Massachusetts Health Care Cost Trends: Premium Trends in Private Comprehensive Health Insurance

1. Massachusetts Health Care Cost Trends: Premium Trends in PrivateComprehensive Health Insurance Dianna K. Welch, F.S.A., M.A.A.A.,Oliver Wyman Actuarial Consulting, Inc.June 27, 2011

2. Premium Levels and Trends in PrivateHealth Plans: 2007-2009 Analysis covers: • Enrollee demographics in the Massachusetts commercial markets • Trends in premiums paid by employers and consumers for health insurance • Medical expenses and retention included in those premiums • Supplemented with results from 2010

3. Adjusted premiums increased 5 to 10%; actual premium increases were lower after benefit buy-down • From 2007 to 2009, private group health insurance premiums in MA increased roughly 5 to 10 percent annually, when adjusted for benefits. • This compares to CPI-U increases of 1.7 percent annually nationwide and 2.0 percent in the Northeast.

4. Significant small group buy-downs in 2009 Percent of Small Group Members by Actuarial Value • On average, the level of benefits covered by private group health insurance has declined and member cost-sharing has increased. • Among small groups, average benefits decreased 3.6 percent from 2007 to 2008 and 6.6 percent from 2008 to 2009.

5. Small group premiums were higher than mid-sizeand large group premiums • Smaller groups paid higher premiums from 2007 to 2009 than mid-size and large groups, when adjusted for demographics, geographic area, and benefits. • It is important to note that premium increases for specific employers may vary significantly from the average.

6. Small group premiums were higher than mid-sizeand large group premiums (continued) Decomposition of Premium PMPM Adjusted for All Rating Factors, 2009 • The higher small group premiums were due primarily to higher claims costs. • The portion of premium retained by the carrier for administrative expenses and contribution to surplus or profit was also higher for smaller size groups. • In 2007 and 2008, small groups paid 120% of what large groups did on a pmpm basis towards non-medical spending. In 2009, that figure rose to 141%.

7. Greater premium volatility for small groups; more members affected by large increases in 2009 Quoted Rate Increases by Group Size, 2009 Renewals

8. Medical loss ratios increased to 91% in 2009 • From 2007 to 2009, the medical loss ratio calculated across all group sizes increased from 88% to 91%. MLRs are greatest for individual business and generally lowest forsmall group business. • Contribution to surplus (for not-for-profit companies) or profit (for “for-profit” companies) accounted for roughly 25% of retention charges built into pricing in all insured market sectorsin April 2010.

9. Preliminary 2010 data show a decrease in MLR,in part due to slowdown in claims expenditures • Medical loss ratios across all market segments combined, as reportedin carrier financial statements, decreased from 90.5% in 2009 to89.4% in 2010. • The decrease in medical loss ratio from 2009 to 2010 appears to be the result of a slowing trend in medical expenditures, both locally and nationally. Claims expenditures do not take into account increasing member cost-sharing.

10. Many small groups received large increasesin 1st quarter 2010 Quoted Rate Increases by Group Size, First Quarter 2010 Renewals 9

11. For more information: www.mass.gov/dhcfp/costtrends