Catastrophic Coverage Or Dropping a Coverage Mandate - Both Get an “F” in Math
Conservatives tout that we should just allow people to buy cheap catastrophic plans (i.e., with high deductibles and out-of-pocket expenses before benefits kick in). But a reform bill that does so is almost as bad as one that allows people to waive coverage and then re-enroll when they think they need to get health care. That of course leads to the phenomenon insurance actuaries call “adverse selection,” and it drives up costs for everyone while permitting “free riders” (those who get the same benefits while paying less or nothing). To see why, look at the following simplified example in the table below. Assume an insurance company insures a “pool” of two adults for very modest average annual costs of $1000 per person per year, but Person A has annual claims of $2000 and B has no claims. Disregard profits and administrative costs and assume that all premiums go to pay claims.
In Scenario 1, the insurance provides standard plans and charges each enrollee $1000, sufficient to cover its total annual costs for the pool. In Scenario 2, Person B, knowing he is generally healthy, is allowed to elect a catastrophic plan that only costs $600. The insurance company comes up short in its premiums by $400. So in the second year (Scenarios 3 and 4), the insurance company could try to double the premium for Person A if they could get away with it and make a clear profit on B. Otherwise they either have to impose a 40% rate increase on A and no change on B (Scenario 3), or else, if they are required to be community-rated, they have to impose a 25% increase on all policyholders in the pool (Scenario 4).
|
Scenario 1: Persons A and B Have Equal Plans and Premiums |
|||
|
|
Person A |
Person B |
Total |
|
Claims |
$2,000 |
$0 |
$2,000 |
|
Premium |
$1,000 |
$1,000 |
$2,000 |
|
Insurance Company’s Net Result |
($1,000) |
$1,000 |
$0 |
|
|
|
|
|
|
Scenario 2: Healthy Person B Elects Catastrophic Coverage Plan |
|||
|
|
Person A |
Person B |
Total |
|
Claims |
$2,000 |
$0 |
$2,000 |
|
Premium |
$1,000 |
$600 |
$1,600 |
|
Insurance Company’s Net Result |
($1,000) |
$600 |
($400) |
|
|
|
|
|
|
Scenario 3: After Scenario 2, Person A Is Charged More the Next Year |
|||
|
|
Person A |
Person B |
Total |
|
Claims |
$2,000 |
$0 |
$2,000 |
|
Premium |
$1,400 |
$600 |
$2,000 |
|
Insurance Company’s Net Result |
($600) |
$600 |
$0 |
|
Rate increase: |
40% |
0% |
25% |
|
|
|
|
|
|
Scenario 4: After Scenario 2, Person A Is Charged More the Next Year |
|||
|
|
Person A |
Person B |
Total |
|
Claims |
$2,000 |
$0 |
$2,000 |
|
Premium |
$1,250 |
$750 |
$2,000 |
|
Insurance Company’s Net Result |
($750) |
$750 |
$0 |
|
Rate increase: |
25% |
25% |
25% |
Note that this example does not even assume the usual annual cost trend increase; it assumes actual medical charges are held flat, and yet the pool of insured people gets a 25% increase! This example of course is exaggerated, since usually there are more very and moderately healthy individuals in the group, compared to those with high claims costs. But the actuarial principle holds true. Further, what actually happens in this situation of large increases is that more and more people either drop coverage or go to the catastrophic plan, further driving up costs for those with the regular plan. This is why many employers who introduce high deductible plans as an option often end up eliminating the other options and forcing everyone to take the high deductible plan (e.g., General Electric’s program for 2010).
It’s easy to pick on insurance company profits as the reason for rising costs. While their profits may or may not be too high, generally the reason high rate increases is adverse selection. As the Associated Press reported on the 12th (click here), insurance carriers are now coming out with huge rate increases for the individual coverage market, where coverage is not subsidized by employers and people have the option (or in many cases of course it’s not an option) to drop coverage. Increases in 4 states are ranging from 15% to 39%. For example, “Anthem Blue Cross plan in Maine is asking for increases of about 23 percent this year for some individual policyholders. Last year, they raised rates up to 32 percent.” One would think Republican Senators Susan Collins and Olympia Snowe would be more interested in solving this problem for their state’s citizens.
Echoing our point above, the article states:
“Premiums are far more volatile for individual policies than for those bought by employers and other large groups, which have bargaining clout and a sizable pool of people among which to spread risk. As more people have lost jobs, many who are healthy have decided to go without health insurance or get [a] bare-bones, high-deductible policy, reducing the amount of premiums insurers receive….
You’re going to see rate increases of 20, 25, 30 percent” for individual health policies in the near term, Sandy Praeger, chairwoman of the health insurance and managed care committee for the National Association of Insurance Commissioners, predicted Friday.
Another recent article in the New York Times reports on the same rate increases occurring in California (click here): “In statements and letters, Anthem and WellPoint have explained what the industry calls a recessionary death spiral: as unemployment and declining wages prompt healthy people to drop their insurance, the remaining risk pool becomes sicker and more expensive to insure, which in turn forces up prices and pushes more people out of the market.”
Unfortunately, these insurance underwriting issues are not readily grasped by most people. But controlling adverse selection and spreading the high health care costs for the sick across the premiums for everyone is the point of insurance in the first place. And that is why the Democrats’ bills have both a mandate for everyone to have coverage and, at least in the house bill, a requirement for a reasonable minimum benefit plan. Mixing a choice between a catastrophic plan and richer plans would work in theory if the people electing coverage had no idea about their health needs in the coming year. But most people do. Many types of treatments and tests, and of course having babies, can be targeted to happen in a year when one elects a good health plan, or put off for a year when one waives coverage or takes that low cost catastrophic plan.
Finally, health savings accounts, which typically are paired with high deductible plans and shelter income used to pay for medical costs, obviously favor those with higher incomes. Instead of making coverage more affordable for those with low or no incomes, they help exacerbate costs by encouraging the adverse selection that drives up premiums.
Showing how much farther to the right Republicans have moved since the 1990s, a Feb. 15th National Public Radio story pointed out the irony that Republicans back then proposed and fully advocated the idea of an individual coverage mandate, including four Senators - Orrin Hatch of Utah, Charles Grassley of Iowa, Robert Bennett of Utah, and Christopher Bond of Missouri, who are still serving (click here):
Beyond the requirement that everyone have insurance, both call for purchasing pools and standardized insurance plans. Both call for a ban on insurers denying coverage or raising premiums because a person has been sick in the past. Both even call for increased federal research into the effectiveness of medical treatments - something else that used to have strong bipartisan support, but that Republicans have been backing away from recently.”
So why the change in attitude?
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