The adverse selection death spiral

Earlier I wrote about how the Obamacare exchanges have failed to attract many young, healthy people — and how the early technical glitches have made the problem worse.

Of course, the older and sicker people who really needed health insurance coverage would have enrolled by hook or by crook — but in order to make all of this work economically, we need as many young, healthy adults as possible in order to prevent the adverse selection death spiral from making the exchanges unworkable.

In order to explain the problem of adverse selection in health insurance, it may be useful to use a different, simpler kind of insurance: homeowner’s insurance.

Suppose you haven’t had homeowner’s insurance for a number of years. Then all of a sudden your house catches on fire, and you have $100,000 in damage. If you walk into an insurance agent’s office the day after the fire and try to buy a policy that will pay for the repairs to your property after they have already occurred the agent will probably have a good laugh and explain why the insurance company would never, ever want to do that.

If there were a law, however, that said homeowner’s insurance companies have to accept all new applications, regardless of the condition of the home at the time of the application, restore the home to its original condition and charge these people the same premiums as everyone else, what do you suppose people might do?

Well, first of all, people whose homes were in good condition would naturally drop their insurance coverage since there would be no incentive whatsoever to keep paying premiums. If the insurer were required by law to accept any application, then people would wait until their houses caught on fire and then apply right after calling the fire department. Why not? And, of course, in order for the homeowner’s insurance company to stay afloat, the premiums would go up — dramatically.

Even if this were somehow workable, which it isn’t, if the fire damage were too extensive, the homeowner’s insurance company could declare the house a total loss and write the policyholder a check to buy a new house.

We sort of inherently understand and accept this in homeowner’s insurance because our home (or our car, boat, motorcycle, etc.) is a piece of property that has a dollar value on it and can be replaced. Plus, a fire at your home is largely an unpredictable event — the kind of event where an insurance market can function well. (Of course, there are some cases where people try to turn unpredictable events like fires into predictable events by deliberately causing them in order to cash in on a claim payout, but this can land them in prison for insurance fraud.)

Pre-existing conditions

But now let’s adapt that analogy back to health insurance. (Disclaimer: I’ve said for a long time that insurance is a really inappropriate paradigm for financing health care…but it’s the one we have in the United States.)

In health care, there are certainly unpredictable events like an accidental injury from playing basketball, but there are also a lot of predictable events. And these are the ones that can really add up like the house fire. If you’re recently diagnosed with cancer, you know in advance that you’re going to need a lot of expensive treatment in the near future. And if you’ve gone without insurance for a while, you might suddenly start to rethink that decision.

But for the insurance company, they don’t want anything to do with you at that point just like the homeowner’s insurance company doesn’t want anything to do with you after you’ve had a massive fire that needs to be repaired. So, just like the homeowner’s insurance agent denying the applicant whose house caught fire, the health insurer would deny that application on the basis of pre-existing conditions.

I wrote earlier that we understand and accept this in terms of homeowner’s insurance, but we feel quite differently when it comes to our health. Obviously for the person with cancer, financing their treatment could be a matter of life and death — and there’s no way to declare a person to be a total loss and just cash out their bodies. (At least not yet.)

On the surface, it may seem like the health insurer is just being greedy by denying this person’s application, but in reality the health insurer is trying to keep its premium rates down for all of the healthy people it has in the pool. If health insurers no longer had this option, then you would see the same kind of dramatic premium increases that you would see if homeowner’s insurance companies had to accept everyone who applied, even if their house had burned.

Finding a counterweight

And yet, we still don’t accept this from an ethical point of view. I know I don’t.

So if we require health insurers to accept everyone at the same premium rate regardless of health status — even someone just diagnosed with cancer — then we need a counterweight to make sure people don’t game the system and buy insurance even when they don’t need it. Along with the requirements for guaranteed issue (no denials for pre-existing conditions) and community rating (no rate increases based on pre-existing conditions), the Affordable Care Act has three counterweights.

First is the individual mandate. This is the part of the law that everybody hates because it’s basically the part of the law where we pay the price for all of the things we want — there is no free lunch. The second, and related counterweight, is an open enrollment deadline — the deadline for this year to avoid the tax penalty is March 31. Finally, there is 3:1 age banding that allows insurers to charge older people up to three times as much for premiums as younger people. (Insurers might prefer something closer to 10:1 age banding, but 3:1 is a lot less of a market distortion than no age banding at all.)

Check HealthCare.gov or your state exchange (where applicable) for yourself. If you compare the price of an unsubsidized health insurance policy with the tax penalty — especially this year — you will see that the penalty is much cheaper. Of course the price of a health insurance policy offered on the exchanges could be reduced dramatically if you qualify for income-based subsidies, but even then the penalty amount for not buying insurance is still relatively small. So many young, healthy people will opt to take their chances and pay the penalty instead of purchasing a policy…if they even realize that they have to make this decision.

If enrollment in the exchanges continues to skew older and sicker, then next year the premiums will inevitably rise higher…maybe much higher whereas the penalties are prescribed in the law without accounting for these actuarial changes. This may even accelerate the death spiral and render the law totally unworkable.

How this all plays out still remains to be seen, but if you’re a young, healthy adult without insurance, I’d like to ask you to at least shop around and see what you qualify for. You may be pleasantly surprised.

Obamacare exchanges: The number of people who enroll is less important than who enrolls

An underwhelming five million Americans have signed up for coverage in the new health insurance exchanges so far. That’s far short of the Obama administration’s goal of seven million enrollments by the March 31 deadline. It’s human nature to wait until the last possible minute, so there’s a good chance that the number will rise significantly in the remaining 10 days. In fact, the Congressional Budget Office projects another one million enrollments before the deadline.

