Tag Archive: adverse selection

Adverse selection in California individual market leads to another round of rate increases in 2012

The Los Angeles Times reports on 2012 rate increases being taken by health plans and insurers in the Golden State’s individual market.  According to The Times, premiums are headed up on average between 8 and 14 percent.  The newspaper reported that outpaces the cost of medical care, citing federal government data showing the cost of goods and services associated with medical care increased by 3.6 percent over the past 12 months.

However, payers cite claims experience — and not underlying medical costs— to justify the rate hikes.  That’s consistent with the adverse selection that is gripping the state’s individual market.  Premiums increase to cover fewer and sicker people who keep their coverage, shrinking the pool as healthier people refuse to pay the higher premiums required to cover the claims costs of the former.  The accelerating adverse selection calls into question whether the state will have a viable individual health insurance marketplace to participate in the California Health Benefit Exchange when it opens for business in January 2014.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

UCLA research note: Elimination of PPACA’s coverage mandate would accelerate adverse selection

If the U.S. Supreme Court severs a keystone element of the Patient Protection and Affordable Care Act that mandates all Americans have public or private health coverage by 2014 but leaves intact another key provision requiring insurers and managed care plans to accept all applicants without medical underwriting, payers would experience adverse selection and premium rates would necessarily rise in response, making coverage less affordable.  That undermines a key objective of the 2010 law designed to reduce the number of people who are medically uninsured, the UCLA Center for Health Policy Research concludes in a research note issued this month.

The note determined this scenario would result in only a small reduction in the number of medically uninsured Californians by 610,000 or 13 percent of the eligible uninsured by 2019. Eliminating the minimum coverage requirement while leaving in place the PPACA’s modified community-based rating where coverage is guaranteed to all applicants would not allow payers to avoid covering less healthy individuals more likely to need expensive medical care.

The UCLA research note effectively concurs with an amicus curiae brief in the Supreme Court case filed by health insurers and plans who contend the PPACA’s coverage mandate is designed to work in conjunction with community-based versus individual medical underwriting and therefore cannot be excised from the law.  “The result would be a ‘marketwide adverse-selection death spiral’ that would thwart rather than advance Congress’s goal of expanding affordable health care,” they warn.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

PPACA’s coverage mandate unlikely to forestall health insurance crisis

Los Angeles Times business columnist David Lazarus wrote last week about one of the biggest challenges to making medical care more accessible and affordable: rampant medical cost inflation.  It will stoutly challenge the “affordable” part of the Patient Protection and Affordable Care Act (PPACA).  Lazurus writes:

It’s a problem that affects all of us. As hospitals jack up prices to get more money from insurance companies, insurers in turn hike premiums for all members to cover their rising expenses. It’s a vicious cycle that exacerbates the unaffordability and inaccessibility of treatment in the United States.

It’s also a phenom that’s not responsive to competitive market forces to hold down the price of medical care and prescription drugs.  A competitive market has two elements.  One, many buyers and sellers.  Two, competitive markets afford ample opportunity for buyers to shop around for the best deal.   Most markets for medical care and medications have the first attribute but not the second.  People who are sick or injured or facing conditions that threaten the quality of their lives and life itself aren’t inclined to question the cost.  Especially when insurers and managed care plans are picking up most of the tab.  As prices increase, payers pass through the higher costs to their insureds and plan members.

Of course, that can only go on for so long before premiums become so high they precipitate adverse selection, with healthier people dropping coverage and leaving payers covering sicker, costlier individuals.   By requiring everyone to have some form of public or private health coverage, the PPACA hopes to stave off adverse selection and put more dollars in the coffers of insurers and managed care plans to cover those increasing medical and drug costs.  However, without some mechanism to hold down the rising price of medical utilization — lowering demand through healthier lifestyles, for example — the PPACA’s insurance mandate may only buy a little time before we’re facing a more widespread health insurance crisis.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

What’s likely driving state challenges of PPACA coverage mandate

The constitutionality of the so-called “individual mandate” of the Patient Protection and Affordable Care Act (PPACA) — the law’s requirement that all Americans have a public or private third party payer covering most of their medical bills starting in 2014 — is under review in multiple U.S. Circuit Courts of Appeal.

