Before individual health insurers were prohibited from medically underwriting applicants for coverage one year ago this month, many faced the dreaded adverse selection death spiral and may have gone under without the intervention of the Patient Protection and Affordable Care Act. That’s when a health insurer ends up with less healthy people in its risk pool and must raise premium rates and cost sharing to cover their higher medical utilization costs. Those higher premiums in turn make the plan less able to attract new members and premium dollars to cover those rising costs. Once the adverse selection death spiral becomes established, it’s very difficult to reverse course. It’s the health insurance equivalent of a cosmic black hole.
The Patient Protection and Affordable Care Act sought to mitigate the death spiral by outlawing medical underwriting in individual health insurance, subsidizing premiums for low and moderate income households, creating single state risk pools and establishing reinsurance and risk adjustment programs to mitigate adverse selection risk.
But for some new health plans in the post-ACA world, adverse selection can occur right out of the gate if they can’t coordinate premium rates and cost sharing with medical utilization. Exhibit A is a couple of CO-OP (Consumer Operated and Oriented Plan) health insurers established under Section 1322 of the Affordable Care Act. Since CO-OP plans are new players in those states in which they operate, they face the temptation to set premiums at low levels in order to gain market share against the established health plan issuers.
Two days before Christmas, Iowa insurance regulators went to court to place Iowa and Nebraska-licensed CoOportunity Health in rehabilitation, citing “extremely high healthcare utilization.” The week before, the federal government declined CoOportunity Health additional loan funding, resulting in CoOportunity being deemed in hazardous financial condition and placed under the supervision of the Iowa Insurance Division. (Links related to the rehabilitation order here.) (Update 1/24/15: Iowa insurance commissioner initiates insolvency proceedings against CoOportunity.)
Meanwhile in Minnesota, another CO-OP plan, PreferredOne, sharply increased premium rates and pulled out of that state’s health benefit exchange marketplace for plan year 2015 despite a bang up 2014 in which it captured a majority of the 55,000 new exchange enrollees, according to this Bloomberg Businessweek story. Same problem as in Iowa with CoOportunity Health: premiums set too low relative to medical utilization.
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