Tom Snook appeared on the Phoenix-area radio show “Benefits Briefing” earlier this week. He discussed healthcare reform, adverse selection, the individual mandate, Medicaid expansion, employer reform considerations, and other reform issues. Listen to the full interview here:
Next in our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series we discuss the challenges insurers face as they balance the removal of traditional cost-control mechanisms and increased rate review scrutiny.
PPACA has brought about increased scrutiny of rate increases, and it seems likely this will continue. But with a 10% increase now deemed potentially “unreasonable” by federal regulators, and with traditional underwriting/risk selection taken out of the system, there are all the signs of an inevitable collision. An influx of less-healthy people could make it very difficult for many plans to stay below the 10% ceiling without losing money and risking financial instability. If the individual mandate works as hoped, this may be mitigated. Risk adjustment, reinsurance, and risk corridors are also supposed to help with this issue, but will they be enough? This is one to watch.
In our previous post we announced the release of Milliman’s “Ten strategic considerations of the Supreme Court upholding PPACA.” Moving forward we will highlight each strategic consideration. We start by evaluating how “Adverse selection may still be a challenge”:
Guaranteed issue and community rating make the individual insurance market more accessible to the uninsured, but without an effective individual mandate these reforms create adverse selection. The key word there is effective. If enrolling in a healthcare plan is viewed as optional for U.S. citizens because the penalties have limited teeth, those who consider themselves healthy are less likely to enroll because it may not be in their immediate economic best interest. For pricing to be sustainable, these healthier people must enroll in order to balance out the insurance pool costs and health risk.
Milliman analysis on the effectiveness of the individual mandate indicates that much depends on a person’s household income, age, and family type. As the exchanges come online in 2014, many will be focused on the enrollment to determine how this theoretical underpinning bears out in actuality.
One new wild card: The court’s ruling on Medicaid expansion complicates the adverse selection question, because the decision raises access questions for certain low-income individuals. Which brings us to Consideration #2 [Medicaid expansion just became a far more complex and variable proposition].
Milliman today released analysis of the Supreme Court’s 5-4 decision upholding the Patient Protection and Affordable Care Act (PPACA). With the court effectively ruling the individual mandate and other elements of the law constitutional—with the notable and complex exception of certain aspects of Medicaid expansion—healthcare stakeholders can turn their attention to implementing healthcare reform.
“Since 2009, Milliman has been working with its clients to prepare for and implement the healthcare reform law,” said Clark Slipher, Milliman Health Practice Director. “With the law’s constitutionality bound up in court, it’s been an uncertain time for our clients, which include insurers, employers, providers, and state and federal governments. This ruling clarifies the road ahead for American healthcare, and while it is reassuring to know where we are going, healthcare stakeholders face many strategic challenges that will require innovation and sound financial planning in the years ahead.”
Strategic considerations facing healthcare stakeholders include:
- Adverse selection may still be a challenge. Even with the individual mandate in place, the success of many insurers under PPACA will depend on their ability to minimize adverse selection.
- Medicaid expansion just became a far more complex and variable proposition. The court’s decision to allow states to opt out of Medicaid expansion creates dynamic changes across the healthcare system.
- Employers grapple with new options and plan requirements. While reports of the demise of employer-sponsored insurance coverage are premature, these plans still face many potential changes.
- What is the effect on early retirees? The role of the employer in covering those between 55 and 65 may change under PPACA.
- Rate review scrutiny and no risk selection: Something’s got to give. Keeping rate increases under 10% may become more challenging with many of the traditional cost-control mechanisms no longer available to insurers.
- Which states will get on the exchange bandwagon? With the Court decision minimizing uncertainty, there may be increased incentive for states to fast-track exchange planning.
- Minimum loss ratios (MLR) pose an ongoing challenge for insurers. Insurers have struggled to comply with the MLR requirements, and increased volatility in medical costs potentially brought on by adverse selection may compound the difficulty for insurers.
- Risk adjustment is essential. A new reform calculus is required with traditional risk selection techniques such as medical underwriting no longer allowed.
- Will cost shifting hold steady, increase, or decrease? Subsidies, rating restrictions, and an effort to achieve universal coverage all introduce new cost dynamics for insurers, providers, and policyholders.
- The cost problem persists. What can be done about it? Certain aspects of PPACA have the potential to affect costs, but this potential needs to be actualized in order to moderate annual cost increases that regularly exceed other consumer spending.
For more detail on each of these strategic considerations, see the full article. To receive regular updates on Milliman’s healthcare perspective, visit our healthcare reform library or follow us on Twitter.
With the Supreme Court currently considering the constitutionality of the Patient Protection and Affordable Care Act (PPACA) in whole or in part, everyone is weighing in on whether the law could or could not survive without the individual mandate, but almost everyone agrees that without the mandate, adverse selection could be a problem. Our latest poll asks: given such a scenario, what do you think would be the best strategy for managing adverse selection?
This post originally appeared on the Society of Actuaries blog.
Two prominent physicians at Johns Hopkins recently made comments supporting the individual mandate provision in the healthcare reform law. Just a few days later, the 11th Circuit U.S. Court of Appeals struck down the provision, ruling it unconstitutional. While the decision is seen by most as just a way station on the way to the Supreme Court, it does point to the sensitive nature of the provision.
As actuaries, we can’t help but see the mandate a little differently than either physicians or judges. Regardless of our political views—and if you’re wondering, mine happen to be independent, moderate, and centrist—our professional expertise tells us that in the absence of underwriting and other traditional insurance risk management provisions, something is necessary to address adverse selection. The individual mandate may offer that something—as I indicated almost two years ago in a paper co-authored with Ron Harris. Without it, the sustainability of private health insurance is at risk.
What is meant by “adverse selection”? Adverse selection is simply people acting in their own economic self-interest. Health insurance is not cheap, especially if you don’t have an employer subsidizing some or all of the cost. The purchase of health insurance is a significant financial commitment that thoughtful people will weigh carefully in light of other economic needs. (Many commentators, including the Hopkins physicians, refer to those going without health insurance as “free riders”; I find this phrase to be unfortunate, as it is simplistic and pejorative without recognizing the economic realities that families face in making this decision).
A new video examines key actuarial and operational considerations for state health insurance exchanges. The video includes perspectives from the CFO of the Massachusetts Health Connector and from several actuaries.
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.
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.