Opponents of the mandate — including more than two dozen state attorneys general — contend the law is unconstitutional because it impermissibly forces someone to engage in commerce when they purchase coverage if not covered thorough their employment or a government program.

One of the more interesting arguments raised in the mandate’s defense this week in the 11th Circuit is based on EMTALA — the Emergency Medical Treatment and Active Labor Act of 1986.

Acting U.S. Solicitor General Neal Kumar Katyal noted the rationale behind the coverage mandate is to more equitably allocate the costs of medical care provided for those not privately covered or in a government health program by those who incur them.

“You can walk out of this courtroom and be hit by a bus,” Katyal told the court.  Without medical coverage, he argued, the treating hospital and the taxpayers will have to pay the costs of the emergency care, he added.

Under EMTALA, the hospital is required to assess and medically stabilize that bus accident patient regardless of medical coverage or his/her ability to pay.

Katyal is correct the hospital could end up eating some of the cost of providing the hypothetical bus accident victim’s care.  Hospitals also write off a significant portion of unreimbursed medical care as uncollectible debt or charity care.  That’s in large part why emergency room bills for those paying on their own are so stratospheric.

However, Katyal’s argument that taxpayers also foot the bill is questionable.

In December 2006, the New America Foundation (NAF) estimated that about 10 percent of California health care premiums are comprised of unreimbursed medical costs incurred by those without medical coverage.  The foundation’s study of this so-called “hidden tax” or “cost shift” is significant given that California is not only the nation’s most populous state, but also has more medically uninsured people than nearly all other states.

Bottom line: The burden of uncompensated medical care is borne privately, not by taxpayers.

That point aside, I suspect the real concern driving the challenge of the individual mandate derives from playing it out several years into the future.

Requiring everyone to have coverage may provide a temporary respite for the smallest and most troubled source of medical coverage: the individual market.  It’s already circling the drain of adverse selection. Bringing more individuals into the risk pool expands its ability to spread risk and generate premium dollars to offset rapidly rising medical treatment costs.

However, those rising costs are passed along as higher premiums.  That could well lead to some — most likely people under age 40 or 45 — to conclude they’d be better off paying the penalty for not having coverage and dropping out of the pool.

Then the individual market would be quickly be back on the brink of adverse-selection driven collapse where it stands today.  That in turn could lead the states and/or the federal government to step into the breach with a government run risk pool or by expanding Medicare/Medicaid for those unable to obtain affordable coverage on the individual market.

Either outcome likely has the states worried.  Recession-hammered states are strapped fulfilling their current obligations as well as meeting their share of state Medicaid programs. They probably don’t relish the prospect of maintenance of effort requirements for a new federal/state insurance program that would take the place of a defunct private individual insurance market.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

Insurers worry adverse selection in health benefit exchanges could jeopardize commercial market

The bulk of individuals buying health plans through health benefit exchanges established by the Patient Protection and Affordability Act (PPACA) starting Jan. 1, 2014 will be low to low moderate-income earners, making less than 400 percent of the Federal Poverty Level (FPL).  An actuarial projection by Mercer Government Human Services Consulting presented this week at a Sacramento, Calif. symposium sponsored by the California HealthCare Foundation estimates that just 25 percent of about 4.6 million Californians not covered by employer or government plans will purchase coverage through the California Health Benefit Exchange.

Most in the state’s individual market earning more than 400 percent of the FPL will purchase commercial insurance and managed care plan products offered outside the exchange, the Mercer estimate concludes.  On the other hand, “virtually all” individuals earning between 200 and 400 percent of the FPL will opt to purchase their coverage through the exchange, Mercer projects, in order to benefit from subsidies in the form of tax credits.

That’s shaping up as a bifurcated individual market, giving rise to insurer concerns over the prospect of adverse selection, with higher cost insureds gravitating toward the exchange, particularly if commercial insurers continue their primary competitive strategy of avoiding those with pre-existing conditions.  But as noted at this week’s Sacramento forum, insurers won’t be able to wall off higher risk individuals in the exchange since they will be required to pool risk from both exchange and non-exchange insureds.  That has some insurers concerned that the experience of the exchanges could actuarially jeopardize commercial markets outside the exchanges.

