Health Insurance Crisis

The California Department of Managed Health Care (DMHC) is questioning the reasonableness of a May 1 rate increase Anthem Blue Cross will be taking for 120,000 individual managed care plan members.

DMHC sent a letter to Anthem Blue Cross asking for an explanation for the rate increase and why it is higher in comparison to indemnity-based insurance products with similar deductibles. DMHC regulates managed care plans in the state.

In an April 25 letter in response to DMHC, Anthem Blue Cross states its individual managed care plan pool is shrinking.  The letter strongly implies adverse selection requires it to boost rates to keep up with losses incurred by those members remaining in the pool who tend to use high levels of medical services.  Anthem Blue Cross projects it will incur a medical loss ratio of 88.5 percent for individual managed care products for 2011 after a 16 percent rate hike and increased deductibles effective May 1.

See the conclusion section on page 7 of Anthem Blue Cross’s letter.

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.

Two newspaper accounts of substantial recent rate increases for individual health insurance premiums approved by the California Department of Insurance this week strongly suggest the segment is in deep trouble and poised to collapse upon itself from both ends.

The stories show that both insurers and consumers believe the segment is growing economically unsustainable amid rapidly rising medical costs.

While Blue Shield of California will boost rates on its individual health insurance policies by an average of 18.2 percent, the nonprofit insurer will still be operating at a loss.  “Even with these increases, we’ll be losing money from our individual policies,” Blue Shield spokesman Tom Epstein told the Sacramento Bee.  Epstein said the red ink could total in the millions of dollars.

Market share leader Anthem Blue Cross will increase rates by 14 to 20 percent effective Oct. 1 for nearly 800,000 individual California policyholders, the Los Angeles Times reports. “It’s already verging on completely unaffordable,” said Mary Feller, 57, of Northern California, told the newspaper.  “If our insurance keeps going up at this rate, we’ll lose it.”  And in a still anemic economy, those rate hikes appear even less affordable.

When selling individual health insurance produces losses for insurers and policyholders can no longer afford the premiums, the market is essentially dead.  The only question is whether it will be pronounced so before 2014 when insurance purchasing exchanges of the Patient Protection and Affordability Act are set to begin operating.  I predict it will.

The Obama administration is apparently concerned over the possibility the individual health insurance market will implode before insurers must take all comers and the purchasing exchanges of the Patient Protection and Affordable Care Act kick in at the start of 2014.

In my previous post, I speculated that unsustainable annual premium increases averaging 20 percent in the individual market could push the segment to a tipping point of market failure before 2014 arrives.  Health and Human Services Secretary Kathleen Sebelius evidently shares that concern based on remarks she made to the Reuters news service this week.  The Reuters dispatch notes Sebelius, a former Kansas insurance commissioner who earlier this year lambasted individual health insurers for imposing steep premium increases, has adopted a more conciliatory tone toward the industry.  Perhaps as a former insurance regulator, she now sees the business model of individual insurers — and possibly that of small group writers as well — in a potential life or death struggle leading up to 2014.

Sebelius suggested continued rate increases — which insurers say reflect the pass through effect of rising medical costs and utilization — could trap the individual market in a downward spiral of premium increases followed by policyholder cancellations and nonrenewals and more premium hikes.  ”If they lose more and more market share as we move toward 2014, it’s not really good for them,” Sebelius said.

As rates go up, individuals who believe they are relatively healthy will be more and more inclined to drop their coverage, especially when monthly premiums begin rival the amount of mortgage payments.  This unvirtuous cycle — which I’ve dubbed “adverse deselection” — would leave as policyholders the most medically risky individuals who are likelier to use more and higher cost medical services, prompting more rate increases.  Earlier this year, Anthem Blue Cross told California lawmakers this dynamic partly justified the insurer’s request for individual premium increases averaging around 25 percent for 2010, an amount that was subsequently lowered to 14 percent in a revised filing with the California Department of Insurance last month.

