After two years of cut-rate pricing, the southwestern Pennsylvania commercial health insurance market is due for a bit of a correction, according to local health care analysts and brokers.
Since 2011, small and mid-sized businesses have reported smaller-than-usual increases, and even cuts, in their health premiums costs.
In the short run, insurers offering artificially low premium rates to grab market share, sometimes known as "buying business," is a good deal for patients and for the companies that provide health care plans for employees by purchasing group polices.
But in the long run, prices ought to reflect the cost of care.
The long run has arrived, says Jim McTiernan, benefits analyst with Pittsburgh-based Triad USA, a division of Arthur J. Gallagher & Co.
"That appetite to take [pricing] risks is changing quickly," he said. "Sooner or later, the financial people take over" and realize the rates being quoted by the sales teams are unsustainable.
Why were Pittsburgh's health insurers -- primarily, Highmark Inc. and UPMC Health Plan -- offering such competitive renewal rates for old customers, and jump-ship rates for new ones?
For one, the two local health giants continue to jockey for customers in advance of their possible breakup, which could come as soon as the end of 2014 -- meaning it's possible that Highmark customers would no longer have access to most UPMC facilities starting in 2015. The company with the biggest stable of insured customers at that point will be at a competitive advantage when it comes to steering those customers toward its affiliated hospitals.
Two: Less-than-typical health care utilization coming out of the recession gave a tailwind to health insurers, allowing them more flexibility on discounts.
And three: The insurers were responding to a newly competitive insurance landscape, driven by the UPMC (the hospital network, not the insurance plan) decision to give national insurers new and wider access into the local hospital and physician market. By giving Aetna, Cigna, United HealthCare and HealthAmerica (the last of which was purchased by Aetna last year) customers access to all of UPMC's facilities, starting in 2010, those health carriers were able to market their plans here more aggressively.
Despite the new entrants, there hasn't been a great deal of shifting of major employer-based accounts, another reason some of the cut-rate pricing has eased.
"They have made a little headway in the market," said Lorin M. Lacy, principal for the health and productivity group at Buck Consultants, Downtown. But "by far, most of our clients have said we're going to wait and see what happens" between Highmark and UPMC.
Highmark says its enrollment has held steady over the last two years. While UPMC Health Plan says it has grown to 440,000 commercial members, the other players have reported adding just a few thousand new commercial members each since 2010.
That's because Highmark and UPMC Health Plan spent 2011 and 2012 ferociously bidding down the prices for small and mid-sized commercial clients, Mr. McTiernan said.
For example, Aetna might make a pitch to Company A to handle its health insurance, but "at the end of the day, Highmark would just cut rates and give them a better opportunity."
As a result, Aetna and the rest sat on the sidelines and picked their spots, he said, occasionally winning business from a large, self-insured company and waiting for pricing sanity to return.
It is returning now, in part, because prices can remain artificially low for only so long before eating away at income margins.
For example, in UPMC's latest quarterly report, the company revealed that its health plan's "medical loss ratio" -- the percentage of premium revenue that goes toward paying claims -- had grown from 89.4 percent in March 2011 to 91.5 percent in December 2012.
That means it's clearing less from its insurance products, and spending more on claims.
Of the two companies, UPMC Health Plan and Highmark, it's UPMC Health Plan that remains the more aggressive on pricing, said Rick Galardini of JRG Advisors in the North Hills, an employee benefits company that specializes in smaller accounts. (Most of the premium pricing flexibility occurs among smaller businesses, since most large companies are "self-insured," meaning they essentially set aside money to pay their own employee claims.)
"It seems like Highmark is cleaning up their books. We're seeing a lot of 69 percent rate increases. ... If it's a high-risk or an older-age group," Highmark is pricing those companies accordingly, or gently trying to shove them off-book, he said.
On the other hand, Mr. Galardini said, "UPMC Health Plan appears to still be doing crazy things." One small business he was familiar with reported a 70 percent price difference between the UPMC Health Plan premium quote and the one from Highmark.
"UPMC is still loading up customers, at any cost," he said.
Pricing caution, to whatever degree it now exists here, is also being driven by federal health care reform. Underwriting rules are changing, pricing rules are changing, and insurers are trying to get a handle on them.
"Overall, my sense is that anticipation for sweeping changes under health care reform for 2014 is trumping the battle for market share that we've witnessed during the past couple of years," said Dave Straight, founder and CEO of the Benefits Network, a local benefits broker.
"The carriers are about to face serious challenges in accurately predicting risk in the small-group and individual market segments next year," he said. "I don't expect that they will have much of an appetite for underwriting losses heading into unknown territory."
As a result, "My impression is that the carriers are taking a more conservative approach to rating of late," Mr. Straight said.
The Pittsburgh small- and mid-sized-business market will learn more about health insurance pricing going forward when the insurers here start offering quotes for the July 1 renewal period. July 1 and Jan. 1 are the two most common start dates for new and renewed policies.
Bill Toland: email@example.com or 412-263-2625.