Health Insurance Crisis

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.

The Kaiser Family Foundation has published an excellent primer on the actuarial foundation upon which “qualified health plans” must be based under Section 1301 et seq of the Patient Protection and Affordable Care Act (PPACA).  The plans will be sold through state health benefit exchanges starting Jan. 1, 2014.  The exchanges will serve as marketplaces aggregating purchasing power among the small group and individual markets — the most distressed health insurance market segments where coverage is far less accessible and affordable than large group and government insurance plans.

These plans that cover from 60 percent (bronze) to 90 percent (gold) of an individual’s projected medical costs show the era of health coverage with minimal cost sharing and out of pocket costs has come to an end for individuals and those employed by small businesses.  That new reality that emerged in recent years is now institutionalized as public policy in the PPACA.  That policy is reinforced by tax policy allowing individuals to establish tax deductible Health Savings Accounts, which have been in existence only since 2004.

The bronze plan’s 60 percent coverage level could be equated to “major medical” plans of decades past that covered as the name implies only major expenses such as hospitalizations but not routine doctor visits.  As medical treatment and pharmaceutical costs continue to push up health coverage rates leading up to 2014, it remains to be seen if the higher level silver, gold and platinum (90 percent of projected actuarial costs) will be affordable for individuals and small businesses even with their new purchasing power via the benefit exchanges.  Many could find their budgets can handle only the low end bronze plan, shifting the bulk of these market segments to a major medical level of coverage.

The Interim High Risk Pool created by the enactment of the Patient Protection and Affordable Care Act’s (PPACA) one year ago has not changed the underlying dynamics of the individual health insurance market and consequently appears to be having a negligible impact on reducing the ranks of the medically insured.

The pool, formalized as the Pre-Existing Conditions Insurance Program (PCIP), was created to provide temporary coverage for those with pre-existing conditions who don’t meet minimum medical underwriting standards of insurers and managed care plans.  It goes away on January 1, 2014, when the PPACA outlaws medical underwriting and requires payers to accept all applicants regardless of medical history.

So far, few have signed up for the plan.  As prior to the PCIP, younger people who would be eligible for PCIP enrollment pay lower rates for coverage but tend to go without.  Older folks in their 50s and early 60s who want coverage are finding PCIP rates out of reach. An added deterrent, other observers note, is the requirement that applicants for coverage be continually uninsured for at least six months.

“The PCIP is a great health plan and the out-of-pocket maximum is low,” Barry Cogdill, president of Business Choice Insurance Services in San Diego, told SignOn San Diego.  Nevertheless, he added, PCIP premiums are too expensive for many.  “That’s why health care reform happened,” Cogdill explained.  “The individual market has been the Achilles’ heel of the health insurance market. You end up with a lot of uninsured people.”

It appears many in this circumstance who aren’t covered by group or government plans will remain so.  Whether they will be able to find affordable coverage when state health benefit exchanges designed to aggregate purchasing power of individuals and small employers open for business in January 2014 remains to be seen.

Less than one week after Blue Shield of California said it would raise rates on individual market products May 1 because premium revenues were not keeping up with losses due to rising medical costs and increased utilization of high cost procedures, the insurer has cancelled the increase.

Losses are now ameliorating, Blue Shield spokesman Tom Epstein told the Los Angeles Times, coming in below projections for the latter part of 2010.  While the insurer isn’t fully certain of the reason, it believes consumers are assuming more risk by purchasing higher deductible policies with fewer benefits in order to keep rising premiums affordable.

“It’s definitely happening,” Epstein told The Times. “As rates go up, people do tend to downgrade into less rich products that have more cost sharing.”

In canceling the planned May 1 rate increase that was to average 6.5 percent and boost premiums by as much as 18 percent for some policyholders, Blue Shield said March 16 that it still expects to lose money in 2011 after $27 million losses on individual policies last year.

