We recently ran a poll on the best course of action to reduce adverse selection if the PPACA individual mandate is struck down by the Supreme Court. The number one answer was “use limited enrollment windows to reduce the occurrence of people joining a plan only when they become sick.”
The PPACA already requires that state health insurance exchanges provide an initial open enrollment period as well as an annual open enrollment period. The idea suggested by the report from the Government Accountability Office (GAO) on potential ways to increase voluntary enrollment is that more restrictive enrollment periods might be useful in the absence of a mandate.
In the absence of a mandate, open enrollment periods could be enhanced beyond the annual periods provided for under the Patient Protection and Affordable Care Act, as amended (PPACA) by incorporating different open enrollment period frequencies and coupling them with various penalties for late enrollees who do not enroll when first eligible. Limiting access to coverage to only such periods is intended to reduce the likelihood that individuals would otherwise wait until they need health care to enroll.
Open enrollment periods could vary in their frequency. Generally, the less frequent they are, the less likely individuals will risk remaining uninsured until the next such period. While PPACA provides for annual periods, these could be extended to every 18 months, every 2 years, or less frequently—some suggesting as infrequent as every 5 years. Or the open enrollment period could be a one-time event in 2014 with subsequent special open enrollment periods only for individuals experiencing qualifying life events that change eligibility for coverage, such as giving birth or attaining adulthood, divorce, or changing jobs.
The report suggests that changing open enrollment frequency could be combined with financial penalties or restrictions on coverage for those who miss the window. Key concerns raised by the GAO include the following:
- Financial penalties might make coverage even more unaffordable for the low-income individuals the exchanges are designed to help
- Overly restrictive enrollment periods may run counter to the goal of increased coverage
- The additional inconvenience might influence the younger, healthier segments of the population to avoid enrolling
Interestingly, enrollment windows have been used to manage adverse selection related to the PPACA already. In 2010, Oregon implemented an enrollment window for child-only policies after two major insurers stopped carrying such policies in response to the PPACA’s elimination of preexisting conditions underwriting. Insurers were afraid that parents might wait to enroll until their children became ill.
Thanks to everyone who participated in our poll asking how best to manage adverse selection if the PPACA individual mandate is struck down. The top three answers were:
- “Use limited enrollment windows to reduce the occurrence of people joining a plan only when they become sick”: 28%
- “Enforce a penalty that escalates the longer people wait to buy coverage”: 23%
- “Sever the high-risk population into a separate pool to keep costs for the general population down”: 18%
In upcoming posts we’ll take a look at each of these options in a bit more detail.
While not one of the more immediate provisions in the healthcare reform law, the individual mandate is likely to be one of the most talked-about elements. As we indicated last week, the composition of any health risk pool has significant cost implications, and an effective individual mandate can help encourage better health risks to enter the pool. The individual mandate is intended, among other things, to prevent a selection spiral.
There is plenty of related press coverage this week, especially over the subject of whether the individual mandate will pass legal muster. The Internet is crowded with individual mandate-related headlines. Ezra Klein with the Washington Post has weighed in twice (here and here).
How will the public react to the individual mandate? While it has been relatively well received in Massachusetts, the reaction may vary from one location to another. An LA Times op-ed on Wednesday supporting the individual mandate drew some heat.
This is one story to keep an eye on.
What follows is excerpted from the recent healthcare reform briefing paper, “Adverse selection and the individual mandate”:
Proposals for individual mandates usually incorporate an incentive (a carrot) to purchase coverage and a penalty (a stick) for not purchasing coverage.
- The carrot is a subsidy, voucher, or other financial mechanism to help make insurance more affordable and put uninsured people of limited means in a position where the cost/benefit decision bears a more realistic relationship to their respective income levels. This would reduce the cost component of the cost/benefit decision described above, and thereby encourage more people to purchase health insurance.
- The stick is a financial penalty of some sort on individuals who fail to purchase coverage. This changes the cost/benefit decision in that it makes the alternative to purchasing health insurance more expensive and therefore less attractive financially.
The strength or weakness in any mandate lies in the level at which these incentives and penalties are set. For example, an insufficient subsidy for healthy but lower-income individuals, even if paired with a tax penalty, may not be enough of an incentive, especially if the tax penalty doesn’t create an imperative to purchase insurance.
Several of the reform bills in Congress share a common theme: A move away from the rating and underwriting techniques that are used to manage adverse selection, and a move toward an individual mandate where all people are required to obtain health insurance. A new paper by Thomas D. Snook and Ronald G. Harris focuses on these reforms, and how adverse selection will impact premiums rates in the post-reform world.
Cost, Mandates, Reform
One of the core concepts in healthcare reform is the effort to minimize adverse selection. An effective mandate is key to this effort.
In order to better understand adverse selection, it may be helpful to look beyond healthcare to other kinds of financial products with distinct selection issues. We were reminded of one such product—private unemployment insurance—over the weekend in the New York Times. Quoting from the article:
It turns out that the biggest problem with private unemployment insurance is something that industry insiders refer to as adverse selection. That is a fancy way of saying that the people who take out this sort of policy are the ones most likely to need it.
