The pandemic-induced economic downturn may also mean small employers—especially those with healthy workers—are less likely to offer coverage.(Photo: Shutterstock)

When it comes to premium rate setting, it's a brave new (pandemic) world.

Each year, the American Academy of Actuaries Individual and Small Group Markets Committee puts out a brief outlining the major factors driving premium changes for the next plan year.

But the calculus is tricky this year.

On one hand, COVID-19 is resulting in high-cost hospitalizations. A Seattle man, for example, survived the virus but his two-month hospital stay cost $1.1 million.

Related: Revised estimate pegs COVID-19 costs at $30B to $547B

At the same time, there has been reduced demand for other medical services, such as office visits and non-emergency hospital services. In the first half of 2020, this has more than offset direct spending to diagnose and treat COVID.

"The COVID-19 pandemic has introduced significant uncertainty with respect to projecting 2021 claims levels," the brief states. "The typical rating factors still apply, but issues surrounding the COVID-19 pandemic are a major consideration for rate setting and will impact both the individual and small group markets."

One key variable: If subsequent waves of COVID-19 infections hit hard, this could further increase care deferrals. But it would also bump up direct COVID-19 related spending. The brief cites estimates by the USC-Brookings Schaeffer Initiative for Health Policy that a COVID-19 infection rate of 5% might increase claims in the commercial insurance markets by about 1%; while a COVID-19 infection rate of 60% could increase commercial claims by 4% to 11%.

Rate changes in 2021 are likely to be driven by factors including shifts in insurance enrollment. In the individual market, there's likely to be an influx of people who lost their employer-sponsored coverage. But others may exit due to unaffordability, or may become eligible for Medicaid.

Even if the net enrollment change is small, the brief cautions, it could still trigger changes in the underlying morbidity level. "[W]hen individuals lose coverage, they must decide whether to purchase coverage, and less-healthy people are generally thought to be more likely to purchase coverage than healthy individuals."

The pandemic-induced economic downturn may also mean small employers—especially those with healthy workers—are less likely to offer coverage.

Still, given the health-related nature of this particular crisis adverse selection in both the individual and small group markets might be reduced, with more value now placed on retaining health coverage.

A host of other factors will also drive rates, including COVID-19 testing and treatment costs, the availability of new treatments and vaccines, increases in mental health and substance abuse treatment needs, changes to telehealth utilization and costs, and changes to provider reimbursement rates.