Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Medical costs dropped significantly in March and April 2020 and remained below historical levels in May 2020 due to deferred or forgone care in response to COVID-19 (see Figure 1). Using data from Milliman’s Health Trend Guidelines (HTGs), we can begin to quantify COVID-19’s impact on the industry. At this time we have published data through May 2020, with updated data through June 2020 expected to be released at the end of November. Medical (nonpharmaceutical) costs fell by about 14% in March 2020, and by about 41% in April 2020, relative to March 2019 and April 2019, respectively. In May 2020 medical costs rebounded somewhat, at 23% below May 2019 levels. Milliman has previously discussed the potential impact of deferred and forgone care on total spending.1 We can now see the actual effects on the commercially insured population.
In March 2020, as COVID-19 cases were beginning to increase in certain areas of the United States, we suspected that the impact of the pandemic would be two-sided—an increase in COVID-19-related diagnostic and treatment costs and a decrease in non-COVID-19 medical costs due to deferred and forgone care.
To estimate cost increases, actuaries made a series of assumptions about the number and cost of diagnostic tests and about the severity distribution of positive COVID-19 cases, including what portion of positive cases would require an inpatient hospital stay, and whether the number of hospital stays would be limited by local hospital and respirator capacity.
Actuaries also had to make assumptions to estimate the impact of deferred and forgone care, for which there was very little historical data and/or modern precedents in the United States. One anecdote gave some indication. In 2014, when it became publicly known that a Dallas hospital was treating a patient with Ebola, a large number of people canceled outpatient visits and opted for other area emergency rooms. The hospital was “a ghost town.”2 Actuaries knew that the impact of deferred care, including utilizing telemedicine instead of in-person visits, would vary by type of service and would most likely have a larger effect on outpatient and professional services than inpatient or prescription drug costs.
With the HTGs now reflecting claims experience through May 2020, we can begin to see the actual industry-wide impact of COVID-19.
As mentioned above, medical (nonpharmaceutical) costs fell by about 14% in March 2020, by about 41% in April 2020, and by about 23% in May 2020, relative to the same months in 2019. The timing of quarantines and “lockdowns” varied by geographic area, but generally began around mid-March. COVID-19 was declared a national emergency on March 13, 2020, and on March 18, 2020, the Centers for Medicare and Medicaid Services (CMS) issued guidance that all elective surgeries and nonessential medical, surgical, and dental procedures be delayed. 3,4 So the 14% reduction is primarily due to a decrease in utilization in the latter half of the month. Of note, due to the mix of weekdays between March 2019 and March 2020, and all else being held equal, we would have expected medical costs to increase by several percentage points—March 2020 having five high-utilization Mondays and Tuesdays compared to four Mondays and Tuesdays in March 2019.
By April 2020, most of the country had either voluntary or mandatory stay-at-home orders, and the effect was a significant decrease in medical spending, including a 52% reduction in outpatient facility allowed claims and a 46% reduction in professional services allowed claims relative to April 2019. Inpatient facility allowed claims dropped by a more modest, but still significant, 28%.
On April 19, 2020, CMS issued guidance for reopening facilities to provide nonemergency non-COVID-19 care.5 In May 2020, medical spending began to rebound but remained below historical levels, with a reduction relative to May 2019 of 27% for outpatient facility, 28% for professional services, and 17% for inpatient facility.
The decreases in allowed medical costs were not felt evenly across the country. For ASO business in April 2020, the Northeast and Midwest U.S. Census regions saw the steepest declines of 45% and 43%, respectively, and the South and West regions saw slightly more modest decreases of 38% and 37%, respectively, relative to April 2019 (see Figure 2).
This regional pattern continued in May 2020, with drops in the Northeast and Midwest regions of 33% and 25%, respectively, relative to May 2019. Medical costs dropped 17% in the South region relative to May 2019, and the West region was down by 22%. Other lines of group business saw similar regional variation during this period.
While nonpharmaceutical costs began to drop sharply in March 2020, prescription drug costs saw a temporary increase. This appears largely due to insurers allowing accelerated refills and relaxing quantity limits and prior authorization rules.6 Costs that would have been incurred later in the year were shifted to earlier months. Small group and individual lines of business saw the highest increases, at 19% and 27%, respectively, relative to March 2019 (see Figure 3). ASO and large group trends increased by 16% over the same time period. These trends returned to normal or slightly below normal levels in April 2020 and dropped further in May 2020, but are expected to somewhat normalize over the next several months.
Considerable uncertainty remains regarding claims runout, and all values discussed above are estimates based on completion factors that may not be representative of the COVID-19 era, so we look forward to updating these estimates as we see further runout.
Utilization levels in the third quarter of 2020 appear to be moving back toward pre-COVID-19 levels, but the return curve will vary by service type and geographic area. The very low second-quarter utilization will likely lead to suppressed 12-month trends. Organizations will want to consider this when making assumptions about trends for 2021. We will continue to monitor the developments of both the increased direct costs due to COVID-19 as well as the effect of deferred and forgone care.
The Milliman Health Trend Guidelines are a series of indices providing data on the cost, utilization, and unit costs of healthcare services—both in total and broken down separately for professional services, inpatient and outpatient services, and brand and generic prescription pharmaceuticals. The information used to calculate the indices is provided by leading health insurance plans and data firms, covering approximately 60 million covered individuals in the United States, representing about 40% of the total commercially enrolled private fee-for-service market. The costs covered by the HTGs are based on the allowed amounts accepted by each healthcare provider—doctor, hospital, outpatient facility, or pharmacy. The indices are calculated for large and small fully insured employer group plans, individual plans, and administrative services only (ASO) employer group plans. Separate indices are available for many geographic areas—regions, states, and metropolitan areas—that all experienced different effects at different times during the pandemic.
1Rogers, H., Mills, C., & Kramer, M.J. (April 2020). Estimating the Impact of COVID-19 on Healthcare Costs in 2020. Milliman White Paper. Retrieved November 1, 2020, from https://www.milliman.com/-/media/milliman/pdfs/articles/estimating-the-financial-impact-covid19.ashx.
2Lupkin, S. (October 18, 2014). Ebola scare turns Dallas hospital into a "ghost town." ABC News. Retrieved October 18, 2020, from https://abcnews.go.com/Health/ebola-scare-turns-dallas-hospital-ghost-town/story?id=26276610.
3CMS (March 18, 2020). CMS releases recommendations on adult elective surgeries, nonessential medical, surgical, and dental procedures during COVID-19 response. Press release. Retrieved October 18, 2020, from https://www.cms.gov/newsroom/press-releases/cms-releases-recommendations-adult-elective-surgeries-non-essential-medical-surgical-and-dental.
4CMS (April 7, 2020). CMS Adult Elective Surgery and Procedures Recommendations. Retrieved October 18, 2020, from https://www.cms.gov/files/document/covid-elective-surgery-recommendations.pdf (note: dated April 7, 2020, but initially released March 18, 2020).
5CMS (April 19, 2020). Opening Up America Again. Retrieved October 18, 2020, from https://www.cms.gov/files/document/covid-flexibility-reopen-essential-non-covid-services.pdf.
6AHIP (last updated October 30, 2020). Health Insurance Providers Respond to Coronavirus (COVID-19). Blog. Retrieved November 1, 2020, from https://www.ahip.org/health-insurance-providers-respond-to-coronavirus-covid-19/.