July 30, 2015

Comments on Humana Rate Filing HIOS Issue ID #30613

I. Introduction
Humana proposes to raise its rates by 14.8% for its exchange plans and 13.0% for its offexchange plans. The Humana rate filing is the only rate filing that is unredacted. While we do
not agree with every judgment Humana has made and have other specific criticisms of the filing,
the Humana filing discloses far more than any other filing, That enables both the regulator and
interested third parties to understand the bases for Humanas assumptions regarding the various
elements of the filing and to make their own judgment as to the reasonableness of those
assumptions.
II. Morbidity
Humana does a good job of describing the methodology it uses to project the morbidity
of its projected 2016 enrollees. And importantly, unlike all the other carriers except BCKC, it
expressly recognizes that 2016 enrollees are likely to have lower claims costs than 2014
enrollees. However, it uses an unnecessarily complicated methodology to determine 2016
morbidity. That complexity appears to have produced an increase in morbidity for 2016
enrollees as compared to 2014 enrollees notwithstanding Humanas statement that is not the
case.
Initially, Humana acknowledges that 2016 enrollees will be healthier than 2014 enrollees
and specifically acknowledges the effect of the increasing tax penalty. In the section of the rate
filing discussing morbidity, it states that initial entrants will be driven by greater medical need
and be less healthy than those who enter in subsequent years in response to the increasing tax

penalty. (5) It expands on this point in the section discussing risk adjustment, when it states:
(14)
Pre-2014 membership is generally healthier, having previously gone through
underwriting, and has lower associated risk scores. Post-2014 issued membership will be
less healthy and will have higher associated risk scores, but according to an assumed
general pattern by issue year: those issued earlier on will have higher average risk scores
than those issued later. This is due to the expectation that those seeking coverage initially
are primarily driven by health need, whereas increased familiarity with the ACA market
and higher tax penalties in subsequent years will eventually push healthier members into
the market.
Nevertheless, Humana concludes that its 2016 morbidity will be 16.9% worse than its 2014
morbidity. It reaches this conclusion by starting from a baseline not of its 2014 individual
experience but rather from what it projects the ultimate experience of its individual business
under the ACAs guarantee issue and community rating rules will be. In the long run, it reasons,
that experience will approximate its current small group experience, which is not individually
underwritten. Humana calculates that the morbidity of that business is 46% worse than the
morbidity of its pre-2014, underwritten individual business. It therefore assumes that the
ultimate morbidity of its ACA-compliant individual business will also be about 46% worse than
that of its pre-2014 underwritten individual business.
Humana then applies various adjustments to this assumed 46% increase in morbidity for
its ultimate ACA-compliant business (compared to its pre-2014 individual business) to project
the morbidity of its 2016 business. Some of those adjustments are increases, and some are
decreases. First, Humana adds another 5% to that 46% because it says its individual experience
will be a little worse than its small group experience, since people in the individual market buy
health insurance based on need to a greater extent than those in the group market. That
reasoning makes sense, but Humana does not explain how it came to conclude that 5% was the
correct adjustment.