California and federal policymakers are on convergent paths when it comes to regulation of premium rates charged by health plans and insurers.  The California state Assembly this week approved and sent to the upper house legislation that would subject managed care service plans overseen by the Department of Managed Health Care and indemnity insurance policies regulated by the Department of Insurance to a prior approval rate regulation scheme.  Such as scheme has been in place in California since 1989 for property/casualty insurers after voters approved a ballot measure instituting it.  Helping push the ballot measure over the top by the slimmest margin of voter approval was anger over rising auto insurance rates.

Similarly, increasing health insurance premiums and particularly a big jump in individual policy rates that Anthem Blue Cross had planned effective March 1 (the rate increase has since been withdrawn) are providing impetus to AB 2578 after a nearly identical bill stalled in 2009.

The Patient Protection and Affordability Act (H.R. 3590) also authorizes a prior approval rate regulation scheme.  Section 1311(e)(2) of Part II the Act (Premium Considerations) requires “justification for any premium increase prior to implementation of the increase.”  That provision would take effect Jan. 1, 2014 as part of the Act’s requirement that states establish American Health Benefit Exchanges — mandatory on line markets through which individuals and small employers (and by 2017, anyone) can compare and shop for health plans.

AB 2578 is likely to end up on Gov. Arnold Schwarzenegger’s desk by September.  A rational policy argument could be made that a prior approval scheme makes far better sense for an oligopolistic health insurance market than the much more competitive property/casualty insurance markets.  But Schwarzenegger isn’t likely to sign the bill into law.  The lame duck Republican governor doesn’t tend to favor market regulation generally and has voiced concern about the “fragility” of California’s individual health insurance market segment — a segment dominated by just five major players.  Since rapidly rising medical treatment costs limit their ability to compete on price, they primarily compete on risk selection by limiting coverage to healthier individuals and pass through increased medical costs via rate increases.  Schwarzenegger’s veto message will likely assert AB 2578 is not needed given the prior approval scheme contained in H.R. 3590.

If veteran Democratic Governor Jerry Brown is elected governor in November, however, legislation similar to AB 2578 will likely reappear in 2011 and potentially get signed into law effective Jan. 1, 2012.  That would give California a two year head start on the feds and provide federal regulators drafting regulations to implement H.R. 3590′s prior rate approval scheme real world experience on how such a scheme actually plays out in the nation’s largest health insurance market.

Not long after 2010 got underway, Anthem Blue Cross created high anxiety among consumers in California’s individual health insurance market by announcing steep rate increases averaging 25 and as high as 39 percent effective March 1.  After the California Department of Insurance asked Anthem to run its numbers again, the insurer said it found mathematical errors in its actuarial projections and would refile corrected rates later this year.

Since individuals lack the bargaining power of employers, they tend to get the biggest rate hikes since insurers can essentially offer them on a take it or leave it basis.  Small employers with fewer than 50 employees by contrast have at least some negotiating leverage with insurers compared to individuals.  But not much more.  They offer next path of least resistance for payers to pass on rising medical costs.

And so come double digit rate increases for them, not just from Anthem Blue Cross but also from all of Anthem’s major competitors who along with Anthem make up about 90 percent of the state’s private health insurance market. A Los Angeles Times survey released May 26 found major insurers in California’s small-business market are raising rates 12 to 23 percent in the small group market.  Not surprisingly, the increases are producing protests from those small employers who have thus far managed to ride out the recession and remain in business.  Some warn the rate hikes will force them to curtail hiring or even close.

The small group market is the bleeding edge of the breakdown of employer-paid health insurance model upon which most working age Americans rely for health coverage.  These rate increases will likely prompt more small businesses to cease providing health insurance for their workers, forcing those employees into the already distressed individual market.

Many of those workers will find they cannot qualify for or afford individual coverage, boosting the number of medically uninsured Californians and creating political pressure for more immediate reforms than those contained in the recently enacted federal Patient Protection and Affordability Act.  The problem for policymakers is no amount of reform of the insurance mechanism that pays medical treatment and pharmaceutical costs can provide relief as long as those costs keep rising far in excess of the rate of inflation.