The nascent California Health Benefit Exchange hopes to stave off adverse selection by penalizing or excluding from the exchange insurers that engage in marketing practices designed to cherry pick healthy individuals while directing higher-risk consumers to the exchange.

A New York Times piece published May 13 suggests insurers see tougher times coming once the exchanges open for business in less than three years.  In the meantime, they’re making hay while the sun is shining and medical utilization is suppressed by a weak economy.  “I think they’re going to go through a winter,” Paul H. Keckley, executive director of the Deloitte Center for Health Solutions, a research unit of the consulting firm Deloitte, told The Times.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

More evidence adverse selection imperiling individual health insurance market

More evidence the individual health insurance market segment in the nation’s biggest individual market — California— appeared in today’s Los Angeles Times. While an Anthem Blue Cross spokeswoman wouldn’t confirm the account, the newspaper reports a couple was told by the insurer it was shuttering the couple’s $2,500 deductible plan because the risk pool is shrinking and no longer viable.

“A shrinking risk pool will eventually mean that the only people left in the plan will be ones with preexisting conditions,” John Barrett, a Pasadena health insurance broker told The Times. “Over time, rates would go up more than other plans.”  In a nutshell, that describes adverse selection in which insureds likely to place the greatest demands on the risk pool comprise an increasingly larger portion of the pool, forcing the insurer to raise premiums in order to ensure the pool remains solvent.

The report comes a little more than two months after Paul Markovich, COO of Blue Shield of California, told a Sacramento, Calif. health care forum that adverse selection is placing “tremendous stress” on the individual health insurance market.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

PPACA notwithstanding, health insurance facing crisis

The enactment of comprehensive health care reform nearly one year ago aside, the U.S. health care system needs deep systemic reform that can meaningfully reduce medical costs and align risk and incentives among consumers, providers and payers.  That’s the consensus among several panelists who took part in a health care forum Friday in Sacramento, California sponsored by the UC Berkeley Institute of Governmental Studies, School of Public Health and the UC Sacramento Center.

For Diana Dooley, California’s newly installed secretary of Health and Human Services, tamping down demand for medical services is an essential component of bending what all panelists agreed is an unsustainable, unrelenting upward trajectory in medical costs.  People have to take more responsibility for their health, Dooley emphasized, suggesting that the current mindset that equates more medical care with better health must be abandoned. “We have an inexhaustible appetite for health care and it’s a significant cost driver,” Dooley said.  “We have to have some very frank conversations around kitchen tables and in political dialogue and ask ‘How much medicine is enough?’ A lot of these cost drivers are our choices.”

Dooley’s absolutely right.  Poor lifestyle choices are within the control of individuals and are the ultimate cost driver.  I would add that those lifestyle choices are strongly influenced by cultural values that place too much emphasis on sedentary work, commuting and leisure time.  Those values reinforce spending too much time sitting, too little time exercising and sleeping and the interconnected lifestyle issues of excessive stress and bad eating habits.

In this environment, it’s no wonder people’s health declines and they become overweight and develop costly chronic conditions like obesity, cardiovascular disease and diabetes.  From the perspective of health insurers, all of that adds up to poor risk management.  But most people don’t view it that way.  Health insurance is seen more as a prepaid medical plan rather than a means of paying for unexpected, high cost medical expenses.  Health breaking down?  Get to the doc shop or the hospital and get fixed up.  The problem is as Dooley and others on the panel pointed out, when too many people adopt this way of thinking, insurers and managed care plans end up paying out too much, jeopardizing the financial solvency of these payers.  Hence, premiums keep futilely chasing after costs in a vicious, unvirtuous cycle.

Panelist Paul Markovich, COO of Blue Shield of California, underscored the seriousness of those escalating premiums in the individual health insurance segment.  Premiums can go up only so much before healthier people decide to drop their coverage, leaving less healthy insureds in the pool.  That is placing “tremendous stress” on the pool, Markovich said.  “You have all heard of the death spiral (of adverse selection).  We are absolutely experiencing some of that stress right now.”

