While the jury is still out on how well the health savings account and preventive-care incentive are working, analysts have looked at utilization trends among the newly insured and found that those signing up for the program are sicker and more frequent users of healthcare than those enrolled in commercial, employer-sponsored health plans.
The Healthy Indiana Plan “population used more care than the typical commercial population in Indiana with the same age and gender characteristics,” says Rob Damler, principal at Milliman, a consulting and actuarial firm. Damler is the consulting actuary to the state of Indiana on the health plan.
Childless adults enrolled in Healthy Indiana, for instance, had nearly three times as many inpatient services as private plan members in the first year. And pharmacy use was nearly 50% higher than a typical commercially insured population.
This newly enrolled group was also sicker than the general population. Their relative morbidity was 65% greater than their peers covered by private health insurance. The earliest enrollees to the program also proved to be the sickest, with the highest healthcare costs, Damler says.
This phenomenon is called anti-selection, where the least healthy population seeks healthcare coverage available to them, driving up the costs to insurers and the population covered.
The Healthy Indiana Plan offers some considerations for national reform, Damler says. “One of the issues that needs to be understood is pent-up demand,” he says. “We need to be prepared that the newly insured may cost more in the first 12 to 24 months than the insured population.”
Not surprisingly, insurance companies say that without a federal law requiring everyone to carry health insurance, national healthcare reform won’t work because the chronically ill will sign up for coverage in large numbers, driving up costs, while the healthy will stay on the sidelines.
“It only works if everyone’s covered,” says Alissa Fox, senior vice president of policy at the Blue Cross and Blue Shield Association.
What follows is excerpted from the new healthcare reform briefing paper by Tom Snook and Ron Harris, “Adverse Selection and the Individual Mandate.”
The idea behind a coverage mandate is to mitigate (or, ideally, totally eliminate) the effects of adverse selection on health insurance costs. If that mandate is so weak as to be ineffective, however, adverse selection will continue to be an issue and health insurance costs will increase as illustrated in the following example.
Consider a potential insurance population comprising three categories: Very Healthy, Moderately Healthy, and Unhealthy. For illustration’s sake, let’s say these groups have the following population sizes and expected average annual healthcare costs:
Average per capita healthcare cost
Let’s also say that a strong mandate existed and all 1 million of these lives would be enrolled into the health insurance pool. In this case, the average per capita healthcare cost would be $1,900. But under a weak mandate, the Very Healthy category has less of a financial incentive to participate, and would be more likely to opt out from coverage. The Unhealthy category still has an incentive to participate because of the relatively high costs it expects to have. If, for example, a weak mandate will cause only 50% of the Very Healthy, 80% of the Moderately Healthy, and 100% of the Unhealthy to enroll, then the average per capita cost of the resulting insured population is more than $2,400—27% higher than the strong mandate scenario.
It should be apparent from this example that the relative strength or weakness of a coverage mandate could best be measured by how many of the Very Healthy potential insureds wind up actually enrolling for coverage. The more healthy lives there are in the insurance pool to help bear a share of the costs, the lower the average cost for everyone.
Click here to read the full paper.
What follows is excerpted from the new healthcare reform briefing paper by Tom Snook and Ron Harris, “Adverse selection and the individual mandate.”
Community rating refers to a health insurance premium rating structure with limited or no variation in the premium rates among insureds. Under community rating requirements, health plans have a reduced ability to vary premium rates so as to be consistent with an individual’s risk characteristics, such as age and gender. Current industry practice in the individual and small group markets is to develop premium rates commensurate with an individual’s actuarially expected costs; for example, younger people have lower rates than older people. A community rating requirement would limit the degree to which a carrier can do this. Limiting the range of rates means raising the lower end and reducing the top end of the rate scale, so that rates are no longer proportionate to expected costs. This creates a cross-subsidy where younger individuals pay more for health insurance to reduce the premiums for older policyholders. The fact that community rating requirements will make insurance more expensive for younger and healthier individuals could serve to undermine the efficacy of the mandate, especially if the mandate is not highly aggressive in terms of penalties for non-compliance.
Click here to see the full paper.
What follows is excerpted from the new healthcare reform briefing paper, “Adverse Selection and the Individual Mandate.”
The purchasing or enrollment decision that an individual makes when deciding whether to obtain health insurance coverage and, if so, what plan of benefits to select, typically represents an exercise of consumer self-interest. It involves consideration of anticipated personal or family needs, price, doctors and hospitals available, other benefits or services, health plan reputation, and various other factors. Adverse selection is the natural process of individuals making insurance purchasing decisions that reflect their own personal circumstances and healthcare needs and desires. Such decisions are generally informed ones, leading to maximization of the cost/benefit tradeoff; and the decisions that maximize this tradeoff favorably for the individual consumer generally have the opposite impact on the insurance program (i.e., lead to higher costs relative to the premium level charged). In recognition of this informed consumer behavior, insurers have developed time-tested underwriting and rate-structuring techniques for mitigating and managing the resulting healthcare risks and costs.