High risk health insurance pools to cover Americans with pre-existing medical conditions who fall short of medical underwriting standards of individual market insurers and managed care plans must be in place within 90 days of the March 23 enactment of the Patient Protection and Affordability Act.  That mandate was put in place by H.R. 3590, Subtitle B, Section 1101.

Going forward, several aspects bear watching.  Among them is how states — the majority of which already have high risk pools in place — implement the pool in their jurisdictions and conform their existing high risk pools to the new federal requirements.

In the interim before the high risk pool mechanism ends Jan. 1, 2014 and health insurance purchasing exchanges that must accept all applicants regardless of pre-existing medical conditions start up, a key question will be the number of people who actually sign up for high risk coverage.  The number in large part will be driven by the size of the premiums.

California’s high risk pool, the Managed Risk Medical Insurance Program (MRMIP), is required by statute to set premiums 125 to 137 percent of standard market rates and has an annual coverage cap of $75,000 and a lifetime limit of $750,000.  Currently the program covers just 7,100 Californians — a tiny fraction of the 1 million potentially medically uninsured Golden State residents projected by Harbage Consulting in 2008.

MRMIP has been limited on the supply side by enrollment caps due to limited funding and on the demand side by relatively high premiums.  HR 3590 requires premiums to be established at a “standard rate for a standard population” that can vary based upon age, an important factor considering a large segment of medically uninsurable are between 50 and 64 years old.  For the oldest members of the pool, premiums are limited to four times those charged the youngest members of the pool.

Standard rates however are on an upward trajectory as evidenced by a sharp increase being implemented for indemnity-based policies by California’s dominant player Anthem Blue Cross.  Those rates if ultimately approved by the California Department of Insurance would be as high as those previously charged those in the MRMIP pool.  For many, they would likely prove unaffordable.  Particularly in a tepid economy that some economists predict won’t fully recover until the high risk pools are slated to end in 2014.

The upshot is HR 3590′s temporary high risk pool may not make much of a dent in the number of medically uninsured not covered through employment-based insurance or government insurance programs.

The enactment of the Patient Protection and Affordable Care Act requiring all Americans to have medical insurance in 2014 follows in the footsteps of nations like Germany and Switzerland that opted not to put in place socialized health care systems like those of Britain and France or Canada’s single payer system where the government pays all medical bills.  Germany and Switzerland mandate all citizens have coverage.  But it’s no bonanza for medical insurers.  They fiercely compete for mere survival and not to earn profits.  If they don’t efficiently administer claims and keep providers and government regulators satisfied, they could find themselves out of business.  For profit U.S. medical insurers could find themselves in a similar market environment within a decade.

Indications of tighter regulation of medical insurance premiums — and ultimately insurer profits — are already emerging in the nation’s most populous state.  Last week, a California state Assembly committee approved legislation that would regulate health insurers like their counterparts in the state that sell property/casualty insurance.  Those insurers cannot use premium plans until regulators first approve them.

AB 2578 would similarly subject premiums, co-payments, and deductibles of both indemnity health insurers and managed care plans to this prior approval regulatory scheme.  If policyholders or plan members would pay seven percent or more above those currently in effect, it would trigger a provision allowing consumer and public interest groups to protest the filing through a public utility commission style hearing.

Nonprofit health insurers already operate in California, most prominently Blue Shield of California.  A de facto shift of medical insurance to a nonprofit business could give Blue Shield a leg up, although it would be under increased pressure to hold down adminstrative overhead.  (Notably, Blue Shield supported California reform legislation proposed by Gov. Arnold Schwarzenegger in 2007 including a requirement that all state residents have some form of medical coverage.  For profit insurer Anthem Blue Cross opposed the bill).

All payers — whether they are in business to make a profit or not — complain they are increasingly squeezed by raging medical treatment cost inflation.  According to Anthem Blue Cross, those out of control costs forced it to sharply raise premiums for its individual insurance products by as much as 39 percent, sparking outrage and giving a political boost to AB 2578.  A similar bill went nowhere in 2009.