Cindy Ehnes, the director of the California Department of Managed Health Care, noted during her seven-year-long tenure managed care plans attempted to preserve their troubled individual markets through risk selection — what Ehnes termed “cherry picking and lemon dropping.”  Next, Ehnes explained, payers imposed high deductibles hoping to shift more risk to consumers and drive down the utilization of medical services.  Now with the individual market facing structure failure, that strategy has played out, leaving only steep premium hikes as a last, desperate measure to keep the market solvent.  That’s why premiums are high and headed higher despite high deductibles.  People paying high deductibles naturally expect their premiums to be substantially lower than those with low or no deductibles. When they don’t see lower premiums in proportion to their high deductibles, they understandably drop coverage figuring they’re getting poor value for their premiums.  That in turn takes more premium dollars out of the pool, forcing insurers to raise premiums even more just to stay afloat.

Not surprisingly, payers bearing the bad news of fat premium increases are coming under withering criticism from the consumer groups, the media, regulators and policymakers.  Ehnes noted — and I would agree — simply chastising “greedy” payers isn’t going to help.  There’s far more to it than that.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

“Everything happens at the margin”

The aphorism “everything happens at the margin” directly applies to the health insurance crisis.  In the health insurance market, that margin is the low end of the market: individuals who buy coverage on their own and the small group segment — those employing less than 50.  This is the most troubled region of the health insurance market where the risk spreading mechanism that is the core principle of insurance is the weakest.

That’s why the Patient Protection and Affordable Care Act (PPACA) includes a mandate that all individuals have some form of health coverage.  This controversial requirement is the focus of Congressional misgivings over the PPACA and some federal court rulings finding the mandate unconstitutionally compels people to engage in commerce.

Modeled after reforms enacted in Massachusetts several years ago, the mandate essentially creates a government enforced pool of insureds so there are more “lives” as they called in the insurance business across which to spread risk of claims.  Too few people and the pool tends to fall into a death spiral called adverse selection, leaving only the highest — the most adverse — risks remaining.  Too many dollars end up going out to pay claims and too few are replaced in the form of premiums.

The PPACA also addresses the troubled individual and under 50 employee group market by establishing state health benefit exchanges.  The exchanges will begin operating in 2014 and are designed to aggregate purchasing power among insurance buyers in these market segments.  Compared to the large employer group market, individuals and small businesses have little or no purchasing clout that can help them bargain with insurers and health plans for lower premiums.

But even midsize and large employers are seeing their premiums rise nearly ten percent in 2011.  Due to their weak purchasing power, the increases are far steeper in the small group and individual markets, rising so rapidly in the latter they now nearly equal the amount of a mortgage payment for people in their fifties and early sixties.

If premiums driven by rising medical costs keep increasing at their current rate, it calls into question the utility of the health benefit exchanges.  By the time the exchanges set up shop in 2014, premiums could be so high that few employers of less than 50 people will be able to affordably provide health coverage.  That would leave primarily individuals buying coverage through the exchanges.  That raises the question of whether premiums will be affordable for these individuals, even with income-based subsidies.  If not, that could lead many of them to conclude it’s a better deal to go bare and pay the penalty for not having coverage.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

Individual health insurance market enters death spiral

More evidence the individual health insurance market segment is entering a death spiral comes from the Los Angeles Times today.  The newspaper reports Blue Shield of California is boosting premium rates in rapid succession, resulting in 193,000 policyholders getting increases averaging 30 to 35 percent as the result of three separate rate hikes since October.  Under a new increase effective March 1, thousands of insureds are could see rate hikes of as much as 59 percent, according to The Times.

The San Francisco-based nonprofit insurer blames rising health care costs and coverage mandates for the increases.  A Blue Shield spokesman says despite the higher rates, the insurer would still lose “tens of millions of dollars” on its individual business segment in 2011.

No surprise there.  When an insurance pool goes into a death spiral, only the highest risks remain in the pool, boosting losses and requiring even higher premiums to cover them. That chases away healthier people who find premiums increasingly unaffordable, leaving behind the least healthy individuals.  And so on goes the unvirtuous cycle.  In the insurance business, it’s called adverse selection and has a terminal prognosis unless reversed.