Duke Helfand of the Los Angeles Times has yet another story in today’s issue on the enormous and unsustainable increases in California individual health insurance premiums.  Helfand’s story spotlights recent rate hikes by Blue Shield of California, which according to his story have gone up 50 percent or more for about a quarter of 193,800 individual policyholders since last fall.

Blue Shield spokesman Tom Epstein defended the increases as reflecting soaring medical care costs and increased utilization of more costly services by policyholders as well as new state and federal mandates.  Those cost drivers required Blue Shield’s actuaries to recalculate projected claims payouts.

Nevertheless, Epstein explained, the outgo continues to exceed premium revenue.  Blue Shield expects to lose $20 million to $30 million on its individual policies this year after a loss of $27 million the previous year, he said.

“People are justifiably concerned when they get a significant rate increase. We wish that we didn’t have to do that,” Epstein told The Times. “When people are getting increases like that and we’re still losing money, something is seriously wrong.”

As Teal’C of Stargate SG-1 would say, “Indeed, O’Neill.”

If Blue Shield were a monoline carrier that sold only individual (and not group) health insurance, California Insurance Commissioner Dave Jones, piqued at Blue Shield’s rate hikes and seeking authority to allow him to approve rates before they go into effect, could have an even bigger problem on his hands: potential insolvency of the insurer.

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.

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.

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.

The Washington Post is the latest news outlet in the past few months to report on low initial enrollments in state Pre-existing Condition Insurance Plans (PCIP) established earlier this year under the Patient Protection and Affordable Care Act (PPACA).  During the fall, tepid interest in the PCIPs — referred to in the PPACA as the Interim High Risk Pool designed to provide coverage regardless of pre-existing medical conditions until health insurers must accept all applicants in 2014 — were also the subject of stories by the Associated Press and The New York Times.

The purpose of the PCIP is to help pare down the number of medically uninsured who can’t get coverage under current health insurance medical underwriting guidelines.  The Post reports state PCIPs are proving to have narrow appeal, attracting those needing very costly care and raising the question of whether the $5 billion appropriated by the PPACA to subsidize PCIPs will be enough before 2014 despite low early enrollments.

What’s likely suppressing enrollments are provisions in the PPACA that require PCIP premiums be set at standard market rates based on age.  For the oldest members of the pool, premiums are limited to four times those charged the youngest members of the pool.  That means those most likely to be served by PCIPs — those with pre-existing conditions in their fifties and early sixties — are finding the premiums out of reach, just as are individuals in that age range who are healthy, acceptable risks for individual health plans and insurers.

As federal officials stress it’s too early to draw conclusions, it remains to be seen whether the PCIPs will make any appreciable reduction in the number of medically uninsured Americans.  Early indications are not promising.  They suggest PCIPs will serve a narrow demographic of very sick but relatively affluent people aged 50-65 who are too young to enroll in Medicare and who need coverage for costly conditions as a hedge against medical bankruptcy.

A month ago, the Associated Press reported state Pre-existing Condition Insurance Plans (PCIP) set up this year under the Patient Protection and Affordable Care Act’s (PPACA) are not attracting the flood of applicants some some feared would quickly deplete the $5 billion the PPACA for appropriated for them.  The PPACA’s appropriation for the Interim High Risk Pool is to provide coverage for people in the individual health insurance market with pre-existing medical conditions who because of the conditions can’t get coverage in the standard market until insurers must accept all applicants starting Jan. 1, 2014.

The New York Times last week did its own story on the lackluster enrollments in the mostly state-run PCIPs.  While sign ups may be slow for a variety of reasons — the bad economy probably chief among them — the PCIPs seem to show the biggest initial appeal to those who have costly conditions requiring expensive treatment such as the cancer patient profiled in the Times story.

If early trends continue, the PCIPs could end up becoming more of a catastrophic coverage pool for those requiring very high cost care, known as high severity losses in insurance terminology.  Such high severity losses could threaten to rapidly draw down the $5 billion allocated for them in the PPACA just as easily as too many people turning to PCIPs to get individual health coverage.