A post at the journal Health Affairs blog questions what I’ve termed “adverse deselection” —  when healthier people in the individual market decide to take their chances and drop their coverage to save premium dollars in the current economic downturn.  In California, Anthem Blue Cross contends the flight of these better risks left it with costlier insureds in its risk pool — what’s classically known as adverse selection — thus necessitating sharp rate increases to cover higher dollar claims brought by sicker individuals.  The theory is these folks will suck it up and pay the higher premiums in order to stay insured, knowing both that they’ll likely need medical care in the future and that they can’t shop around for lower premiums because no other insurers are likely to accept them due to their preexisting medical conditions.

Jonathan Kolstad, assistant professor of health care management at The Wharton School and Leonard D. Schaeffer of the University of Southern California’s Center for Health Policy and Economics, claim to have developed data casting doubt on that scenario.  ”There is little evidence of a change in composition and size of the non-group insurance market between 2007, prior to the recession, and March of 2009, near the bottom of the recession,” they conclude.

Initially, I thought regardless of whether those dropping their coverage are healthy or not, the recession has likely shrunk the individual market.  Those who need medical services still have to pay the premium to keep their coverage in force.  And when comes down to paying the mortgage or a monthly health insurance premium that in many cases nearly equals the mortgage payment, it’s the latter that’s likely to go unpaid.  But consider another study issued this week by the UCLA Center for Health Policy Research projects California’s individual market actually grew during the recession, covering 8.5 percent of non elderly adult Californians at its start in 2007 to a projected 9.1 percent in 2009.

Veteran Sacramento-based journalist and policy wonk Daniel Weintraub, who recently launched his HealthyCal.org Website, deserves a big shout out for pointing out California law requiring health plans and insurers spend at least 70 cents of each premium dollar on medical care for plan members and policyholders can do virtually nothing to hold down premium increases. Moreover, it may even lock in the absolute growth of health plan and insurer profits that many consumer advocates blame for rising premiums.

Simple mathematics explains why.  Seventy percent of medical treatment costs — a quantity that has been outpacing the rate of inflation over the past decade — is still a growing number in absolute terms.  For example, if the cost of providing medical care to plan members and insured policyholders increases from an average of $3,000 annually per plan member or policyholder to $5,000, a health plan or insurer would be required to spend on average at least $3,500 per member versus just $2,100 under the 70 percent minimum loss ratio requirement.  Premiums must naturally rise to absorb the increase.  The 30 percent left over after health plans and insurers meet the minimum medical loss ratio grows into a bigger pot of cash.  The same math would be at work if the minimum medical loss ratio were increased as some policymakers have advocated.

Rising medical treatment costs produce ratcheting upward pressure on both premiums and potentially the profits of health plans and insurers when administrative costs are netted out.  This ratcheting effect also undermines arguments by health plans and insurers that if everyone was required to have coverage — the so-called individual mandate — then coverage would become more affordable and accessible since there would be a much larger pool of people with coverage and paying in premiums to cover the cost of their medical care.

An individual mandate might produce some temporary relief by spreading risk across a bigger pool of people.  But due to the ratcheting effect of rising health care costs, the same underlying mathematics would be at work, simply subjecting a larger number of people to rising premiums while locking in higher absolute profits for health plans and insurers.

An individual mandate does however make sense when viewed from the perspective of the business model of health plans and insurers when that model assumes profit margins in the low single digits such as suggested last week by Anthem Blue Cross President Leslie Margolin in testimony before a California legislative committee.  Low margin businesses (such as grocery chains and airlines, for example) offset their skinny profit margins with big sales volume.  So it’s not surprising that health plans and insurers like the idea of forcing everyone to have coverage.  It would be like the airline industry requiring everyone to purchase at least one round trip ticket per year.  Or requiring everyone to shop at a major grocery chain outlet at least monthly.  It’s no wonder that both free market conservatives and more liberal consumer advocates dislike the individual mandate.  The former because it’s contrary to free market economics and consumer choice and the latter because they fear consumers will end up trapped on the up escalator of rising medical costs that will be passed through to them by health plans and insurers.