It’s unlikely the individual market will survive as a viable market segment before the federal Patient Protection and Affordable Care Act (PPACA) requires insurers to end medical underwriting and take all comers in 2014.  That provision combined with the PPACA’s requirement that everyone purchase coverage is aimed at restoring the pool by spreading risk among both healthy and the sick.

However, it appears for the individual market  — with California representing the nation’s largest state market where about eight percent of those 65 and under get their health coverage — the PPACA will come too late to save it.  Whether it the PPACA will provide the foundation for a new individual health insurance market to emerge in 2014 is also an open question if health care costs continue their rapid rise.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

Rising HMO premiums hint at adverse selection

The large group health insurance market is rearranging itself along the lines of medical utilization with those using more medical services opting for managed care HMO plans and those using fewer services opting for lower cost, high deductible PPO and POS plans.  Premium rates are adjusting to this higher utilization, with HMO members expected to see a 9.8 percent bump in 2011, the highest rate increase since 2006’s 10 percent hike, according to a report issued this week by Aon Hewitt.

Since HMOs provide richer benefits but at a higher cost, they are preferred by employees who use health care more often and need coverage that is more robust. “Having a higher mix of these plan participants in HMO plans raises the risk pool, which can drive costs higher,” Aon Hewitt notes. In other words, adverse selection.  Once the trend of adverse selection becomes entrenched, the risk pool enters a death spiral of fewer insureds to share costs, requiring big premium increases that speed depopulation of the pool.

Large employers are apparently already feeling those higher prices — and it could ultimately lead to contraction of the large group HMO market, Aon Hewitt warns. “Employers continue to be successful in reducing HMO rate increases by a few percentage points through aggressive negotiations with health plans, changes in plan designs and employee cost sharing,” said Jeff Smith, a principal and leader of Aon Hewitt’s HMO rate analysis project. “Still, these increases have been very difficult for employers to absorb, particularly this year when many companies are focused on economic recovery and complying with health care reform. If HMO rates continue to outpace average health care cost increases, employers may elect to take even more aggressive steps in the coming years, such as eliminating HMO plans altogether.”

This looks like yet another sign of the end of the rich, all inclusive employer provided health coverage of recent decades and a revival of major medical coverage for hospitalizations and other high cost services and not routine or minor ones.

 

The large group health insurance market is rearranging itself along the lines of medical utilization with those using more medical services opting for managed care HMO plans and those using fewer services opting for lower cost, high deductible PPO and POS plans.  Premium rates are adjusting to this higher utilization, with HMO members expected to see a 9.8 percent bump in 2011, the highest rate increase since 2006’s 10 percent hike, according to a report issued this week by Aon Hewitt.

 

Since HMOs provide richer benefits but at a higher cost, they are preferred by employees who use health care more often and need coverage that is more robust. “Having a higher mix of these plan participants in HMO plans raises the risk pool, which can drive costs higher,” Aon Hewitt notes. In other words, adverse selection.  Once the trend of adverse selection becomes entrenched, the risk pool enters a death spiral of fewer insureds to share costs, requiring big premium increases that speed depopulation of the pool.

 

Large employers are apparently already feeling those higher prices — and it could ultimately lead to contraction of the large group HMO market, Aon Hewitt warns. “Employers continue to be successful in reducing HMO rate increases by a few percentage points through aggressive negotiations with health plans, changes in plan designs and employee cost sharing,” said Jeff Smith, a principal and leader of Aon Hewitt’s HMO rate analysis project. “Still, these increases have been very difficult for employers to absorb, particularly this year when many companies are focused on economic recovery and complying with health care reform. If HMO rates continue to outpace average health care cost increases, employers may elect to take even more aggressive steps in the coming years, such as eliminating HMO plans altogether.”

 

This looks like another sign of the end of the rich, all inclusive employer provided health coverage of recent decades and a revival of major medical coverage for hospitalizations and other high cost services and not routine or minor ones.

 


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

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