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.
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].
“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.”
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.
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?
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).
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