Tag Archives: adverse selection

Results on the Obamacare experiment are mixed

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We’ve seen a spate of bad news about the Patient Protection and Affordable Care Act (otherwise known as Obamacare) recently.

Insurers are leaving the exchanges. For those insurers who remain on the exchanges, premiums are on the rise. In Arizona, monthly premiums for a 40-year-old non-smoker on a “silver” plan will increase from $207 to $507 (that’s a 145% increase) in 2017.

Ouch.

Not surprisingly, Republicans have seized on this.

So is the sky falling? Is Obamacare “hurting the families it was supposed to help” as John McCain charged?

Talking about unsubsidized premiums on the exchanges is misleading

Let’s take the extreme case in Arizona of a 145% increase. What opponents of Obamacare don’t account for are the tax credits that most people on the exchange receive to help them cover the cost of care. After all, that’s why people buy individual health insurance on the exchanges in the first place…because it’s the only way to qualify for these tax credits based on income.

So, after tax credits, that same customer (assuming he earns $30,000 per year) will pay $207 in 2017: exactly the same as in 2016.

Table 1: Monthly Silver Premiums

for a 40 Year Old Non-Smoker Making $30,000 / Year

2nd Lowest Cost Silver Before Tax Credit

2nd Lowest Cost Silver After Tax Credit
State
Major City
2016
2017
% Change
from 2016
2016
2017
% Change
from 2016
Arizona Phoenix $207 $507 145% $207 $207 0%
NOTES: In areas in which the two lowest-cost silver plans have the same premium, the next lowest-cost silver plan is used as the “second-lowest” silver plan. In some cases, a portion of the second lowest-cost silver plan is for non-essential health benefits so these values may differ from the benchmark used to determine subsidies.

SOURCE: Kaiser Family Foundation analysis of premium data from Healthcare.gov and insurer rate filings to state regulators. For more information see “Early Look at 2017 Premium Changes and Insurer Participation in the Affordable Care Act’s Health Insurance Marketplaces” Jul 2016.

So, sure, if you don’t qualify for tax credits, you would not want to buy this plan on the exchange. But, if you don’t qualify for tax credits,  there’s not much point in going on the exchanges to begin with.

How did this happen?

First of all, if you want to understand why the Patient Protection and Affordable Care Act was destined to raise unsubsidized health insurance premiums for healthy people, you can read my explanation here. In short, Obamacare asks healthy people to subsidize sick people so that they can access health care.

But the exchanges have been up and running since 2014. Why the big jump between 2016 and 2017?

Table 2: Total Number of Insurers by State, 2014 – 2017

Total Number of Issuers in the Marketplace
State
2014
2015
2016
2017
Arizona 8 11 8 2
SOURCE: Kaiser Family Foundation analysis of premium data from Healthcare.gov and insurer rate filings to state regulators. For more information see “Early Look at 2017 Premium Changes and Insurer Participation in the Affordable Care Act’s Health Insurance Marketplaces” Jul 2016.

NOTES: Insurers are grouped by parent company or group affiliation, which we obtained from HHS Medical Loss Ratio public use files and supplemented with additional research.

So, six of the eight insurers on the exchange for Arizona dropped out for 2017. In most industries, less competition means higher prices. So, on the surface, that would seem to explain it.

But health insurance is not most industries. The more insurers (payers) there are, the more leverage hospitals, physicians, and other health providers have to demand higher and higher reimbursement because, if one of their insurance contracts is terminated, they can fall back on their other contracts. Also, health insurance premiums are heavily regulated and must be approved by state departments of insurance in advance. In addition to the historic regulations in each state, Obamacare added a new rule that insurers must maintain medical loss ratios of at least 80 percent…meaning they must spend 80 percent of their premium income or more on paying claims.

The insurers who dropped out cited concerns about the health risks of the populations insured on the exchanges. In short, the beneficiaries were sicker as a group than the insurers had predicted, which is a phenomenon known as adverse selection. Too many young, healthy people are opting to go without insurance and simply pay the penalty, effectively turning the exchanges into a heavily subsidized high-risk pool…something even John McCain advocated when he campaigned for President in 2008.

