Healthcare Town Hall

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.

Mandates individual mandate, Ron Harris, Tom Snook

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.

Read more…

Mandates, Reform adverse selection, individual mandate, Ron Harris, Tom Snook

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:

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.

Cost, Reform, Universal coverage individual mandate, Ron Harris, Tom Snook

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.

Reform, Universal coverage adverse selection, community rating, individual mandate, Ron Harris, Tom Snook

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.

Cost, Reform, Universal coverage adverse selection, individual mandate, Ron Harris, Tom Snook

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 adverse selection, individual mandate, Ron Harris, Tom Snook

HC Pro has published an article about the Healthy Indiana Plan, with insight from Milliman principal Rob Damler. Here is an excerpt from the HC Pro article:

Anyone creating a health reform plan must understand that the first year (especially the first few months) will bring in people with the most serious medical problems and who will require the most expensive medical care, says Rob Damler, FSA, MAAA, principal and consulting actuary at Milliman in Indianapolis.

Milliman compared Indiana’s HIP population against the typical commercial population and found much higher inpatient services, ER visits, and pharmacy costs. Milliman discovered the HIP population was more likely to have chronic diseases, such as asthma, depression, and diabetes, than the typical commercial population. The first people to enroll in the program in the first few months had a higher morbidity rate.

Read more…

Medicaid, Uninsured individual mandate, Rob Damler

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.

Mandates, Reform Bruce Pyenson, Guaranteed issue, individual insurance market, individual mandate, Leigh Wachenheim