A selection spiral is a worst-case result of adverse selection that can quickly make an insurance program insolvent. The dynamics of a selection spiral work like this: A health plan gets worse risks (higher-cost individuals) than it anticipated in its original rate setting, and so has to increase premium rates to provide adequate revenue to cover these higher costs. However, raising the rates changes the entire cost/benefit equation, and so the rate increase will cause some individuals to drop their coverage—and those who do drop are more likely to be the lower-cost individuals in the pool. As a result, the health plan winds up with a pool of risks even worse than the one it started with, with premiums that again need to be increased to cover the new, higher costs. This sort of spiral can quickly get out of control and lead to the collapse of the insurance pooling mechanism.
Click here to see the full paper.
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.
Families USA published a report today quantifying the cost of uncompensated care received by the uninsured and detailing how those costs are absorbed by American families with commercial insurance. To quote the Wall Street Journal:
The average family in 2008 saw $1,017 in health-insurance costs passed on from those without insurance, according to a report released Thursday by the advocacy group Families USA.
The report found that individuals with health insurance paid a “hidden health tax” of $368 to cover those without insurance. The report found that a total of $42.7 billion in care for those without insurance was passed on to health insurers – which in turn pass on the costs through higher premiums.
The report comes as Congress debates proposals to provide health-insurance coverage to all Americans – a key part of President Barack Obama’s legislation agenda. It uses data primarily from the consulting firm Milliman Inc.
Finding a way to cover the 47 million uninsured Amreicans is at the top of everyone’s reform wish list. How we clear the access hurdle is vital, as Milliman principals Clark Slipher and Ron harris outline in their recent article framing the healthcare reform challenge:
Based on years of experience with the current healthcare system, we know that sound and proven approaches to broaden coverage are available, even within a decentralized and pluralistic system of financing. These approaches recognize the multidimensional nature of the circumstances surrounding access to affordable healthcare coverage, including such important considerations as the wide range in individuals’ health status and the broad spectrum of families’ financial means and economic value judgments. Unfortunately, there are also numerous superficially attractive but fundamentally unsound ways to try to broaden coverage that we believe would exacerbate costs and impair access to affordable coverage.
The challenge we face is to reform the system in a meaningful way that will enable full coverage of everyone in the United States without, over the long term, simply spending more.
While covering the uninsured is expensive, the solution may lie in making more with the healthcare dollars we already spend:
The more than 25% potential reduction in healthcare-system inefficiency and waste equates to approximately $600 billion. If the system were made substantially more efficient—achieving, for example, even one-third of this total potential savings—resources sufficient to provide coverage for the uninsured could be available without increasing the current level of overall spending on healthcare.
The head of the White House Office of Healthcare Reform stoked some controversy this week by suggesting that a Medicare-like model is not the only way to go when it comes to a public healthcare option:
There are different breeds of public plans that could be part of this.”
The response from many organizations has been negative. Still, there are certainly other models. Before the Medicare-like public plan idea gained steam, an FEHBP-type plan was often mentioned. Then there is the Healthy American Act.
Not to mention ideas from overseas. The Dutch system has drawn a lot of attention; see the interview below for more information on that.
A wholesale change seems less likely than something incremental, but perhaps there are things to learn from other countries. Either way, it is simply too early to handicap this race.
For profit, for everyone: Exploring the Dutch healthcare system
The Dutch healthcare system is the world’s only private system of basic healthcare insurance operated by insurance companies for profit. We asked Dutch healthcare actuaries Roeleke Uildriks and Ji Kwen Ng to explain.
Massachusetts has been getting a lot of healthcare reform ink, and Kevin Sack penned another article on the topic recently in the New York Times. The attention makes sense given the ambitious universal coverage experiment at work in Massachusetts. But is the media overlooking other instructional examples from elsewhere in the country? Vermont has something interesting going on as well.
We’ll posit several states that deserve consideration based on recent Milliman research:
The Los Angeles Times published an editorial today about the growing consensus among health insurers over the need for universal coverage. While some might find this puzzling, there are sound insurance principles that support the broadest possible coverage.
This interview with Bruce Pyenson offers a primer on adverse selection, a topic germane to the question of broad coverage.
Q: How do you define adverse selection?
Bruce Pyenson: Adverse selection describes a situation where an insurer enrolls an unexpectedly higher concentration of less healthy individuals. Of course, the idea of insurance means the insurer will lose money on some people and make money on others. But people, like insurers, naturally make choices that maximize their own financial interests, and certain insurance product characteristics and market conditions may create situations that result in a greater concentration of less healthy (or more expensive) individuals covered under an insurance policy. In its most severe form, adverse selection is the insurance equivalent of a run on a bank.
If this seems unclear, consider the 80/20 rule. Something close to the 80/20 rule applies to healthcare—about 20% of the people generate about 80% of the cost. Adverse selection can happen because not all of us are average from a health cost perspective; as a matter of fact, almost none of us are average. Most healthcare costs come from relatively few people. In any year, the people who are low cost may not feel they need good coverage, if any at all. The people who are high cost really need the financial protection of coverage.