Second, Humana reduces its assumed morbidity by 2% because its small group business
is less healthy than the average small group business. It says it has concluded that based on data
from Wakely Consulting and its own analysis.. But it does not disclose that data or describe that
analysis.
Third, Humana reduces its assumed morbidity by 4.9% more because it acknowledges, as
explained above, that those entering in 2016 will be healthier than those entering in 2014. It
does not disclose the data on which that 4.9% estimate is based, however, nor does it describe its
analysis.
Fourth, Humana increases its assumed morbidity by 4.3% based on its assumptions that
its plans for 2016 are more generous than the market average and that less healthy people will
choose more generous plans, thus causing Humana to pay out more in claims than average. It
does not disclose the data underlying its 4.3% estimate.
Fifth, Humana, to its credit, and unlike the other carriers, acknowledges that some
Missourians who buy in 2016 will have previously been in underwritten plans that did not
comply with the ACA. Humana estimates that these people will account for 2.5% of its 2016
enrollees. Disturbingly, however, Humana says that this 2.5% of its 2016 business -- which is
necessarily overwhelmingly healthy because these plans were sold only to healthy people -- will
have no effect on the overall morbidity of its 2016 business. While any effect of this healthy
2.5% on Humanas individual business as a whole must be small, it should have some effect
because it will have the same approximate morbidity as Humanas pre-2014, underwritten
individual business. Assuming no effect seems inconsistent with Humanas assumption that its
ACA-compliant business will be 46% worse than its non-ACA-compliant business.
Sixth, Humana says it has estimated its 2014 experience to be 28.4% worse than its preACA experience. It divide[s] that amount out of the morbidity estimate for 2016, outlined
above, to arrive at a final morbidity adjustment of 11.1% that gets applied to 2014 allowed
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claims. (5) That seems to be a convoluted way of determining the differential between 2014
morbidity and 2016 morbidity, and it produces a counter-intuitive result. Although Humana
acknowledges that the less healthy enrolled first -- i.e., in 2014 -- it enables Humana to project
that the morbidity of its 2016 business will be worse than that of its 2014 enrollees. Using
Humanas 2014 ACA-compliant experience as a base, and then adjusting it forward based on
assumptions about its 2016 business, would seem to be a simpler, more reasonable and more
internally consistent methodology than using its small-group-derived, estimated ultimate ACAcompliant individual market business as a base and then working backward to estimate 2016
morbidity.
Moreover, even after calculating, based on the above steps, that the morbidity of its 2016
business will be 11.1% higher than that of its 2014 business, Humana further increases its
assumed increase in morbidity by 5.4%. It bases that on its estimate that its 2014 plans were less
generous than the market average and that its 2016 plans will be more generous than average,
and thus will attract a less healthy group of risks. It does not disclose the data based on which it
arrived at the 5.4%, however, nor does it explain why it is assuming that its plans were leaner
than average in 2014 but will be more generous than average in 2016. (That is certainly
possible, but Humana does not provide a description of its changes in its plans.) In addition, it
looks as if this step and Step 4 -- Humanas increasing its assumed morbidity by 4.3% based on
its assumption that its 2016 plans are more generous than average -- could involve doublecounting.
III. Changes in benefits
On top of all the above, Humana says that it must increase the rate by 5.3% more to take
account of changes in benefits.. But essentially all -- 4.8% -- of what it calls changes in benefits
is not really a change in benefits but rather what it calls induced utilization -- the additional
utilization caused by people buying health plans with more generous benefits. Humana says that
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It will see induced utilization because the people buying its plans will be less healthy than in the
past. However, it does not show the data on which its 4.8% assumed increase for induced
utilization is based. It is also possible that some double counting is involved when this increase
is added to the immediately preceding 5.4% increase, which as just described could itself involve
double counting.
IV. Changes in demographics
Humana includes an additional 6.3% increase based on changes in demographics. Of that
6.3%, 3.9% is for age and gender. Presumably Humana assumes that its 2016 business will be
either older and more male, or heavily weighted toward women in their child-bearing years.
Humana does not disclose, however, either how it estimated how the age or gender of its
enrollees will change or the data it used to produce its 3.9% estimate.
Humana next states that the geographical distribution of its members will change,
resulting in a 2% increase. That assumption is troubling because if the area factors Humana uses
are justified, changes in distribution by territory should not affect the rate.
Finally, Humana includes a 0.2% increase for tobacco use. That is a very small amount,
but Humana does not appear to suggest that it will have more tobacco users in 2016 than in 2014,
and thus does not appear to support this extra 0.2%.
V. Network impact.
Humana says that its establishment of networks -- which presumably involve paying the
providers in those networks less in exchange for a guaranteed volume of patients -- results in a
reduction of 12.9%. Although Humana does not disclose the data on which it calculated that
reduction, a 12.9% reduction based on the establishment of networks is consistent with the
reductions included in other filings in other states.
VI. Seasonality

Humana increases the rate by 2.3% based on the theory that because coverage was
effective later in the year in 2014 than it will be in 2016 (due to the initial failure of the federal
exchange in 2014), we expect people to have more opportunity to schedule appointments and
surgeries and therefore incur more claims per person per month than is reflected in the
underlying experience. (8) Humana discloses no data justifying either that general principle or
the 2.3% increase it attributes to that principle. To be sure, someone who has coverage for only
ten months of the year will have more claims than someone with 12 months of coverage,
everything else being equal. But it is not clear that the person with ten months of coverage
should have fewer claims per month. To the contrary, waiting longer to get coverage -- as
people did during the first open enrollment period -- could increase the urgency they felt for
getting treatment as soon as they got coverage.
VII. Trend
Humanas explanation of trend is reasonable, and the annual trend factor it uses --6.4%-is in the same range used by many insurers. Although Blue Cross of Kansas City uses a much
lower trend factor --4.5%-- and the annual increase in national health expenditures has been
around 4% for the past six years, many carriers in other states use trend factors in the 6% range.
VIII. Risk adjustment and reinsurance
Humanas discussion of risk adjustment is extensive and well-explained. Its conclusion
that it will receive a $28.52 PMPM risk-adjustment payment, which produces a 8.5% decrease in
the rate, is reasonable.
Humanas discussion of the reinsurance program is more limited, and the 5.2% by which
it concludes that its reinsurance recoveries will reduce the increase is much less than the 10% to
15% impact CMS has calculated.1i That does not mean that it is incorrect, but it does mean that
the data on which Humana relies for its assumed 5.2% reduction should be carefully scrutinized.
IX. Medical Loss Ratio
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Humana assumes an MLR of 80%. That means that the rate increase Humana has filed
for is the highest it can possibly take and not need to refund money to its policyholders if all its
assumptions and estimates are accurate. It also means that if the assumptions and estimates on
which its proposed increase is based turn out to be too conservative, Humana will need to issue
refunds.

1
CCIIO, Establishment of Exchanges and Qualified Health Plans, Exchange Standards for Employers
(CMS-9989-FWP) and Standards Related to Reinsurance, Risk Corridors and Risk Adjustment (CMS9975-F), Regulatory Impact Analysis, March 2012, at 42.