“The potential set of policyholders are selecting against the insurance company, because they know their situation better than an insurance company might,” said Michael Schmitz, a principal and consulting actuary for the Milwaukee office of the consulting firm Milliman.
As a result, there is not the sort of risk sharing that occurs when insurance is mandatory, as it generally is with auto insurance.
This dynamic is made more complicated when it comes to healthcare because, unlike auto insurance or private unemployment insurance, healthcare in America is not just insurance but also an employee benefit. An article in the Washington Times this weekend referred to this latter factor as “a baroque form of third-party prepayment.”
Another way of thinking about it is to look at utilization trends, which can be major drivers of healthcare costs. Which brings us back to a delicate question: How do you encourage a system where everyone has insurance coverage without creating a system that encourages overutilization?
America’s Health Insurance Plans (AHIP) issued another call for an individual mandate, citing a Milliman report by Leigh Wachenheim and Hans Leida looking at how guaranteed issue affected the cost of individual insurance in eight states. In short, if people are guaranteed to receive insurance when they apply but not expected to have coverage at all times, they are more likely to only enroll when they need care, which results in adverse selection.
Of course there’s yet another delicate balance on the topic of adverse selection. Quoting Bruce Pyenson from an interview on adverse selection:
We can also manage adverse selection by getting as close to universal coverage as possible. I think the smart money says that you are not going to have 100% coverage. There will always be issues where people, for one reason or another, do not get coverage. But making coverage as broad as possible will help prevent adverse selection.
The dead bear in the room: the cost problem. Part of the reason adverse selection is such an issue is that the cost of health benefits is too high and is getting worse. As costs grow, some families may succumb to the temptation to use money spent on insurance premiums for other purposes and go uninsured.
As is so often the case with health reform, no one change can occur in a vacuum.
Most of the attention is focused on the Senate Finance Committee in anticipation of its bill. But before figuring out how that as-yet-unseen bill can be reconciled with the bills already introduced by the Senate HELP Committee and House Tri-Committee, it may be useful to examine some* of the implications of the drafted legislation on large employers. New analysis by Milliman principals Lorraine Mayne and Robert Schmidt does just that, looking at the impact of a mandate, insurance reforms, and other provisions specific to employers.
Here is one of many quick analyses on the implications, this one looking at the individual mandate (emphasis in original).
Individual Responsibility. The AHCA and AAHCA both have provisions that would penalize individual taxpayers who do not participate in “qualifying coverage.” This provision would not appear to have a major impact on employers that do not have significant groups of employees that currently opt-out of coverage. However, employers may need to adjust their benefit plan options to meet the “qualifying coverage” requirements.
See the full briefing paper.
* Note that in the interest of getting into some of the finer details (and not letting the elephant in the room take up all of the oxygen) this analysis punts on looking at the public plan.
Employers, Mandates, Reform
Weeks of closed-door meetings with members of the Senate Finance Committee may be coming to a head this week. Apparently the public plan and an employer mandate are not in the Finance Committee’s compromise bill and co-ops and certain insurance market reform are in. The details regarding inclusion of an individual mandate are still unclear.
As the details come out—and finally there are some specifics from Kent Conrad—it may be worthwhile to review what we know about healthcare co-ops, specifically how they behave in the presence or absence of a mandate. This is excerpted from a recent Q&A with Milliman principal Jim O’Connor on the topic:
Q: How would co-ops be affected by the presence of an individual or employer mandate?
A: It is probably valuable to first clarify some language. An “individual mandate” is a requirement that everyone obtain health plan coverage. An “employer mandate” is a requirement imposed on employers. Neither should be confused with a “benefit mandate,” which requires that health plans cover certain types or levels of benefits.
Individual and/or employer mandates, if constructed correctly, would likely bring a positive impact on the healthcare market overall, compared to a guaranteed issue environment without any such mandates. Contrary to popular opinion, a proportionately large number of the uninsured are relatively healthy. Bringing all of these uninsureds into the market would not only result in a positive impact on insurers overall in a guaranteed issue environment, but also help redirect people to more appropriate and less costly healthcare provider settings (e.g., uninsureds would no longer need to go through a hospital emergency room to get to see a doctor for routine and non-urgent care). However, it should be noted that although the uninsured utilize considerably fewer healthcare services (partially because they tend to be healthy, but also because they defer treatment as long as they can), when they get coverage they are likely to utilize an increased level of services, at least temporarily. This additional utilization would need to be anticipated.
If open enrollment periods were required, a sound mechanism to pool high risks of the unhealthy would help stabilize the market and financial operations of both co-ops and traditional commercial insurers. This could be done through high-risk pools or through a risk-adjuster mechanism similar to that used by the Medicare Advantage program. Depending on the effectiveness of the risk-adjuster method, health plans might not need to increase rates in anticipation of biased adverse selection. A mandatory high-risk pool might have a similar effect, especially if consistent government support were used to help fund the pool. By contrast, a voluntary high-risk pool, funded only by the insurers participating, would likely not be as successful in lowering rates.
Read the entire interview
Mandates, Reform, Universal coverage