But six million is still one million short of the goal. That gap is disappointing, and Republicans are almost certain to pounce on it as another failure of the Affordable Care Act.

When the exchanges first opened on October 1, 2013, the federal exchange site (www.healthcare.gov) was beseeched with glitches that made it nearly impossible for anyone to sign up. To make matters worse, these hassles disproportionately dissuaded younger, healthier people from enrolling. After all, younger adults tend to be more technically savvy as a group than older adults and have less patience for more traditional forms of enrollment like paper or telephone.

New HealthCare.gov ads smartly target young, athletic types who feel invincible

For all of the SNAFUs with the website and all of the delayed mandates, one thing that the Department of Health and Human Services has gotten right is the advertising.

New HealthCare.gov ads include retired basketball stars Earvin “Magic” Johnson and Alonzo Mourning as spokespeople to encourage young, healthy people to sign up for health coverage in the marketplace.

With new rules prohibiting insurers from discriminating on the basis of pre-existing conditions, it’s easy to get older, sicker people to sign up for health coverage because they obviously need it. But it’s harder to get young, invincible people to see the value in purchasing health insurance since they don’t use much health care. But it’s also critically important to get them into the risk pool because, without them, there is a high risk of adverse selection in the risk pools, driving up insurance premiums for everyone. That’s why the much-maligned individual mandate is so important and also entirely inadequate.

While a bunch of young men on a basketball court probably can’t relate to cancer treatment, they can often relate to sports injuries. So it’s obvious why athletes are compelling spokespeople for this cause.

But why Johnson and Mourning instead of current players who are more relevant? Without going into their stories explicitly, many basketball fans understand that these men became seriously ill during their NBA careers. Johnson famously announced his HIV diagnosis in 1991, and Mourning’s career was also cut short by a rare kidney disease that required a transplant and ended his career. Both men had an air of invincibility but were faced with life-and-death circumstances. Both are survivors, and both required expensive medical treatments that most young people don’t think about.

So these ads are a stroke of genius by HHS. Will they be enough to close the gap of young, healthy people? Probably not. But they could definitely move the needle.

Affordable Care Act is a “burning platform” for change

If you hear the phrase “burning platform,” you probably think it has a negative connotation. Obviously it’s not particularly pleasant or comforting to envision the ground on which you’re standing catching on fire.

But in the case of health care, I think having a burning platform is a very good thing.

I first heard the phrase “burning platform” from Robert Matt, Vice President at Hancock Regional Hospital, who was teaching a graduate course I took called Lean in Healthcare. I bluntly asked him why LEAN principles which had proven to be so transformative in other industries and had even showed value in a few limited cases in health care had not really become the norm in the health industry. His response was that there had never been a “burning platform” that created a sense of urgency for the industry to change. The U.S. health industry was too comfortable (dare I say fat and happy) to change its practices.

But as plenty of research has demonstrated, things are not fine in the U.S. health care industry. We pay far too much and do not receive the requisite value in return for what we pay in terms of safety and outcomes when compared with the health systems of other nations.

Fortunately, it looks like the industry is beginning to notice some warmth under its feet as a result of the Patient Protection and Affordable Care Act, commonly known as Obamacare. In short, the decline in per-patient reimbursement expected as a result of the law is forcing hospitals and physicians to take more drastic steps toward improving efficiency, quality and safety. Indiana University Health, the largest health system in Indiana, is aiming for savings of more than $1 billion per year.

Of course, some of those savings will be the result of layoffs, and I certainly can relate to losing a job through no fault of my own. The health industry is unusually labor-intensive compared to many other industries, and so it’s impossible to cut costs significantly without cutting people.

I’m afraid that these pink slips will create skepticism toward implementing lean principles in other places, but this skepticism is unwarranted. Had it not been for the lean innovations made at IU Health to improve processes, even more people would have lost their jobs in order to reach the $1 billion goal. Lean is not about cutting people, it’s about helping people to do their jobs more efficiently and effectively. It’s about problem solving, not just (or even primarily) cost-cutting.

But think about it this way — when the industry saves, we as patients save. We save on our medical bills and even on our health insurance premiums because health insurance premiums are a function of the cost of claims. Plus, I have a feeling a lot of those people who received pink slips will land on their feet, just doing something different within the industry to accommodate the influx of new patients.

Nobody every said progress would be easy or pleasant all the time, but that doesn’t mean we shouldn’t do it. Sometimes progress forces us to light a few fires and burn a few platforms.

 

Public health is health care too

When people normally think of health policy, the first thing that comes to mind is health insurance reform like the Affordable Care Act.

But health status isn’t just about access to insurance, doctors, drugs and hospitals, it’s also about the environment where we all live. That means factoring in the health effects of air quality, water quality, urban planning, transportation (is it safe to walk or bicycle instead of driving?), public safety, nutrition and sanitation.

Now that’s holistic medicine.

Obamacare is already reducing the number of uninsured Americans

For all the talk about people “losing their health care” (which really just meant their plans were cancelled and they would have to switch to a different plan with richer benefits) and all the technical difficulties on the exchanges, the Patient Protection and Affordable Care Act (aka Obamacare) is already working to reduce the uninsured rate to its lowest level since 2008, according to a report by the Associated Press. This should surprise no one since that was the whole point of the law. The Affordable Care Act is far from perfect, but it does represent real progress.