this possibility, each small employer would pay $199 pmpm, but there are no funds leftover to pay for the stand-alone contraceptive coverage. Second, rate laws and rate review could allow for rates to differ between the with-contraceptive versus without-contraceptive benefits. In this latter case, the correct outcome would be that nine employers would pay $200 pmpm (for the benefits with contraceptive coverage) and one would pay $190 pmpm (for the benefits without contraceptive coverage). Again, however, there are no funds leftover to pay for the stand-alone coverage.
The Administration’s Proposal
The administration appears to be proposing that both of the above possibilities will be nullified by the proposed federal rule. Specifically, the Administration is claiming that insurers will be able to take the cost savings from the stand-alone contraceptive coverage ($100 total in this case) and use that offset the direct cost of that same coverage. There are two ways this can play out under rate review.
First, in all cases, the experience of the small group block must be adjusted to account for the costs of the stand-alone contraceptive coverage. This is currently not explicitly allowed under the Administration seperate rules that enforce the Public Health Services Act S. 2794 on rate review.
Second, the final rating algorithm must accomodate the additional cost of coverage. Here there are the same two possibilities as discussed in the previous section: either states do not or do allow for the rates to differ between plans that cover contraceptives and those that don’t.
If states don’t allow a distinction in rating between the plans with contraceptive coverage and those that don’t, the insurer’s total expected cost ($20,000 per month in our example) would be divided by the total members (100 in our example) to get to a single average charge ($200 pmpm in our example). In this case, the $100 total cost of contraceptive coverage is effectively borne solely by the religious employer itself, since they are now paying exactly the same rate as what the true cost rate would be if their underlying contract covered contraceptives.
The other possibility is that the state could allow a distinction in rating between the plans with contraceptive coverage and those that don’t. Here, the average expected cost difference is $10 pmpm. Therefore, the total cost ($20,000 per month in our example, broken down into $19,900 of base benefits and $100 in stand-alone contraceptive cost) must be split between two different benefits plans that have a cost differential of $10 pmpm. With some basic algebra, our example would boil down to a premium level of $201 pmpm for the cost of the non-religious employer plans, and $191 pmpm for the cost of the religious plans. There’s also an intuitive way to see this solution: $200 pmpm and $190 pmpm are the underlying costs of the two coverage policies; there is an additional charge of $1 pmpm that is assessed to the market for the cost of the stand-alone contraceptive coverage given to $100 people.
Although it is unclear which paradigm would hold, this second possibility, with the cost of the stand-alone contraceptive coverage being spread to the entire block, seems more consistent with the ANPRM quotation and current regulatory schemes, which do generally allow for the rates to differ by plan (in most states).
Although the specifics are not clear, the administration seems to be proposing that the direct cost of the contraceptive coverage should either be borne entirely by the religious organization itself (when the state has strict rate review with limited rate differentials) or the same cost should be spread to all small employers (when the state allows for rates to reflect the lack of contraceptive coverage). In either case, additional federal regulations will need to be modified to accommodate the Administration’s proposal, specifically instructions regarding Part I of the Preliminary Justification, as detailed in regulations governing the application of PHSA S. 2794.