Is private health insurance a good way to finance health care?

Despite all of the Republican protests, PPACA was designed to be a compromise between Democrats and Republicans to reform the health insurance system without eliminating private insurance. It was modeled after the health reform law that Mitt Romney signed when he was governor of Massachusetts (commonly known as RomneyCare). It’s debatable how well RomneyCare worked in Massachusetts and how good a model it was for federal policy.

I believe the only way to truly correct what is broken in U.S. health care is by burning down (metaphorically) the private health insurance system and moving to a single-payer system financed directly by the Treasury (that is, by taxes). Here’s why:

  • Only single payer can solve the adverse selection problem. Although there is a penalty for not carrying health insurance under the Affordable Care Act, many people — especially young and healthy people — have opted to remain uninsured and pay the penalty because it’s cheaper than buying even subsidized insurance on the exchanges. But, with a single-payer system, every American would be automatically enrolled, and risk would be spread broadly among them. It would not be possible for anyone to be uninsured.
  • Single payer reduces the cost of health care itself. Health insurance premiums are a function of the cost of health care. A system with multiple payers adds layers of administrative complexity for health providers just trying to get reimbursed for the care they provide. Whether it’s managing multiple insurance contracts, hiring collection agencies to chase down payments from patients, or writing off uncompensated care, these costs get passed on in the form of demands for ever higher reimbursement from private insurers with the threat that they will go out of network if their demands are not met. In my hometown of Indianapolis, our largest insurer (and my former employer) Anthem Blue Cross and Blue Shield initially offered health plans on the exchange with “narrow networks,” to reduce costs but later backed off when subscribers were unhappy. With a single-payer system, no provider would dare go out of network because there would be no other source of income to fall back on. That’s the power of a monopsony to reduce costs. It would also eliminate the uncompensated care problem because everyone would be covered.
  • Single payer covers everyone, without exception. The goal of universal health coverage in the United States has been frustratingly elusive. The Affordable Care Act has reduced the uninsured rate from 16 percent to 8.6 percent, which is a tremendous achievement. But 8.6 percent still adds up to 27.3 million people, and that’s 27.3 million too many. Plus, many of the insurance plans offered today, including on the exchanges, have high deductibles and out-of-pocket limits, putting beneficiaries at great financial risk even though they are technically “insured.”

What else can be done?

With that said, a single-payer system doesn’t seem politically feasible, and repealing the Affordable Care Act like the GOP wants to do would put us right back where we started before 2010…including all of the serious problems that went with it. So, what can realistically be done to address the very real problems on the Obamacare exchanges?

  • Substantially increase the penalty for going without insurance. It wouldn’t be popular, but changing the financial calculus could bring more healthy people into the risk pool, which would in turn reduce insurance premiums by spreading risk more broadly. If the penalty were higher than the cost of insurance (or at least not dramatically lower), there would be little to no incentive for remaining uninsured. The higher the penalty, the lower the premiums.
  • Crack down on special enrollments. The exchanges offer special enrollment periods — intended to enable people who have had life changes like a job loss or a change in marital status — to enroll outside of the annual open enrollment period. Insurers have suggested that people have been abusing these special enrollment periods…waiting until they get sick to buy health insurance off cycle instead of enrolling during the open enrollment period.
  • Sweeten the deal for young people. To get more young people (who tend to be healthy) into the pool, they need to be enticed. Perhaps an extra tax credit for people under 30 could change the equation, at least for some. Alternatively, changing the 3:1 age banding requirement (meaning that the oldest person in the pool can only be charged three times as much as the youngest person in the pool) to something more like 5:1 could encourage more young people to enroll since their premiums would be lower.
  • Reduce the cost of care. Despite the spike in premiums on the exchanges in some states, the Affordable Care Act is working to slow the growth of total health care spending…actually exceeding expectations. If we can mitigate the adverse selection problem by getting more young, healthy adults into the risk pool, premiums will follow suit.obamacare-total-spending

 

 

The adverse selection death spiral

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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

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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.